Liability risk and adaptation finance

This high-level briefing paper explores the legal implications of adaptation to climate change-related impacts. Based on existing cases, it shows how climate litigation can act as both a driver and consequence of adaptation or maladaptation. As a corollary of the analysis, observations are drawn on the potential for litigation to help overcome some of the barriers to scaling finance for adaptation. It also provides a framework to consider the range of climate-related liability risks, and presents key inputs from which financial institutions can understand climate litigation as a mechanism to reduce barriers to adaptation finance.

It has the following key takeaways:

1. Climate  change  litigation  and  other  legal  action  can  act  as  a  driver  and  consequence  of  adaptation  to  the  physical  risks  associated  with  climate  change.
2. The paper provides a foundational framework within which institutions can  conceptualise  the  role  of  legal  action  as  a  driver  or  consequence  of  adaptation, and as a mechanism to reduce barriers to the availability of adaptation finance.
3. Liability risks can alter the breadth, and temporal materiality, of associated physical risks for any given borrower, book, portfolio or system,
4. Liability risks can act as a mechanism to transmit climate-related risks and direct costs from individual market actors, with secondary impacts at portfolio (sectoral) levels and, potentially, tertiary impacts on financial systems.
5. Legal action can reduce barriers to the deployment of adaptation finance at the necessary scale.
6. The magnitude of climate liability risk will vary significantly across borrowers, books, portfolios, institutions and financial systems.