NGFS warns of rising climate litigation cases

The Network for Greening the Financial System (NGFS) has released two complementary reports highlighting the rise in climate-related litigation. Ravi Menon, chair of the NGFS, encouraged central banks and supervisors to “build up their capabilities to assess and manage the risks posed to the financial sector”, due to the increase in cases.

The first report outlines trends and developments over the past two years, and finds that litigation is “growing rapidly, not only in terms of the volume of cases being initiated, but also crucially in terms of the legal arguments being used, and the diversity of addressees of such claims”. The results echo a report from the London School of Economics which found that “climatewash” litigation cases rose from less than 10 in 2020 to 26 in 2022.

The second report highlights the growing relevance of climate-related litigation to microprudential supervision. It reveals that 93% of NGFS members have not quantified the impact of climate litigation on regulated financial institutions. Options for supervision are sketched out and encourage supervisors to “adopt a risk-based approach” to mitigate the direct costs such as damages, fines, legal and administrative fees, as well as indirect costs which include insurance pay-outs, credit losses and adverse business impacts.

European Central Bank vice chair Frank Elderson welcomed the report, saying that, should courts mandate a legal obligation for corporations to take proactive measures to reduce their emissions, it would carry significant implications. It would “quite frankly be revolutionary”, he said, as such an obligation is not currently factored into corporate planning and decision-making processes.

Commenting on possible supervisory approaches, the second report suggests member organisations scrutinise current and future patterns in order to assess if their jurisdictions are susceptible to high levels of legal action. Furthermore, they should pinpoint financial institutions with substantial involvement in industries known for high emissions.

The reports list a range of potential supervisory methods, proposing that central banks explore adopting climate scenario simulations to assess the risks associated with legal actions. They also suggest creating universally accepted definitions for climate litigation risks within the market and establishing clear guidelines for integrating this aspect into governance and risk management frameworks.

Typically, litigation risk falls under the umbrella of operational risk. However, the NGFS has emphasised that climate-related litigation risk may warrant “special consideration”. This is primarily due to the potential for substantial financial liabilities and mounting scientific evidence linking specific actors to climate-related damages.

The NGFS also highlighted instances of greenwashing litigation cases such as when Goldman Sachs was made to pay a $4mn penalty over ESG fund claims last year.

“The notion of prudent financial management is being reassessed in light of the transition to a low-carbon economy,” the report notes while pointing to examples of beneficiaries compelling directors to implement plans to divest pension schemes from fossil fuels.

Crucially, 2023 saw the first climate-related litigation cases against a credit institution. NGOs are using corporate due diligence legislation in France to take legal action against BNP Paribas for its fossil fuel financing.