Climate litigation is the new ESG risk for banks
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Climate litigation is the new ESG risk for banks

Banks need to start quantifying the legal risks of both climate action and inaction.

Illustration: iStock

Earlier this month, Milieudefensie, a Dutch arm of the Friends of the Earth network, threatened ING with legal action over its contribution to climate change.

Climate-related litigations are becoming more frequent, both against banks themselves and their corporate clients.

Beyond the actual cost of legal representation, the big headache for any international bank is how to stay on top of legislative reforms in all their markets and crucially, to make sure that a firm-wide policy aligned with the legal frameworks in one country or region doesn’t break the rules in another.

Who is next?

It is not the first time a financial institution has been the target of strategic litigation for damages to the environment, nor is it the first commercial bank to face this kind of lawsuit.

Last year, the French branch of Friends of the Earth, alongside other NGOs, sued BNP Paribas at the Paris judicial court, claiming the bank had failed to comply with the French duty of vigilance law.

In April 2021, ClientEarth filed a similar suit against the Belgian national bank for failing to meet environmental, climate and human rights requirements when purchasing bonds through the corporate sector purchase programme from fossil-fuel and other greenhouse-gas intensive companies.

The European Investment Bank was also on the receiving end of a ClientEarth lawsuit in 2019, which alleged that the bank had improperly rejected its petition for an internal review of the ECB's decision to finance a biomass power plant.

Making a point

Looking at how these recent cases have been progressing, the NGOs – who at times have withdrawn claims if they got enough reaction – may care more about the noise that their work generates than the verdict itself.

Strategic filings against financial institutions draw attention to the potential illegality of failing to take material action against climate change – and it seems to be working.

“I have spent more times talking to banks about this topic over the last year than any topic ever,” one lawyer tells Euromoney.

Ratings agencies are looking closely at the potential consequences of this trend.

Morningstar DBRS states in a recent commentary: “We note separately that the ECB warned in December 2023 of higher fines for banks not achieving the expected progress in managing their climate and environmental risks. However, we think the reputational damage related to these cases could become relevant to the credit rating under a scenario of disorderly transition or business as usual.”

Following the case against BNPP last year, Fitch Ratings also stated that the threat of climate-related litigation is not enough to result in changes to its environmental, social and governance relevance scores for European banks now, but it could lead to increasing differentiation in the future.

Jurisdictional crossover

As is often the case with climate litigation, the laws that are claimed to be breached differ from one country to the next. France’s duty of vigilance law for example, is particular to that country. Other European countries, such as the UK and Germany, have transparency regulations.

But the regulatory environment remains heterogeneous, which forces banks to juggle different sets of laws in every market. Most notably in the US, the same financial institutions being sued for climate inaction in Europe risk being reprimanded for thinking too much about ESG.

That will make it harder for banks to stick to group-level commitments and transition plans.

The bizarre combination of claims criticizing banks both for climate action and inaction will likely be a key concern in this year of elections.

“At the moment, we see state-level attorney generals raising this point on fiduciary duty. It will depend on what happens with US election,” the lawyer added.

And so banks will have to be prepared to think through the risks jurisdictionally, as they could end up in a place where abiding by a vigilance law in one jurisdiction forces them to breach anti-trust law in the other.

Either way, it is their reputations that take the hit.

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