ECB's Elderson: Banking Sector Must Deal With Climate-Related Litigation Risk

4 September 2023

By Mariana Somensi – NICOSIA (Econostream) - European Central Bank Executive Board member Frank Elderson said on Monday that the banking sector must address the risks of climate- and environment-related litigation to avoid financial losses.

In a speech at a conference organized by the ECB, Elderson noted that besides the costs of damages, penalties, legal expenses and the hit to a company’s stock price, ‘[t]here could also be potential risks to a company’s viability if a ruling were to result in unexpected adaptation costs or outright stranded assets that had not been priced in.’

In this scenario, other companies in the same line of business, as well as the banks financing these, would be impacted, he noted.

But banks could also come under direct threat, given that ‘litigants are turning their attention to the financial sector, with the idea that if they sue the banks, they can “turn off the taps” of funding to high emitters’, he said.

As to how banks can ward off such risks, the ECB’s 2020 guide on climate-related and environmental risks, updated in 2022, was one resource, he noted.

Another avenue of defence was proper planning, underpinned by an awareness of the threat to their business model from environmental litigation in some jurisdictions, he said.

‘And given the determination of the NGOs, and their knack for forum shopping – choosing the jurisdiction most likely to provide a favourable verdict –, we don’t know how many banks they will be aiming for,’ he explained.

‘To address this source of litigation risk, the best advice I can give is that banks should start putting in place their Paris-aligned transition plans,’ he said.