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A rising trend of cross-border environmental legal action against energy companies is at risk of spreading to banks. Analysis by Claude Brown at Reed Smith.

Last week, a senior official at the European Central Bank (ECB) issued a warning to banks – stick to climate goals or risk being sued. This is not hyperbole. Research from the Network for Greening the Financial System shows that climate-related lawsuits are becoming increasingly common. 

Following this warning, Paris and New York joined a coalition of campaign groups in an ongoing legal action against the international oil and gas group TotalEnergies, seeking to force the company to reduce greenhouse gas emissions, and commit to the objectives and targets outlined in the Paris Agreement. 

This is a drastic move, and one which should be viewed through the lens of a landmark Dutch court ruling in May 2021. In that notable case, campaign groups and individuals brought a climate change action against Royal Dutch Shell. The judge ruled in their favour, ordering the energy company to reduce its carbon emissions by the end of 2030 to a level equivalent to 2019 – a reduction of 45%. 

Importantly, not only did the court rule that the company owed residents generally in the Netherlands a duty of care to reduce emissions, but it also set a clear precedent linking human rights and climate change. It is apparent that others are seeking to capitalise on that precedent – indeed, the coalition, of which Paris and New York are now part, referenced the case in its preliminary statement, writing that its desired outcome might be “similar to the Shell decision in the Netherlands”. 

As a trend, climate-related litigation is on the increase. The link between climate change and human rights is currently less developed, although equally dangerous for corporations and, by extension, for banks. 

A question of geographies 

While the Dutch court only admitted claims from Dutch residents, rather than the world at large, there are questions over whether the arguments used in the case could apply, for instance, to the UK, given that it is a signatory to the European Convention on Human Rights. In the cases that have been brought thus far, claimants must demonstrate a clear connection to the issue (i.e. by nationality or residence).

financing a project anywhere in the world, if it had adverse implications for the environment, would risk making a bank liable

However, another significant climate change lawsuit may provide more clarity on the scope of such claims. Luciano Lliuya v RWE AG, currently on appeal, involves an indigenous Peruvian farmer suing the German energy company RWE for the costs of preventing a glacial lake from flooding. A ruling in Mr Lliuya’s favour would set the precedent that corporations can be held responsible for the impacts of climate change in countries outside their sphere of operations. 

If this trend were to prevail, the ramifications for banks are clear. Financing a project anywhere in the world, if it had adverse implications for the environment, would risk making a bank liable. 

Litigation and the banking industry 

As it stands, there is currently only one case of an environmental claim related to human rights against a bank (albeit a central bank): ClientEarth v Belgian National Bank (BNB). This litigation concerned the bond-buying programme run by the ECB – the Corporate Sector Purchase Programme – in which the BNB participated by buying bonds in companies that ClientEarth (an non-governmental organisation) claimed were fuelling the climate crisis. ClientEarth claimed that the ECB and BNB were obligated under human rights law to consider the “risks to human rights arising from the climate impacts of the programme”.

Although the claim failed on procedural grounds, it may only be a matter of time before commercial banks are subject to similar litigation. This possibility should be firmly on the radar of financial institutions, not least because human rights claims are more difficult to defend. If a court is prepared to accept a case as a human rights claim, it is necessary only to show infringement of an individual’s rights – rather than actual damages to the climate or claimant caused by the corporation’s policy and actions. 

There are numerous reasons that banks, and the financial industry as a whole, should be concerned. First, any claim itself brought against a bank carries obvious financial and reputational risks. Second, as more cases are brought on climate change grounds, we may even see claims brought against syndicates of banks, spanning different geographies. If this were to transpire, rendering the broader banking industry susceptible to litigation of this nature, then the problem shifts to a new plane. The risk becomes not one of isolated, localised claims – but a systemic issue that could leave the banking system vulnerable. 

Another trend is the growth of environmentally oriented litigation funders, especially those with an activist agenda. These specialist funders, which are increasing in number, could provide the capital to progress similar change-inducing litigation. Given that success breeds imitation, the potential growth of this trend should not be ignored. 

Is there a solution?

What, then, can be done to safeguard against the growing threat of human right-based environmental claims being brought against banks? The solution lies in preparation. 

Any corporate governance strategy must ensure that awareness of sustainability and climate change issues is systematically embedded and integrated into the banks’ strategy, reporting, policies and processes. It is also important to think at least three steps ahead. Short-term actions can have unforeseen consequences that open up banks to litigation in the future. 

Through a combination of embedded governance and long-term issue awareness, banks can protect themselves against damaging claims and ensure they are better prepared for the growth in climate change claims on human rights grounds.

Claude Brown is a partner at international law firm Reed Smith.


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