Financial market players acknowledge the potential financial risks associated with climate litigation, according to legal professionals

In a significant development, the Grantham Research Institute has published its annual climate litigation snapshot report, revealing a surge in climate-related lawsuits worldwide. This trend is particularly noticeable in the global south, where countries like Brazil, India, South Africa, and Indonesia have seen a spike in such cases.

In the United States, controversial challenges to ESG-oriented investment strategies continue, with conservative political groups, certain industry associations, and some state attorneys general arguing that ESG investing may conflict with fiduciary duties or economic interests. In 2024, multiple climate-related lawsuits have been filed, including legal challenges by Native American tribes and religious groups against mining projects like the Resolution Copper project in Arizona, which was contested due to environmental and cultural concerns related to sustainability and climate impacts.

Across the Atlantic, the European Banking Authority's ESG risk management guidelines mandate banks to identify and mitigate climate-related risks, including litigation risk. Frank Elderson, European Central Bank executive board member, has warned that 70% of European banks analysed could face elevated litigation exposure due to misalignment between their credit portfolios and public Paris Agreement commitments.

The UK supreme court has also made a landmark decision, deeming an oil well extension unlawful for failing to consider scope 3 emissions from supply chains under planning laws rather than financial disclosure rules. This decision underscores the growing importance of climate considerations in legal proceedings.

In China, the state actively encourages litigation to advance climate policy. The Chinese Supreme People's Court issued guidance in 2023 encouraging courts to engage with litigation around green development, heavy industry restructuring, and establishing carbon markets, aligning judicial efforts with national climate targets. As a result, China has seen 518 climate-relevant cases, mainly involving carbon market regulation, energy transition contracts, and protection of carbon sinks.

The report finds that judicial interventions are dynamically reshaping the risk landscape. Significant financial exposures are expected to emerge if landmark cases result in large-scale judgments or settlements. The authors predict that the role of litigation in global climate governance will become even more pivotal and contested in the coming years.

Banks are under pressure and face direct legal exposure and indirect risk through clients, according to the report. The authors suggest that the coming years will show whether litigation can continue to catalyse action in the face of intensifying climate risks and shifting political currents.

In Brazil, the federal prosecutor's office and environmental agency are pursuing more than 30 lawsuits related to illegal deforestation in the Amazon. The global south's approach to climate litigation involves enforcement actions and cases seeking compensation for localised climate damages.

Research shows litigation risk now ranks above physical climate risk in perceived materiality among equity investors and analysts. The role of litigation in global climate governance is undeniably significant, and its influence is expected to grow in the years ahead.

Financial market players acknowledge the potential financial risks associated with climate litigation, according to legal professionals