Climate litigation – more relevant than ever
Perspectives / ESG
It has only been a few weeks since the COP26 climate summit in Glasgow, where nations have agreed to pursue efforts to limit the global temperature rise to 1,5 degrees and pledged to further cut greenhouse gas emissions. Though this joint commitment of countries is an important development to tackle the global problem of climate change, it is not only political efforts that play a vital role to battle climate change – another path that is increasingly being pursued is in the courts and with litigation.
Several NGO’s and activists have claimed that using the courts in this way is necessary when parties (governments, private parties, financial actors) are unwilling to act.
There is a clear trend seen in the relevance of climate litigation worldwide. The cumulative number of climate-related cases has more than doubled since 2015.
The public sector
The fact that most climate change-related lawsuits are filed against the public actors, could originate in the fact that governments have a duty of care to protect their citizens (i.c. against the dangers caused by climate change), along with the reason that governments have in several instances explicitly committed themselves to fight climate change (Paris Agreement). That outcomes of climate lawsuits against public bodies can be substantial was proven in 2019 in the Urgenda case, when the Supreme Court of the Netherlands issued its final judgment that the Dutch government must reduce emissions immediately in line with its human rights obligation. [2] NGO’s emulating litigation strategies in other jurisdictions has appeared not to be uncommon in climate cases – the Urgenda case has led to litigation being brought on similar grounds inter alia in France, Ireland, Germany, Italy, and before the CJEU and ECHR. [3]
The private sector
It is not only public authorities that have recently been encountering activists seeking to raise awareness on climate issues by filing strategic lawsuits – climate litigation against the private sector has also gained popularity. One of the most revolutionary wins for a climate NGO happened only a few months ago, in the Milieudefensie et al. v. Royal Dutch Shell case. In this case, the court ordered Shell to reduce emissions by a net 45% at end of 2030 relative to 2019 levels, across both emissions from its own operations as well as emissions from the use of the oil it produces. [4]. The ruling was a landmark moment in the battle against climate change since it was the first time that a firm was legally obligated to align its policies with the Paris Agreement. In France, the case Notre Affaire à Tous and Others v. Total is still pending. In this case, the NGO alleges that the French oil company violated the French Commercial Code by failing to adequately report climate risks associated with its activities and take action to mitigate those risks in line with the goals of the Paris Agreement. [5]
Financial actors
Thus far, we have already seen a variety climate-related cases against both the public and private sector for the past couple of years. It is not to be expected that financial institutions will stay out of harm’s way. On the contrary: Roger Cox, the lawyer who was involved in both the Urgenda case and the Shell case, has stated to the Financial Times that he expects that banks and financial regulators will be targeted next, for the reason that “financing these large CO2 emissions is not something that can be accepted anymore”. [6]
The litigation risk that financial institutions face is both direct and indirect in nature, but can in both cases result in substantial financial implications. They can be directly exposed to the risk of litigation as defendants in a case, potentially facing pay-outs and fines, legal and administrative costs, insurance costs, financing costs, and reputational costs; but they can also be indirectly exposed through litigation that targets their counterparties, which can result in losses if the client’s solvency is harmed, loan defaults occur and additional reputational costs are made. [7]
Financial institutions can additionally be indirectly exposed when the court judgment has an impact on their assets or clients, its creditworthiness, firm value, its financing costs, as well as an effect on the investee companies’ share price, possibly resulting in stranded assets for the financial institution.[8] It is therefore important for financial actors to take into account the potential impacts of climate litigation in order to be able to make a thorough, accurate risk assessment.
Types of litigation risk for financial institutions
Sarra et al. (2021) have identified several litigation risks that financial institutions face across operations and asset classes, which can manifest on their balance sheets. We highlight the most important ones for financial institutions (and/or their assets and counter parties); regulatory liability, litigation risk regarding fiduciary duties, green-washing litigation risks, and civil lawsuits.[9].
- The risk of regulatory liability exists especially now that regulators have warned that climate-related risks are material, and therefore need to be adequately disclosed and managed. There are several cases pending, where investors have alleged that failure to disclose climate-related business risks in relevant reports is in violation of laws to protect investors. With the increased regulation on the disclosure of (climate-related) risks in the past years, the risk of facing sanctions has increased significantly too. Litigation risks regarding fiduciary duties are a related risk category. Challenges to the director’s duties would include allegations that directors have failed to act prudently and with the care, skill and diligence of a reasonable person, given the growing recognition of the financial risks associated with climate change that could affect loan portfolios and investment assets. In the case McVeigh v. Retail Employees superannuation Trust, parties reached a court-approved settlement where a pension fund had to agree to incorporate climate change financial risks and implement a net-zero strategy after a pension fund member alleged the trustees of breaching their fiduciary duties posterior to failing to provide information regarding climate change.[10]
- Green-washing litigation risk is also an area of concern for financial institutions. These risks occur when NGO’s or investors allege (clients of) financial institutions of green-washing mis-interpretation. The most exemplary case would be the class action against Volkswagen for wrongfully misleading the public into believing their cars were ”cleaner” than they actually were, with US lawsuits settling into the tens of billions of US Dollars. [11]
A more recent green-washing case concerns the investigation the Deutsche Bank AG’s asset management arm, DWS group, that is under investigation by the SEC and federal prosecutors, for allegedly overstating its ESG credentials and sustainability criteria applying to its investments.[12]
- Another risk related to climate litigation are civil lawsuits that are increasing in number. A case that is currently pending is the ClientEarth v. NBB case, where ClientEarth filed suit against the Belgian National Bank for failing to meet environmental, climate, and human rights requirements when purchasing bonds from fossil fuel and other greenhouse-gas intensive companies.[13] The NGO alleges that the NBB’s purchases of corporate bonds under the Corporate Sector Purchase Programme (CSPP), as well as the ECB’s decision on implementing the CSPP, violate the EU treaties and fundamental rights.
- In addition, entities could possibly be held responsible directly or indirectly for actions (contributing to) causing a climate-related event.[14] Liluya v. RWE AG is a case currently pending, where a Peruvian farmer sued RWE, Germany’s largest electricity producer, for emitting substantial volumes of greenhouse gases, and alleges that RWE is partly responsible for the melting of mountain glaciers near his town resulting in dangerously high water levels.[15]
- The global trends in climate litigation report from the LSE (2021) also mentions value chain litigation, cases of government support to the fossil fuel industry (e.g. through subsidies or tax relief), and cases focused on the distribution of the burdens associated with action, which may be classed as ‘just transition’ cases as areas to watch in the future.[16]
In Summary
Summarising, climate-related litigation takes multiple forms, is becoming more common and has made (financial) consequences for financial institutions more probable than ever.
Both the fact that regulation is developing incredibly quickly and that a verdict in one case can suddenly be applicable to a large number of other cases, make it important that the material risk of climate litigation is now real and needs to be taken seriously by financial institutions.
References
[1] J. Setzer & C. Higham, LSE report: Global trends in climate change litigation: 2021 snapshot
[2] https://www.urgenda.nl/en/themas/climate-case/climate-case-explained/
[3] https://ccli.ubc.ca/wp-content/uploads/2021/08/Climate-related-legal-risks-for-financial-institutions-Executive-brief.pdf
[4] http://climatecasechart.com/climate-change-litigation/non-us-case/milieudefensie-et-al-v-royal-dutch-shell-plc/
[6] https://www.ft.com/content/53dbf079-9d84-4088-926d-1325d7a2d0ef
[7] Solana, J. (2020). Climate change litigation as financial risk. Green Finance, 2(4), 344-372.
[8]https://www.ngfs.net/sites/default/files/medias/documents/climate_related_litigation.pdf
[9] https://ccli.ubc.ca/wp-content/uploads/2021/08/Climate-related-legal-risks-for-financial-institutions-Executive-brief.pdf
[10] http://climatecasechart.com/climate-change-litigation/non-us-case/mcveigh-v-retail-employees-superannuation-trust/
[11] https://www.reuters.com/article/us-volkswagen-emissions-idUSKCN12P22F
[12] https://www.spglobal.com/ratings/en/research/articles/211006-climate-change-litigation-the-case-for-better-disclosure-and-targets-12136711
[13] http://climatecasechart.com/climate-change-litigation/non-us-case/clientearth-v-belgian-national-bank/
[14] https://www.ngfs.net/sites/default/files/medias/documents/climate_related_litigation.pdf
[15] http://climatecasechart.com/climate-change-litigation/non-us-case/lliuya-v-rwe-ag/
[16] J. Setzer & C. Higham, LSE report: Global trends in climate change litigation: 2021 snapshot
