ESG Circular - Issue 3 - Staying ahead of emerging risks and opportunities

A High Court claim by over 100 Filipino nationals against Shell is the first to attempt to hold English-domiciled entities liable for climate-related harm suffered overseas, potentially setting a precedent which would expose greenhouse gas emitters to the risk of substantial (and unquantifiable) contingent liability and reputational damage. 

The claim draws on advances in attribution science in an attempt to demonstrate Shell’s role in global warming and the intensification of extreme and catastrophic weather events.

What is attribution science?

The claim in Shell/Odette is made in the context of a marked increase in climate harm-related claims globally,¹ many of which have sought to use attribution science to establish a causal link between the GHG emissions of businesses and climate-related harm, including the recent German case of Lliuya v RWE and Smith v Fonterra in New Zealand.  

If successful, Shell/Odette may set a precedent for establishing causation for climate-related harm against major GHG polluters and help solidify the role of attribution science in such claims.  Corporates should therefore be aware of the potential impact on their risk exposure, in both financial and reputational terms. 

The fashion industry is under increasing scrutiny for its ESG practices. Regulators, activists, and consumers are demanding greater transparency and responsibility from brands, not only in their own operations but across their complex global supply chains. With new and evolving regulations – such as those addressing modern slavery and environmental risks – and the rise of ESG-related litigation, fashion businesses must adapt to a rapidly shifting compliance landscape.

The fast-evolving nature of this area requires businesses to manage risk proactively in order to navigate the regulatory and reputational challenges.  Some important risk-management strategies to adopt include:

• mapping and assessing supply chains
• ensuring supply contracts address ESG risk
• monitoring and cooperating with those within supply chains
• maintaining accurate records to assist in reporting and disclosure.

Our recent article examined the sources of risk in fashion supply chain, and discusses how businesses (and their legal advisers) can identify those risks, navigate regulatory requirements, and develop robust compliance regimes that not only protect their reputations but also support sustainable growth. These lessons are relevant to the many businesses in other sectors who rely on global supply chains.

Climate risk and financial stability are inherently intertwined. Financial institutions lending to, investing in, or insuring businesses are inevitably exposed to climate-related risks affecting their customers: for example, climate events may harm a customer’s business, resulting in insurance claims or loan defaults, or could damage collateral, reducing its value. The shift towards a low-carbon economy may also test the viability of certain business models, impacting the creditworthiness of a borrower and, in turn, the financial institution’s risk-adjusted return.

Regulators, unsurprisingly, are increasing their scrutiny of how institutions address these challenges. The Prudential Regulation Authority (PRA), for example, has required UK banks and insurers to review and update their approaches to climate-related risk management by 3 June 2026, to align with its latest guidance. Institutions are expected to assess and quantify climate risks and their balance sheet impacts, despite ongoing difficulties in developing methodologies and obtaining data for accurate assessment of the likelihood and consequences of climate events, and continuing political shifts in climate policy.

Notwithstanding these challenges, the PRA still calls for robust integration of climate risks into risk management frameworks, with senior oversight and reliable internal reporting. Other jurisdictions, including the EU and Singapore, have adopted similar approaches.

For customers, this renewed regulatory focus means their climate risk profiles may increasingly influence institutions’ lending and underwriting decisions as part of institutional risk management. Elements such as the credibility of customers' transition plans, geographical factors, and supply chain resilience may all become more significant as a result.

Irrespective of political arguments over the future direction of ESG regulation, the inescapable financial impact of climate risk is here to stay.

The data centre sector is at an interesting stage for real estate and infrastructure investors. The explosion in AI tools has accelerated demand for data centres to fuel the growth in AI capability, unlocking vast investment potential. However, data centres are notoriously ravenous users of power and water and generate high levels of heat and noise.  For investors looking to protect the sustainability credentials of their portfolio, they might appear to be unattractive investments. However, this does not tell the full story: there are three factors for investors to bear in mind.  

• Firstly, due in part to the power supply constraints discussed here, increasingly data centres sites now meet some or all of their power needs from on-site renewables such as solar and wind power. On-site back-up generators now often use non-petrochemicals such as hydro-treated vegetable oil instead of diesel.
  
  
• Secondly, looking at the circular economy model, some of the excess heat produced by a data centre could be directed towards a district heat network to provide energy to future residential developments in that area, or to heat civic buildings such as libraries or swimming pools. For background on how these work, read our short guide to heat networks.
  
  
• Thirdly, data centres facilitate access to data and so have a role to play in improving data equality. Whilst there is inevitably a balance to be struck in terms of the environmental and social cost of our reliance on data and the promised AI benefits, there may also be sustainability gains enabled by data centres, such as the facilitation of remote working reducing travel needs.

Data is likely to continue to fuel the digitisation trend for the foreseeable future, but the real estate and infrastructure investment community will also be keeping a close eye on fears of an AI bubble, which would carry the risk of obsolescence. Watch this space.

Companies can expect ongoing scrutiny from UK investors on their long-term plans and resilience to systemic risks, such as climate change.

The UK Pensions Minister recently responded to calls to clarify pension scheme investment duties by announcing Government plans to issue statutory guidance on the topic.  A Labour backbencher had tabled an amendment to give trustees clarity that when investing in members' best interests, they may take into account broader systemic risks and opportunities to their investments, the impacts of investments (including impacts on members’ standards of living) and the ability, where appropriate, to take account of members' views.

Whilst the Minister decided not to hardwire any clarifications into primary legislation, he did announce that he will be putting forward legislation to give the Government power to issue statutory guidance on  how trustees can comply with their existing investment duties when considering the above factors and  what is meant by systemic risk and standards of living. The guidance will provide "added confidence to trustees that they can invest in the long-term interests of members and our society" but will not require them to so invest.

This announcement follows calls from the UK Sustainable Investment and Finance Association (UKSIF) for the recently launched Pensions Commission to consider climate change and the global transition towards a net-zero economy as part of their review into pensions adequacy in the UK.

In their recent article, "Road to 2030: the Role of ESG in Navigating Change in UK Pension Schemes" published in the International Comparative Legal Guides, Partner Jonathan Gilmour and  Senior Counsel, Harriet Sayer provide further thoughts on how ESG considerations are most often relevant to how trustees of UK pension schemes carry out their duties.

UK-listed companies, including those based overseas, are to be subject to new climate disclosure requirements from next year. The first UK Sustainability Reporting Standards (UK SRS), modelled on the S1 and S2 standards from the ISSB (International Sustainability Standards Board) are expected to apply to UK-listed companies from 1 January 2027.

Listed companies already reporting on climate-related financial risks and opportunities under the TCFD regime will find the shift to UK SRS reasonably straightforward. The ISSB's S2 climate standard is very similar to TCFD, but with some notable differences including on Scope 3 emissions and the disclosure of industry-based metrics relevant to a company's business model.  Unlike the ISSB's S2, however, the FCA is only proposing to require Scope 3 disclosures on a "comply or explain" basis and even that requirement will only apply after an optional transition period of one year. 

Scope of disclosures and transitional relief: Conscious of the increasing reporting burdens on companies, the FCA is proposing a transitional approach to implementation. The ISSB standards themselves provide the option for companies to disclose "climate-first" for the first year (S2 only), omitting disclosures on risks and opportunities other than climate (under S1). The FCA proposes to extend that transitional relief for a second year – in financial years beginning between 1 January 2027 and 31 December 2028, companies may, if they wish, merely note that they have not made S1 disclosures.

Following the transitional period, listed companies will have three options:

1. disclose in line with S1 on general sustainability issues,
2. where those disclosures have been fully or partially omitted, but the business has identified sustainability-related risks and opportunities ("SRRO"), disclose what those SRRO are, the reasons for not disclosing on them, and any steps it is taking or plans to take plus a timeframe for making those disclosures in future, or
3. state that the business has not identified any SRRO.

Next steps and actions: Final rules can be expected to follow shortly after the FCA's consultation closes on 20 March 2026, which should give businesses time to prepare ahead of 1 January 2027.

Meanwhile, as they approach the 2026 reporting season, UK-listed companies should be thinking about what extra data may be needed to comply with UK SRS next year (bearing in mind that 2027 disclosures reflect 2026 data).

And although general sustainability disclosures will not be mandatory for a further two years and only then on a "comply or explain basis", businesses should keep them in mind in the drafting of other non-financial reports, whether on a voluntary or mandatory basis. Transparency and consistency are key levers for managing risks naturally arising from disclosing sustainability information to the market. In any event, investor expectations may well run ahead of the FCA rules and investor pressure might push firms to fully disclose in line with US SRS ahead of the strict requirements of the rules.

Our briefing provides more detail on who is in scope (including exemptions), the transitional provisions, what should be disclosed and how to prepare.

Hot on the heels of the recently finalised Sustainability Omnibus, the European Commission followed up with the so-called "Environmental Omnibus" package last December. The Environmental Omnibus contains legislative proposals to streamline Environmental Impact Assessment procedures to encourage investment in data centres and "AI factories", renewable energy, energy grids and storage projects. With large funding opportunities in the pipeline (The RESourceEU Action Plan pledges €3 billion to accelerate investment in critical raw materials) and 'Made in Europe' public procurement requirements set to be proposed this year, it will be up to European industry to respond.

With renewable energy projects hitting a record high in 2025, and a Clean Power by 2030 target in place, the UK Government is similarly stepping up its ambition. Reforms to grid queueing systems, the streamlining of certain regulatory processes, and the  Planning and Infrastructure Act 2025 removing barriers to the installation of EV charging infrastructure and significantly reforming the Nationally Significant Infrastructure Projects regime are all promising for the clean-energy roll-out (albeit some of the reforms do conversely pose a greater risk for nature).

Challenges remain. The cost of Net Zero remains a politically sensitive issue – with the UK government's reduction to existing renewable subsidies (discussed here) feeling like a case of mixed signals at best – and regulatory barriers remain, especially in planning. The currently tabled reforms in the UK and EU will not in themselves be sufficient to deliver the holy grail of sustainable energy sovereignty. However, they do nonetheless show a clear policy acceleration towards electrification. In that sense they are yet another example of the UK and Europe now being much more in step with each other (and in many respects Asia) on sustainability, than they are with the US . Regulatory simplification and clear government backing should lead to reduced delivery risk, lower transaction costs and a smoother path to market for strategic energy projects. With further developments on the horizon (the EU is expected to simplify its energy product legislation and develop frameworks for renewable energy and energy efficiency in 2026), it's a fast-moving area that businesses should be following closely.