Monday, July 19, 2021
Wave of climate protection lawsuits
Banks are threatened with their own “Dieselgate”
What the manipulation of emissions values is in the auto industry, could become the financing of climate polluters for banks. A wave of lawsuits could roll over the financial institutions in the next few years. Another point of attack would be bonds declared as sustainable, which do not live up to their reputation.
Many banks have not even processed all legal proceedings from the financial crisis, but a new storm is brewing: climate protection lawsuits. “Sustainability, that will be the next wave of lawsuits,” says a top manager of a European financial institution. Banks can make themselves vulnerable because they finance climate-damaging business through loans or capital market placements. In addition, they sometimes raise expectations that are too high for so-called “green plants” that are supposed to support ecological projects. “We make too many promises that we cannot keep,” warns the banker.
Lawyers do not anticipate a wave of lawsuits immediately – but it could come in two or three years. According to a survey by the London School of Economics, 1,841 climate action lawsuits were filed worldwide between 1986 and May 2021, 191 of them in the 13 months up to the end of May alone. In the vast majority of cases, governments are in the dock, but an increasing number of cases are also targeting companies.
At the end of May, a Dutch court ordered the oil company Royal Dutch Shell to almost halve its CO2 emissions by 2030. This was the first time that a court obliged a private company to cut greenhouse gas emissions. The decision, which reflects a rethinking of the courts, could open the floodgates for similar proceedings.
The influential shareholder adviser ISS sees the rulings against the tobacco and asbestos industry as examples of what could be expected of companies in matters of climate laws: The victims were awarded hundreds of billions of dollars in compensation. The climate crisis is even greater with a view to possible damage to health and prosperity.
Paris climate goals as the crux of the matter
Energy and raw materials companies are still the main targets of climate protection lawsuits. In the case of financial firms, on the other hand, the carbon footprint seems small at first glance. According to a study by Oliver Wyman’s consultants, 95 percent of loans to European companies come from banks that want to adhere to the requirements of the Paris Agreement. This also includes Deutsche Bank, Commerzbank, UBS and Credit Suisse.
However, the companies that support the banks with loans and capital measures could become a problem: only eight percent of the borrowing European companies are committed to the Paris climate targets. Accordingly, lawsuits from activists against financial institutions are likely to increase: “Banks are faced with this because they finance a lot of the activities that we have to turn away from,” explains Ellie Mulholland of the CCLI research project.
The same applies to financing through the capital market. So-called green bonds, i.e. bonds intended to finance environmentally friendly projects such as solar and wind energy, have multiplied in recent years. From January to March 2021 alone, green bonds with a record volume of 130 billion dollars were placed, as the data provider Refinitiv has calculated. Lawyer Felix Biedermann from Simmons & Simmons in Frankfurt is currently creating a certain amount of hype when it comes to sustainable investments. “And where there is a gold rush atmosphere, there is a tendency to underestimate risks. But the party that many are celebrating at will be over at some point.”
EU wants to avoid “greenwashing”
What is green is not always clear. According to the Dutch asset manager NN, this labeling is only justified for 85 percent of the bonds. The rest is emitted by companies that use the proceeds for environmentally friendly projects, but harm the environment elsewhere. Politicians are also aware of the problem. The EU Commission wants to introduce a “gold standard” for green financial investments, also to avoid “greenwashing”. Switzerland wants to follow suit in autumn.
Simmons & Simmons attorney Daniel Kendziur warns of a wave of lawsuits for the financial sector that could reach the proportions of the diesel scandal for the auto industry. Volkswagen and other manufacturers had manipulated the emission values using special software in order to make cars appear cleaner than they actually were. For fines and compensation from customers, Volkswagen alone has so far put more than 32 billion euros on the table. “There is a threat of a kind of diesel gate in the area of green financial products,” says Kendziur. Small investors could be mistaken about the climate friendliness of a plant and then try to claim compensation. There are as many small investors as there are diesel drivers in Germany. “That can be a huge thing.”
Mass litigation could affect everyone
In addition to possible mass proceedings under the title “Green Bond Gate”, competitors, tax authorities or consumer protection associations could also take action against misleading advertising of such products and sue, according to Kendziur. A foretaste of this is given by a lawsuit brought by the Baden-Württemberg consumer center against Deka Bank. The advice center had accused the institute of misleading advertising in connection with an investment fund. Deka relented, but pointed out that a transparent and generally accepted representation of the sustainability impact of investments simply did not yet exist.
According to experts, everyone from the issuer to the accompanying bank to the asset manager and wealth manager could be sued if they were misled. AlixPartners consultant Ralph Kreis sees the greatest danger with providers who package and sell green bonds in funds or structured products. “I can imagine that sometimes too much is promised there.” Lawyer Kendziur sees an immediate need for action for products that are now coming onto the market. Competition lawsuits or interventions by financial market regulatory authorities could very soon arise. “But the big waves of complaints from investors will not show up in a few months, but in a few years.”
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