Climate litigation: a real risk for corporates and financial institutions

Recent Trends in Climate Litigation

Increasing Legal Scrutiny

Climate litigation has seen a marked increase in recent years, with the cumulative number of cases globally more than doubling since 2015. This surge is driven by various factors, including increased regulatory scrutiny and the growing recognition of the financial sector’s role in mitigating climate change. Financial institutions, in particular, are underprepared to manage potential climate litigation, making them more susceptible to legal action.

More High-Profile Cases

Several high-profile cases illustrate the growing trend of climate litigation. For example, in the UK, a landmark case was brought against the Board of Directors of Shell, marking the first time directors were held accountable for their company’s climate impact. In the Netherlands, the same oil company was ordered to reduce its carbon emissions by 45% by 2030, invoking The Paris Agreement in a court of law for the first time.

Growing Greenwashing and Regulatory Actions

Greenwashing claims, where organizations are accused of making misleading statements about their environmental practices, are also on the rise. Regulatory bodies like the US Securities and Exchange Commission (SEC), Germany’s BaFin, and the UK’s Financial Conduct Authority (FCA) have issued fines to high-profile financial institutions for greenwashing, and this trend shows no signs of slowing down.

What are the Implications for Financial Institutions?

In a recent report, published by Marsh, some of the key implications of climate litigation are highlighted.

Transition Risks

Climate litigation compounds the well-known physical and transitional risks associated with climate change, amplifying its overall consequences for businesses. As investors increasingly recognize climate litigation as a significant form of transition risk, concerns escalate further. Financial institutions must ensure their corporate strategies concerning climate and ESG information are robust and compliant with evolving regulations.

Scope 3 Emissions

The increase in attention to financial institutions’ Scope 3 emissions data is contributing to the rise in climate litigation. Scope 3 emissions encompass indirect emissions that an organization is responsible for in its value chain. For financial institutions, this can relate back to statements on their corporate strategy, the investments they hold, and the loans they grant. Accurate quantification of these emissions is challenging, further exposing business leaders and board members to potential litigation.

Fiduciary Duties and Shareholder Actions

There has also been an increase in legal action from shareholders alleging breaches in directors’ duties to exercise reasonable care, skill, and diligence regarding their decisions that may influence climate change. These cases often focus on whether directors have adequately considered the financial risks associated with climate change in their decision-making processes.

How should  Financial Institutions Prepare for Climate Litigation?

Build Resilient Strategies

Effective risk management against climate litigation demands a balancing act from businesses, complying with reporting requirements while avoiding the risk of greenwashing and potential litigation relating to disclosures. This involves the need for a comprehensive review of corporate strategies around climate change and carbon reduction, as well as ensuring alignment across business lines to avoid isolated and uncoordinated climate narratives.

As the landscape of climate litigation continues to evolve, it’s crucial for financial institutions and corporations to stay informed and proactive in their approach to climate-related risks and disclosures. The growing trend of favourable judicial outcomes in climate cases indicates a shift towards supporting climate action through legal means, making it essential for organizations to adapt and prepare for these mounting risks.

Take Proactive Measures

To prepare and safeguard against these challenges, organizations should invest in specialized training on the risks related to climate litigation. Financial institutions should also keep abreast of regulations surrounding ESG and any necessary disclosures, ensuring compliance to mitigate litigation risks.