Climate Litigation and the Financial Sector

The key enabling role of the financial system

The financial services industry (FSI) constitutes the metaphorical lifeblood of the economy, allocating capital from investors to individuals and businesses in need of lending and financing. It also provides key risk transfer and risk management services, such as insurance, that help spread risks across time, geographies and economic actors. The emissions funded or insured by FSI institutions are typically much greater than their own direct emissions, so the financial sector plays a critical enabling role, determining which economic activities are financed.

Climate litigation trends

This report analyses and comments on the current trends of climate cases related to FSI across the following litigation categories:

• Where claimants pursue their right to access information from FSI institutions on their climate-related risks and impacts, investments, strategies and more;
• Litigation claims that FSI institutions have violated a duty of care or due diligence obligation, thus relying on the ‘inside-out’ materiality of the external impacts from a company’s business on climate, nature and people;
• Conversely, claims may leverage the traditional ‘outside-in’ financial materiality, in which companies are accused of breaching their fiduciary duty to identify, manage and disclose sustainability-related potential risks and opportunities created for their business;
• The insurance sector is uniquely exposed and can face insurance-related claims for a variety of reasons: where insurers are the direct target of litigation as a corporation, where they are obligated to pay claims or legal expenses for their clients resulting from liability insurance coverage, and also due to their potential involvement in disputes regarding the indemnification of climate-related property damage;
• Litigation can also relate to greenwashing, such as the publication of misleading information regarding the environmental or climate benefits of the products and services of an FSI company.

In addition, direct protest actions from NGOs or individuals and their subsequent litigation issues are a separate, but also growing business risk for companies to consider going forward.

The ongoing legal battles over ESG regulation

Furthermore, there are many cases which do not raise direct claims against individual FSI institutions but rather question specific ESG regulations. For instance, multiple legal challenges are also pending against the SEC’s climate-related disclosure rules in the US, some claiming that they violate the First Amendment rights of companies and others arguing that the rules fall short of effecting real change. In Europe, other cases are pending against the EU Commission in relation to the EU Taxonomy Delegated Regulation. The outcome of such legal battles can ultimately have significant regulatory consequences for the FSI sector.

Outlook

In addition to actual litigation, reputational issues (such as fear of being accused of greenwashing) and legal threats (such as the ones which led to the undoing of the Net Zero Insurance Alliance in 2023) play an increasingly material role. In the absence of significant legal and regulatory progress, direct action in the form of protests and boycotts may also grow and become more radical.

As there is no denying that the financial sector plays a critical indirect role in climate change, it is essential that financial institutions enhance their corporate responsibility and take steps to mitigate their impact on the climate to avoid potential legal implications. Additionally, it is imperative that companies implement effective risk management processes against climate litigation, by complying with reporting requirements while avoiding the risk of greenwashing.

Thank you to the authors of this article: Jerome Crugnola-Humbert and Amanda Bänziger