Investors Face Direct Risk from Climate Litigation

While indirect risks remain predominant, litigation could target asset owners following increased focus on financial institutions.  

Investors will be increasingly subject to direct climate litigation risk in 2024 rather than indirect risks through investments as the types of cases brought evolve.  

Direct litigation risks include challenging investors’ mismanagement of climate and biodiversity-related risk, breaches of fiduciary duty, greenwashing, or financing environmental and human rights-related harms.  

The risk could also manifest in strategic litigation being brought or encouraged by NGOs seeking to compel or exert pressure on investors to change investment strategy. This could stem from campaigns which lobby for divestment from polluting companies or projects. 

“In our view, the risk to investors from ESG or climate litigation remains primarily indirect,” Mark Banks, Dispute Resolution Senior Associate at Baker McKenzie told ESG Investor. “However, institutional investors are not immune from direct claims being made against them.” 

He added there was “no reason in principle why asset owners could not be targeted in a similar way to financial institutions”. 

Released last week, Baker McKenzie’s Global Disputes Forecast 2024 flagged there will wider range of organisations targeted by ESG litigation and highlighted increasing climate change litigation against financial institutions as a key client concern.  

“We expect climate litigation to pose an increasing threat to businesses over the next three-to-five years, particularly in Europe,” said Banks.

Robert Clarke, Lawyer at environmental law firm ClientEarth, said investors should consider direct legal action a real possibility.

“Scrutiny of their operations and financing is mounting,” he added, noting the consequences to investors are both financial and reputational. 

ClientEarth recently labelled as a “missed opportunity” the decision of the High Court of England and Wales to dismiss a case in which it sought to hold oil giant Shell’s directors personally liable for failing to prepare for the energy transition. 

Financial institution focus 

Following successful litigation in 2021, a Dutch court required Shell to slash its emissions by 45% by 2030 and held the firm responsible for Scope 3 emissions from its value chain. 

Airlines in the EU and US have also faced litigation over accusations of greenwashing.  

Targeting some of the biggest carbon emitters, nearly 2,500 climate lawsuits have been filed globally to date, more than double the number five years ago. 

The University of Oxford’s Oxford Sustainable Law Programme (SLP) report noted that litigation against corporations and financial institutions is in its early stages. 

Last February, French climate campaigners sued BNP Paribas for financing fossil fuels in the first climate-related lawsuit against a commercial bank. Earlier this month, fellow financial institution ING was sued for breaching its duty of care by financing major greenhouse gas (GHG) emitters, which could lead the bank to reduce its CO2 emissions by 48% by 2030. 

Litigation against institutions and investors on grounds of liability for finance emissions are becoming more common, said Thom Wetzer, Director of the Oxford SLP. 

The parties bringing litigation cases are “becoming increasingly sophisticated well resourced”, he added. 

Indirect investor risks underestimated 

Investors are still exposed to indirect litigation risk, arises from underlying investments suffering loss as a result of being targeted by climate-related legal action. 

“Investors often underestimate indirect legal risks despite the financial toll of lawsuits against investee companies,” Clarke said. “Successful litigation forcing companies to recognise stranded assets, accelerate their net zero transition, or pay damages for their contribution to environmental and human rights harms could pose significant financial shocks in some industries, with investors paying the price.”  

This October, a case will be brought against mining giant BHP, on behalf of more than 700,000 Brazilians, over the 2015 Fundao iron ore tailings dam disaster, at London’s High Court.  

The claim, for £36 billion (US$44 billion), could have a major impact on the firm’s share price, a knock-on effect on investors, and potentially set a precedent for future litigation. 

“Ready access to capital remains the largest barrier to large class action-style claims being brought and sustained to trial,” explained Banks. “Given the proliferation of litigation and other funds focusing on climate litigation as a potential source of revenue, that barrier has been significantly eroded.” 

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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