Climate Related Litigation

Climate litigation is “growing rapidly” and central banks should monitor associated financial risks, says this report from the Network for the Greening the Financial System (NGFS). The report outlines key trends in climate litigation and forecasts an increase in cases concerning biodiversity loss, as well as continued expansion in the scale and pace of climate litigation.

The authors find that the scope, volume and addressees of climate cases have substantially expanded since the previous NGFS review in 2021. The current report is part of ongoing work by the NGFS to address climate litigation risk and was published with an accompanying document exploring the microprudential implications of such risks.

The report mentions various financial risk factors that may result from climate-related legal challenges. These include reputational damage, direct financial costs, spillover effects and stranded assets. The authors also find that litigation risk can reduce firm value and creditworthiness, and may exacerbate existing transition risks.

The report stresses that central banks should consider how litigation risk factors influence microprudential supervision and financial stability.

According to the authors, climate cases are expanding the traditional notions of litigation risks – NGOs are engaging in strategic litigation which aims to influence public policy through publicity, rather than via financial outcomes.

The authors expect the pace of litigation to accelerate alongside the passage of climate-focused legislation, in particular from laws that concern greenwashing, climate disclosures and corporate due diligence. For instance, they state that improved regulatory reporting requirements may increase the likelihood of cases against financial institutions.

The report notes that public authorities are the primary targets of climate litigation, and that central banks and financial supervisors have started to be named in such cases. In the last two years ClientEarth, an environmental law charity, has brought cases against both the National Bank of Belgium and the UK’s Financial Conduct Authority.

Plaintiffs have used a wide range of legal fields, from administrative to public international law, to require public entities to fulfil their international climate obligations. In some cases, litigants have used climate commitments made by national governments to challenge decisions to grant licences for, or invest in, fossil fuel-related projects. These cases can pose an immediate risk to institutions with a financial interest in such projects.

Climate-related litigation against financial institutions is also on the rise, say the authors. The notion of “prudent financial management is being reassessed” in the light of the transition and neglecting climate related financial risk may be considered a breach of fiduciary duties in future company law.

For these reasons, the authors say supervisors may need to ensure such liability risks are incorporated into financial institutions’ operational risk management.

Non-financial institutions, in particular fossil fuel and energy companies, are the final, significant class of defendants discussed in the report. The authors note that non-financial companies in an increasing range of sectors, including transport, food, and plastics, are now subject to legal proceedings.