New legal risks for banks related to climate change and possible mitigation strategies

Anthropogenic global warming and climate change-related risks are facts. While physical risk (which can cause damage and losses) and transition risks (due to disorderly policies and transition pathways) are generally understood, new types of risk for financial institutions are emerging in banking supervision and in so-called climate change litigation. An example of the former is the new ‘risk from misalignment’ of banks with European Union (EU) climate objectives, as recently discussed by the European Central Bank (ECB). This risk is caused by the requirement to align with EU climate change goals, which may not be compatible with the path a financial institution in a market economy might choose to adopt during the transition to cleaner energy. The second development is driven by climate activists suing banks in ‘strategic litigations’ based on the concept of ‘duty of care’, which may not require causality as a legal precondition. While these developments can be debated, they are likely to be the ‘new normal’ for financial institutions. It is proposed that these new types of climate change-related legal risks can be managed through a four-step mitigation approach as an iterative process of awareness, monitoring, active mitigation and observing emerging trends.