Fund Solutions

Climate Litigation Risk Rising for Institutional Investors

Regulation “presenting a whole new world” of legal risks for financial players.

Institutional investors are increasingly likely to be sued for failing to fulfil fiduciary duties or comply with regulations relating to climate risks, according to legal and regulatory experts.

Studies have shown that climate litigation is an increasingly popular avenue for shareholders, NGOs and the public to hold carbon-intensive companies to account on their emissions-related targets and decarbonisation progress. A famous example is oil and gas giant Shell being ordered by the Dutch court to slash its CO2 emissions by 45% compared to 2019 levels by 2030.

This means investors have largely been concerned with their exposure to climate litigation through investee companies. However, experts have warned that institutional investors are risking being taken to court by beneficiaries or climate activist NGOs if they are not seen to be prioritising climate-related issues in their investing and portfolio management decisions. Further, with increasing climate-related regulation, investors demonstrating non-compliance will also suffer a legal fallout.

“We are seeing a growing number of, not just traditional litigants targeting carbon majors and companies banks’ have exposure to, but potential litigators focusing on shareholders and investors,” said Rebecca Burton, Managing Associate at law firm Linklaters, speaking at a webinar hosted by the UK Sustainable Investment and Finance Forum (UKSIF).

“From a retail consumer perspective, litigation is targeting the greenwashing of investment products. More broadly, because of the increasingly mandatory nature of climate-related disclosures, the question of how climate is affecting the business itself is presenting a whole new world of potential litigation against financial players,” she added.

The Task Force on Climate-related Financial Disclosures (TCFD) framework is gradually being mandated around the world, including countries such as the UK, New Zealand and Singapore. Non-financial and financial companies are required to disclose their exposure to and management of climate-related financial risks under four core pillars: governance, strategy, risk management, and metrics and targets.

Multi-pronged pressure

If governments are being held to account over their climate-related targets, financial and non-financial companies in those jurisdictions can expect to see an increase in focus on these issues, panellists noted.

Environmental law group ClientEarth this week announced it would be taking the UK government to court over its “inadequate” net zero strategy, noting breaches in its legal obligations under the Climate Change Act to demonstrate how UK policies will help reduce emissions enough to meet the legally binding targets.

Central banks and prudential regulators such as the European Central Bank and Bank of England are also recognising the financial risks posed by climate litigation, for banks themselves as well as other financial institutions.

Asset owners are already being held to account if they don’t provide full transparency to end-users and beneficiaries.

In November 2020, Australia’s Retail Employees Superannuation Trust (Rest), which has A$57 billion in assets, agreed to a settlement of litigation regarding the fund’s handling of climate risks. The fund was taken to court by pension member Mark McVeigh, who noted that Rest had failed to provide information related to climate change business risks and hadn’t disclosed any plans to address those risks.

Rest agreed to align its portfolio with a net zero by 2050 target and to report against TCFD. The fund will also conduct scenario analysis to inform its future investment strategy and strategic asset allocation, advocating for investee companies to also comply with the goals of the Paris Agreement.

“Rest’s policy requires that the management of climate change risks and also involves the disclosure to members of those risks, as well as the systems, policies and procedures maintained by the trustee to address those risks,” the statement noted.

Litigators, such as climate activist NGOs, are beginning to recognise that putting more legal pressure on financial institutions will also bear fruit against companies themselves, said Nigel Brook, Partner at London-based Clyde & Co.

“From the NGOs’ perspective, they have to consider which levers will have the biggest impact,” Brook said. “They are beginning to recognise that putting enormous pressure on the financial markets will make them put more pressure on heavy-emitting companies and also look more carefully at their green investments.”

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