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Liability risk and adaptation finance

This briefing paper builds on a UNEP FI work programme of research into adaptation and adaptation finance, so it focuses on the relationship between physical and liability risks, and the potential impact of such legal action on adaptation finance.

This briefing paper provides a framework by which institutions can consider the range of climate-related liability risks to a borrower, book, portfolio or system – both before (ex ante) and after (ex post) the relevant physical risk.

Key points

Key takeaways of the study include:

  • Liability risks can alter the breadth, and temporal materiality, of associated physical risks for any given borrower, book, portfolio or system.
  • 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.
  • Legal action can reduce barriers to the deployment of adaptation finance at the necessary scale.
  • The magnitude of climate liability risk will vary significantly across borrowers, books, portfolios, institutions and financial systems. Robust risk assessment and development of pricing models remain a complex future task, requiring collaboration between lawyers, sustainability and risk professionals. A work program to develop a framework of threshold risk materiality indicators is suggested as a priority next step.