In a blog published on January 24, 2024 on the European Central Bank (ECB) website, Frank Elderson, Member of the Executive Board of the ECB, and Vice-Chair of the Supervisory Board of the ECB, wrote: “70% of (95 analysed European) banks could face elevated litigation risks as they are publicly committed to the Paris Agreement, but their credit portfolio is measurably misaligned to it” . Elderson’s concern aligns with the escalating trend of climate litigation, with now over 2,500 documented cases spanning over 50 countries, affecting public and private sector entities. However, there have been relatively few climate litigation cases involving banks, and relatively little research on the potential impacts on the banking sector.
Emerging climate litigation impacts on the banking industry
Dilger et al, (2024) investigates perspectives on how climate litigation is affecting banks, using a survey and interviews with a range of practitioners including inter alia banks, law firms, NGOs and litigation funders. The research suggests climate litigation is seen as one component of the broader climate governance landscape for banks, with an impact over the medium to long term rather than imminent; correspondents believe that heavy emitters are ahead of banks in the line for litigation, though climate litigation will come to banks over a 5-year timeframe. Regulations are identified as the leading influence on climate litigation, with developments in human rights legislation also seen to be potential tipping points. The increase in private funding for climate litigation is seen as potentially significant, but clear precedents would have to be created before banks were realistic targets for private litigation investors. The greatest impact on banks so far appears to be reputational, with significant focus on the risk of banks not delivering on climate expectations or pledges leading to accusations of greenwashing. Difficulties in identifying direct financial impacts on banks from climate litigation appear to prevent detailed analysis of potential valuation downsides, in part because climate litigation cases are more usually brought by NGOs seeking improved climate governance rather than damages payments. Banks are also seen to be balancing the risk of climate litigation against potential litigation for pursuing strategies that might compromise banks’ short-term financial results.
Emerging focus on Human rights
Noorda (2024) looks at how climate litigation is being used to seek to compel financial institutions to fulfil their responsibility to respect human rights. Under the UN Guiding Principles on Business and Human Rights, financial institutions must not cause, contribute to or be directly linked to adverse human rights impacts arising from their own operations as well as their business relationships. NGOs and affected rightsholders are initiating legal actions seeking both the measurement, disclosure and alignment of the Scope 3 emissions of financial institutions with the Paris Agreement goals, and also the divestment or disengagement of financial institutions from projects, clients, or sectors characterized by high greenhouse gas intensity. The article discusses a recent “rights-turn” in climate litigation concerning the financial sector.
Legal action should be included in climate risk assessments
Wetzer et al. (2024) argues that developments in legal action mean that financial risk (focused on physical and transition risks) should no longer be the dominant frame through which companies, investors, and financial regulators assess climate change. Drawing on analysis of climate litigation, regulatory enforcement, and other legal action, the article proposes a framework that accounts for how legal action shifts or amplifies physical and transition risk exposures and creates additional climate risk exposures: retrospective analysis of stock market impacts following legal judgements; quantitative estimates of climate impacts to estimate the legal risk associated with efforts to hold defendants liable for climate change; attribution analyses of a firm’s contribution to a specific event; cost estimates of marginal abatement if accelerated mitigation was required; and an assessment of the implications of developing judicial doctrine and precedent, legislation and scientific advances.
Potential costs for financial institutions from climate litigation
Solana (2020) provides an analysis of the different types of costs for financial institutions that can arise from climate change litigation. They can be directly exposed to the risk of litigation as potential defendants in a case, facing potential pay-outs and fines, legal and administrative costs, insurance costs, financing costs, and reputational costs; but they can also be exposed indirectly, through litigation that targets their counterparties, especially their clients, which can lead to losses if the client’s solvency is affected, and can impose additional reputational costs.