Banks face rising dangers from local weather lawsuits | USAEMALL.com

Welcome back.

Climate-related lawsuits against companies have emerged at a growing pace in the past few years — including cases against European banks ING and BNP Paribas. A German court ruling last month suggested the risk of business disruption from these lawsuits might be greater than previously thought.

But as they ratchet up their fossil fuel lending, are banks taking that risk seriously enough?

CLIMATE JUSTICE

Fossil fuel bets could be riskier than banks realise

For a few years after many of the world’s biggest banks set net zero targets in 2021, an optimistic case could have been made that they were at least making some progress towards that goal.

Fossil fuel financing by the world’s 65 largest banks by assets declined by 15 per cent in 2022, and another 10 per cent in 2023, according to the annual Banking on Climate Chaos report.

But last year, according to the latest edition of the report published yesterday, it came roaring back — with a 22 per cent annual rise that has nearly wiped out the modest declines achieved in the prior two years. Fossil fuel finance by the banks amounted to $869bn, almost back up to the $922bn provided in 2021.

The rise was broad-based, with two-thirds of the 65 banks increasing their fossil fuel finance last year. But it was driven disproportionately by the biggest US banks, where the growth rate far outstripped the wider average.

JPMorgan, Bank of America and Citigroup — the world’s three largest fossil fuel financiers — increased their financing for fossil fuel companies by a combined $42.6bn last year, a 42 per cent annual rise. At Barclays, by far Europe’s biggest fossil fuel financier, the figure grew by an even more bullish 55 per cent.

In response to the report, the banks have said that their financing figures reflect the needs of society, and highlighted their extensive financing for the green transition. JPMorgan, for example, said it provided $1.29 of low-carbon energy finance for every dollar backing the high-carbon sort. (This seems less impressive when you consider that the global ratio last year was 2:1, according to the International Energy Agency.)

Nearly all the financing covered by this report — produced by non-profit groups including the Rainforest Action Network — came before Donald Trump’s victory in November’s US presidential election, which has provided further tailwinds to fossil fuel investment this year.

But these fossil fuel bets could prove riskier than some bankers realise. A new study by academics at the London School of Economics’ Centre for Economic Transition Expertise argues that banks are failing to pay enough attention to the risk of climate-related lawsuits, which have been steadily growing in frequency over the past decade.

Last month, a German court dismissed a climate case brought against power company RWE by a Peruvian farmer for lack of evidence of harm — while asserting that, where such evidence can be shown, such a case may have merit. In another recent case involving oil company Shell, a Dutch court ruled that high-emitting companies had a “duty of care” to tackle climate change — and suggested that ongoing fossil fuel investments could clash with this duty.

Having studied banks’ public disclosures, the academics found that the lenders acknowledged they faced material risks around climate litigation, but tended to be vague about the details. Where they did go into detail, the banks broadly focused on the threat of greenwashing lawsuits, rather than litigation against banks or their clients over fossil fuel production. In banks’ presentation of the risks, they tended to present them as “reputational” rather than “operational” — perhaps because the latter type of risk can lead to increases in required capital buffers, which weigh on earnings.

In short, the academics reckon, supervisors need to pay closer attention to the expensive risks that climate lawsuits could create for banks. As banks’ fossil fuel portfolios continue to grow, so does the potential for trouble.

Smart reads

Hard to quit Why is coal demand still growing 10 years after the Paris Agreement? This FT Big Read explains.

Colour crackdown Kraft-Heinz is set to remove artificial dyes from US products as companies face government pressure over synthetic ingredients.

Up and running Norway has launched the world’s first full-scale industrial carbon capture and storage operation.