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Supervisors Urged to Assess Climate Litigation Risks for FIs

Climate litigation is becoming a major problem for financial institutions, according to the Network for Greening the Financial System (NGFS), requiring guidance from financial supervisors to help firms contend with the associated financial, reputational and legal risks. The NGFS has published its findings on climate-related litigation trends, also issuing guidance for micro-prudential supervision of related risks for financial institutions. The volume of climate-related litigation cases against states, public entities and corporates, as well as the breadth of legal arguments being used, is rapidly growing, the NGFS noted in one of its new reports. “It is crucial for central banks, supervisors and financial institutions to be aware of these trends, and to take action to address these risks,” said Chiara Zilioli, Chair of the Experts’ Network on Legal Issues and General Counsel of the European Central Bank. NGFS’ second report has highlighted the growing relevance of climate-related litigation to micro-prudential supervision, asking supervisors to identify risk drivers, transmission channels and exposures to properly assess ensuing financial risks to a financial institution, noting litigation could lead to both direct and indirect costs for firms. Providing a reliable estimate and prediction of future climate-related litigation risks will be challenging for supervisors, the report acknowledged. Tolga Yalkin, Chair of the NGFS Workstream Supervision and Superintendent of Policy, Innovation and Stakeholder Affairs at the Canadian Office of the Superintendent of Financial Institutions (OSFI), said: “Climate change is happening across the globe faster and more profoundly than some expected. These significant and rapid change will increase litigation. Prudential supervisors must make sure financial institutions are addressing this litigation risk.”  

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