On 4 September 2023, the European Central Bank (ECB) published the keynote speech, given by Frank Elderson, Member of the ECB Executive Board and Vice-Chair of the ECB Supervisory Board, delivered at the ECB legal conference. The speech addressed the risks of climate and environment-related litigation for the banking sector.
In his speech, Mr Elderson warned that climate and environment-related litigation (climate related liability risk) is becoming a major source of risk for supervisors and banks. As a major source of risk, it needs to be properly anticipated and addressed. And it is particularly important at a time when non-financial but also financial companies, including banks, are becoming the direct targets of such litigation. Mr Elderson also warned that banks need to be aware that in certain jurisdictions the impact of climate-related litigation could dig right down into the viability of their business models.
In terms of how can banks may properly address and mitigate climate-related litigation risk and how prudential supervisors may guide them Mr Elderson states that banks should start putting in place their Paris-aligned transition plans – realistic, transparent, and credible transition plans that banks can and actually do implement in a timely manner. He also mentions that:
- In 2020 the ECB published its guide on climate-related and environmental risks. The guide contains several expectations that can help to address climate-related litigation – within existing categories of risk.
- In its 2022 thematic review the ECB set institution specific remediation timelines for meeting expectations by the end of 2024, including intermediate deadlines of the end of last March and the end of this year. The ECB also provided a compendium of good practices implemented by supervised banks, including practices to address climate and environment-related litigation risks.
- Some banks have started to consider climate-related liability risk, and a few have started to quantify possible losses. One example of good practice relates to how banks calculate a client’s credit risk. Some include liability risk as a factor when rating their clients’ probability of default to better price in this type of risk.
- Some banks have assessed reputational risks, including those related to potential greenwashing and financing of polluting industries, by defining a set of scenarios and mapping the possible affected stakeholders and the profit and loss area that would be most affected. The banks then use specific case studies to quantify the possible losses that could arise.
- Another good practice is to mitigate the risk of greenwashing by ensuring adequate disclosures, by considering this risk in the governance framework, and by conducting regular compliance checks.
For further updates on regulatory developments in the ESG space please visit our Financial Services Regulatory Developments in ESG hub.