Climate litigation expected to contribute to financial risk, says ratings giant

Climate-related litigation could translate into financial consequences for affected companies, according to a new whitepaper from S&P Global Ratings.

Despite S&P noting that no climate litigation cases have yet resulted in awarded damages and that it was not aware where this type of litigation has had a material impact on any issuer's creditworthiness, “we expect the rise of climate litigation may be one of many mechanisms by which transition and physical risks crystalizes for issuers, carrying with it potential for reputational and financial risks.”

S&P’s whitepaper Climate Litigation: The Case For Better Disclosure and Targets – produced in collaboration with the ratings agency’s Sustainable Finance Scientific Council – comes as climate change-related litigation is on the rise. 

The report pointed to how between 2017 and 2020 the number of court cases nearly doubled, and that more than 1,800 cases had been filed in 40 countries as of May 2021. 

Amongst the number of significant rulings “that may have wide-ranging implications”, the landmark case against Royal Dutch Shell was highlighted. The May ruling saw the energy major be ordered by a Dutch court to reduce its emissions.

The report also flagged that a growing body of litigation cites “securities laws in an attempt to compel issuers of securities to be more transparent about climate-related risks and opportunities.”

It also pointed to the emergence of greenwashing claims – allegations that companies' marketing materials falsely paint a rosy picture of an issuer's climate risks and strategic positioning – adding these claims are still rare but expected to become a “growing litigious area”.  

In relation to this, the report referenced the ongoing investigation regarding DWS Group allegedly overstating its ESG and sustainability claims. DWS has denied the allegations. 

“We do not have insights on the status of these reported investigations into DWS Group or their merit, but more broadly, as the number of ESG-labelled offerings from asset managers grows along with demand, we believe that stakeholders such as regulators and investors will continue to demand more transparency around sustainable investing product claims in an effort to separate the substance and impact of products from mere marketing and puffery,” it wrote.

It added that the adoption of standardised global reporting frameworks for climate-related issues, like the Task Force on Climate-related Financial Disclosures (TCFD), could help limit issuers’ exposure to climate litigation. 

A July report by the Grantham Institute was in line with S&P’s findings on the rise of litigation; adding that three areas to watch are value chain litigation, cases of government support to the fossil fuel industry, and cases focused on the distribution of the burdens associated with action, which may be classed as ‘just transition’ cases.