Climate Risk And The Cost Of Corporate Reassurance

“Insurance capacity cannot sustainably compensate for underlying physical risks that continue to rise.”

James Talbot of the Bank of England made that observation in a recent speech. As climate change intensifies hazards such as extreme heat and heavy rainfall, businesses face damage to their assets and disruption to the infrastructure they depend on. Insurers can meet some of those losses, but rising exposure also affects the price and availability of cover.

For a company investing in a factory or property, this creates a problem that extends beyond its next insurance renewal. An investment expected to operate for thirty years may depend on cover remaining affordable throughout that period. The assumptions behind that expectation can affect the decision to invest, what the company tells investors and, eventually, how those decisions are examined in court.

Climate Risk And The Limits Of Insurance

A business does not need to suffer a flood before climate exposure starts costing it money. Higher premiums, larger excesses or exclusions can leave it paying more for protection while retaining more of the risk itself. If cover becomes unavailable, the financial assumptions supporting an investment may change considerably.

Anonymous senior insurance and reinsurance professionals describe firms raising prices, restricting cover and withdrawing from markets in the Inside Track memo Sounding the Alarm. They also allege pressure within some firms to lower estimates of future losses for commercial reasons. An anonymous modeller writing for the Bureau of Investigative Journalism describes being pushed to reduce disaster-loss forecasts so their employer could offer cheaper insurance and win business.

Lowering an estimate may make a policy easier to sell. It does not change the hazards facing the property it covers. There can be sound reasons to revise a forecast, including better data, but pressure to secure business is a different explanation.

These accounts do not establish misconduct by a particular company. They identify a potential weakness in the information businesses rely on: an assessment may reflect commercial pressure as well as the available evidence. A company using that assessment to judge an investment’s viability has an interest in understanding how it was produced.

Climate Risk Data In Court

The consequences of those assessments extend beyond insurance pricing. A warning about a property’s exposure can influence what a buyer will pay or whether a lender will finance its purchase. That gives the accuracy of climate-risk information immediate commercial importance, even if the predicted damage lies years ahead.

Florida’s case against First Street Technology concerns how such information is produced and sold. The state alleges that First Street exaggerates the risks facing individual properties and inadequately explains the uncertainty and limitations of its scores.

Filed in Polk County on 23 October under the Florida Deceptive and Unfair Trade Practices Act, the complaint challenges alleged errors in property data, statements about accuracy and peer review, and the handling of correction requests. Florida claims these practices affect property values, mortgage lending and insurance decisions.

The peer-review allegation gives a concrete example. Review of a methodology does not mean that an independent expert has checked every property score it generates. Florida alleges that First Street’s marketing gives consumers an unjustified impression of how its scores have been scrutinised.

Those allegations remain unproved. Differences from government flood maps need to be examined in light of what each assessment measures, including its time horizon. A fall in property value also does not establish that a warning was misleading. Buyers may have learned about a real risk.

The issue is whether the information supports the statements made about it. Consumer-protection litigation has also approached that question through allegedly reassuring climate communications. In Commonwealth v Exxon Mobil, Massachusetts alleged misleading statements and omissions concerning climate-related risks, the climate effects of Exxon’s products and its environmental credentials. Florida challenges warnings about exposure instead. Both cases require examination of particular statements and the understanding they give their audience.

Climate Risk And Directors’ Duties

Companies also have to decide what to do with the information they receive. A forecast may suggest higher operating costs, disruption or difficulty obtaining insurance. Management must weigh those possibilities when deciding whether an investment still makes commercial sense.

Litigation over directors’ duties examines that decision-making, although establishing a breach requires more than showing that climate risk exists.

In ClientEarth v Shell, ClientEarth sought permission to bring a derivative claim on Shell’s behalf against its directors. It alleged that their handling of climate risk breached duties to promote the company’s success and exercise reasonable care, skill and diligence.

The High Court refused permission in 2023, emphasising directors’ discretion to balance competing commercial considerations and weaknesses in ClientEarth’s evidence. The court’s decision illustrates the difficulty of moving from an acknowledged business risk to a substantiated claim against directors over their response.

A business may reasonably accept a risk, invest in protection or conclude that a project remains worthwhile despite higher costs. The legal assessment will depend on the duties engaged and the evidence concerning the decision.

Talbot’s warning returns the discussion to the life of the investment. Insurance available today cannot settle what a business will be able to withstand decades from now. When a company commits money on that basis, its forecasts, financial assumptions and explanations to investors form a record of what it expected and why. If the investment later becomes disputed, that is the record a court may be asked to examine.