Financial institutions: soon in the eye of the climate litigation storm? – Sylvie Gallage-Alwis

By Sylvie Gallage-Alwis

Partner Sylvie Gallage-Alwis examines the development of a Climate Transparency Hub platform by the French Agency for Ecological Transition, and further discusses how financial institutions are being held accountable and will have to play a significant role in the States’ reasoning, in Thomson Reuters.

Sylvie’s article was published in Thomson Reuters, 27 November 2020, and can be found here. A version of this article was published in La Lettre des Juristes d’Affaires, 15 January 2021, and can be found here.

Ten years ago, the International Finance Corporation (IFC), from the World Bank Group, published a report. In its introduction, it said: “Climate change is set to have a dramatic economic impact… Failure to consider climate change in investment strategies can undermine projected financial returns and affect the non-financial risk management of institutions, particularly on development, environmental, and social issues… As they channel investment, financial institutions have an opportunity and responsibility to take a leading role in mitigating and adapting to climate change.” (IFC, Climate risk and financial institutions, challenges and opportunities, 2010).

Climate Transparency Hub

By the end of 2020 and more importantly in 2021, a significant number of steps will be implemented in this respect, including regulatory changes in Europe. One of the initiatives worth mentioning at this stage is the Finance ClimAct program, initiated exactly a year ago and that has been in the headlines this past month given the imminency of the launch of one of its tool: the Climate Transparency Hub.

The Finance ClimAct initiative’s purpose is presented as follows: “the financial system needs to put climate considerations at the heart of its operations, in order to participate in the transition to a low carbon and climate-resilient economy while managing the climate risks to which it is exposed. In order to achieve this objective, the Finance ClimAct project will develop the tools, methods and new knowledge necessary (1) for savers to integrate environmental objectives into their investment choices, and (2) for financial institutions and their supervisors to integrate climate issues into their decision-making processes and to align financial flows with energy climate objectives”.

In this respect, the Climate Transparency Hub is “a tool for monitoring and identifying good practices in climate reporting, the platform covers all financial institutions (institutional investors, asset managers and banks) subject to regulatory obligations and makes this information available to the greatest number of people, in a centralized manner” (Finance ClimAct website).

The French Agency for Ecological Transition (ADEME) has announced end of October 2020 that it will be ready to launch it in due time, with the cooperation of other institutions such as the French Autorité des marchés financiers (AMF). The reporting will first be on a voluntary basis to then become mandatory.

The context of this launch and overall initiative is, more specifically, the European Green Deal and the European 2030 Climate Target Plan together with the promise made by the European Commission to review, by June 2021 “all relevant policy instruments to achieve the additional emission reductions” to reach a target to cut greenhouse gas emissions by at least 55% by 2030.

In this scope, financial institutions are asked to focus on “green investments” and help develop sustainable projects rather than projects which can trigger pollution. Many have highlighted that the green economy should become highly beneficial to the private financial sector (banks, insurers, asset managers, investors, etc.). The IFC said “climate-smart investment” would indeed represent, just in emerging markets, $23 trillion between 2016 and 2030.

New regulation: new litigation

In this line, the financial institutions need to become very familiar with the European Commission’s “sustainable finance” goal, which it defines as “a work stream to support the European Green Deal channelling private investment to the transition to a climate-neutral economy”. This knowledge and compliance with new regulations to come will be vital to avoid what usually comes with new regulation and complex regulation: new litigation.

As such, banks, insurers, investors’ policy towards future investments and the type of clients/projects they decide to invest on will become evidence of whether climate change is at the heart of their decisions. NGOs are indeed watching. For instance, a French NGO (Notre Affaire à Tous) has published a report analysing 25 companies, including four major banks and one insurer, stating that, the latter have to increase their goals as their published initiatives would not, as they currently stand, allow the financial sector to comply with the European authorities’ and French authorities’ goals.

It notably criticizes the fact that these institutions’ initiatives would allegedly lead to carbon neutrality in 2100 and the fact that if they have dropped unusual uses of gas and petrol, they are still investing in standard gas and petrol use. To reach this conclusion, the NGO notably analysed the websites of these institutions, the publications they have done on climate change and their clients.

Statements made by financial institutions on their websites for instance could be the ground of future claims, notably on consumer law grounds for deceit or misleading advertising. The financial institutions can also become the target of the so-called breach of the vigilance duty (devoir de vigilance) which, this past year, has become the number one legal ground used to sue large private corporations before French courts (e.g. claim against Total).

But one can fear that the financial sector will also become part of future claims against corporations on the ground that they participate to the risk for part of the population or specific people to develop a disease linked to air, water, ground pollution (e.g. concepts of ecoanxiety, moral distress, etc.) or to become the target of specific taxes or claims by the States.

Both in 2019 and 2020, the French State has been condemned by both the Court of Justice of the European Union and the French State Council on the ground of air pollution. As a consequence, it has announced that a number of measures will be implemented to reduce said pollution, measures that should affect the industries participating in such pollution. Even if there will be discussions around the causal link, one could imagine suing the banks which supported the companies that will be targeted by such claims.

In other words, the financial sector should recognise and seize all the bright sides of the green economy and the opportunities it brings. It should however not be blind-sided by the fact that such investments will be used as evidence that they could have done so earlier and that they have the ability to choose the projects in which they want to invest.

The will of the European authorities to have as much transparency as possible apply to the financial sector should be already anticipated and a balance should be made between the pros and cons of a non-green/sustainable investment from now on. Document and data preservation, establishment of specific environmental studies should also become part of what each file should contain in order to be ready to answer to future litigation threats, climate litigation being one of the rare types of litigation which has not been slowed-down by COVID-19.

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