ECB’s Elderson urges banks to ‘get up to speed’ with climate litigation

The European Central Bank’s supervisory board vice-chair says lenders and their clients need to implement credible Paris-aligned transition plans to mitigate the rising risk of climate lawsuits.

The worsening impacts of climate change will lead to increased litigation, and banks and corporates must be prepared to be in the firing line, warned Frank Elderson, a member of the European Central Bank’s executive board and vice-chair of its supervisory board, at the organisation’s legal conference on Monday.

“Some Europeans faced hell this summer,” Elderson said. The fires and flooding seen in parts of Europe and countries around the world means the “tragedy of the horizon” is upon us, he said, quoting former Bank of England governor Mark Carney. For supervisors and banks, the reality of climate change means greater risk of litigation.

Globally, 560 new cases of climate litigation have been filed since 2021, he said. While states were initially targeted by non-governmental organisations and other climate campaigners, followed by companies, it is now the turn of financial institutions to be hauled before the courts for their role in financing fossil fuels or for preferring greenwashing to real action to cut emissions, he added. 

Good advice

Elderson’s speech contained various pieces of advice for leaders. He urged “CEOs, their general counsels and all executive and non-executive board members of the banks under our supervision [to] get up to speed” with the world of climate litigation and “mitigate the associated risks for your institution”.

Mitigating risks from climate litigation could include institutions taking it into account when rating clients’ probability of default, or assessing reputational risks linked to potential greenwashing, and the financing of polluting industries by defining scenarios and mapping possible affected stakeholders and profit and loss areas, he said.

“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,” Elderson added.

Any climate and environment-related litigation risks identified by a financial institution could be addressed through action plans requiring clients to adopt best practices or the bank could decide to limit its business relationship with certain clients, he continued. 

Supervisors’ homework

“Supervisors have homework to do too,” noted Elderson, drawing attention to a report on the micro-prudential supervision of climate-related litigation risks published last week by the Network for Greening the Financial System, the organisation Elderson chaired since its launch in 2017 before stepping down last year.

Central to dealing with climate litigation is for banks to try to avoid being the target of such cases in the first place by implementing credible Paris-aligned transition plans, he said.

“I don’t mean a slick advertising campaign with glossy photos of rainforests – that is just a recipe for greenwashing accusations. I mean realistic, transparent and credible transition plans that banks can and actually do implement in a timely manner,” said Elderson.

Banks can only manage to draw up and execute such plans if they have “accurate, granular data; conduct a robust materiality assessment; integrate transition planning into their internal discussions and strategic decision-making and establish proper internal governance to this effect”, he added. 

“With these elements in order, banks should be able to communicate how they are positioning themselves throughout the transition to a climate-resilient and sustainable economy,” he continued. 

The ECB’s own climate plans came under fire at the end of July in a report published by Greenpeace and three UK universities. The study claimed the ECB’s decarbonisation strategy was “rapidly losing steam”, with the central bank failing to “clean its portfolio of dirty bonds” from energy giants such as ENI, TotalEnergies, Shell and BP.