Financial markets recognize climate litigation as a substantial financial risk, assert legal professionals.
A new report from the Grantham Research Institute reveals that litigation risk has surpassed physical climate risk as the most significant concern for equity investors and analysts. This shift in perceived materiality is causing a ripple effect, with banks and financial institutions around the world facing increased scrutiny and potential legal exposure.
According to the report, 70% of European banks could face elevated litigation exposure, a warning echoed by Frank Elderson, a member of the Executive Board of the European Central Bank. In Germany, major financial institutions like Deutsche Bank, Allianz, and Commerzbank have been focusing on climate risk management in recent years, implementing measures such as integrating climate risk into their risk assessment frameworks, enhancing ESG (Environmental, Social, and Governance) reporting, and committing to net-zero targets to address both physical and transition risks as well as reduce litigation risks associated with climate change.
China presents a unique model, with the state actively encouraging litigation to advance climate policy. In 2023, Chinese courts saw 518 climate-relevant cases, a significant increase from previous years. The Chinese Supreme People's Court issued guidance in 2023 encouraging courts to engage with litigation around green development, heavy industry restructuring, and establishing carbon markets.
In the global south, governments such as Brazil, India, South Africa, and Indonesia have seen a surge in climate-related lawsuits. In Brazil, the federal prosecutor's office and environmental agency are pursuing over 30 lawsuits related to illegal deforestation in the Amazon.
The European Banking Authority's ESG risk management guidelines mandate banks to identify and mitigate climate-related risks, including litigation risk. Approximately 27% of newly filed cases in 2024 sought to challenge regulations promoting climate considerations or ESG factors. Banks are under pressure, facing direct legal exposure and indirect risk through clients.
More significant financial exposures are expected to emerge if landmark cases result in large-scale judgments or settlements. Speaking at the launch of last year's report, Catherine Higham, author and senior policy Fellow at the London School of Economics, warned that a lack of clarity in climate litigation is bad for business as it undermines the predictability needed by markets.
The report finds that judicial interventions are dynamically reshaping the risk landscape. It also reveals significant variation in how banks conceptualize and manage litigation risk. As the trend towards climate litigation continues, it is crucial for banks and financial institutions to stay vigilant and proactive in addressing these risks.
In the UK, the supreme court has set a precedent by deeming an oil well extension unlawful for failing to consider scope 3 emissions from supply chains under planning laws. This decision underscores the importance of considering the full scope of climate impacts in decision-making processes and could have far-reaching implications for other industries.
As the world grapples with the challenges posed by climate change, it is clear that litigation will play an increasingly important role in shaping policy and driving action. Banks and financial institutions must be prepared to navigate this complex and evolving landscape to ensure their continued success and sustainability.
