News broke yesterday that Shell’s Board of directors are facing a lawsuit for allegedly failing to properly prepare the company for the net zero transition.

And whilst it may be the first case of its kind related to directors' responsibilities under the UK Companies Act, it comes as no real surprise that a company in the Oil and Gas sector has become the subject of such a lawsuit, as concern has been building around the risk of these cases for a while now.

The question is, will the outcome set a precedent for an avalanche of similar claims, or will it stem the potential tide, at least for now? Indeed, some consider Shell to be a better responder to climate change in this industry, and may have been targeted in order to maximise the chances of precedents across the sector.

Only time will tell, but the risk of not preparing for net zero is a real one. The physical risks are starting to be better understood, even if they’re not yet well modelled. Cat model providers and other research groups are paving the way for firms to better understand and allow for these risks in their businesses or insurance portfolios.

Transition risks are also now a key focus, with responsible investment and decarbonisation strategies creating opportunities for first movers, and increased risk for laggards.

But until now, liability risks driven by potential claims on management and boards of directors have been more of a theoretical risk on the horizon rather than something explicitly quantified.

Litigation claims related to climate change are often broken down into claims against those contributing to climate change, failing to disclose or misrepresenting the risks, and failing to prepare for or mitigate the risks.

The highest profile climate change lawsuits seen so far have been cases in the US against oil producers, and much of the litigation action to date has been activist led rather than driven by shareholders seeking damages. There was also legal action against Shell last year, where a Dutch court ruled the company must reduce its emissions.

Given this development, insurers and reinsurers writing D&O cover will be reassessing their exposures, in terms of the businesses they are covering, any policy limits and/or exclusions, and their strategies for upcoming renewals.

It is becoming increasingly important for insurers to understand their exposures to climate change, in both their underwriting and their investment portfolios, and to develop ways to measure and monitor these risks. We find tools that assess a firm's alignment with net zero targets and their preparedness for the transition, such as the Transition Pathway Initiative and Climate Action 100+, can be a useful measure of how likely that firm might be to face climate related litigation in the future.

A key first step that insurers can take to understand their existing portfolio is to conduct scenario analysis, allowing them to understand their exposures to all aspects of climate change risk and identify the material areas. Insurers can then use this to develop key risk metrics, and ultimately to feed into strategic decisions.

Until now, liability risks associated with climate change have often been referred to as a 'future issue', with more focus being on the physical and transition risks that we have already started to see. But this legal action against Shell is a stark reminder for insurers that litigation risks are real, and are happening now.

Please get in touch if you'd like to know more or to discuss how we can help support your climate-related risk management.