Climate liability litigation: a growing risk for UK financial institutions

Setting the scene: what is climate liability litigation?

Climate liability litigation – also referred to as “climate change litigation” or “climate litigation” – is defined by the Sabin Center for Climate Change Law as “cases brought before judicial and quasijudicial bodies that involve material issues of climate change science, policy or law” ².

It captures a broad range of litigation – from “framework” cases, which challenge government or corporate climate targets and policies; to “turning off the taps” cases, which challenge the financing of projects or activities that support high-emitting activities incompatible with climate goals; and “transition risk” cases, which concern the (mis)management of climate transition risk by directors. While not directly about climate liability, greenwashing or “climate-washing” cases – challenging inaccurate narratives on contributions to climate action – can be considered a category of climate litigation too.

Claims are being filed across the world using novel torts and under human rights principles, as well as leveraging tried and tested statutory duties and reporting obligations.

Recent claims in the English court have included a Supreme Court ruling that planning authorities must consider downstream emissions when granting project approvals; and a claim alleging that company directors had breached their duties by failing to appropriately manage climate risk which, although it failed, demonstrates how claimants – particularly activist shareholders and NGOs – are prepared to try novel means to hold companies to account.

Increasing incidence and diversity of climate liability litigation

By all accounts, the risk (and incidence) of climate liability litigation is increasing. New climate litigation cases recorded worldwide in 2024 form nearly 8% of all such cases to date.³ This global trend is driven by mounting political, regulatory, investor and consumer pressures; and in the UK, the rise in third party litigation funding and broadening of collective action procedures is making these claims more viable.

The variety of climate liability litigation is broadening too, both in terms of subject matter and targets. Until recently, claims have typically been against governments and high-emitting industries. However, we are now seeing an increasingly broad range of sectors targeted – including financial services. In particular, banks have been challenged for their provision of financing to companies involved in high-emitting activities in Europe, with claims ongoing in France and the Netherlands. Whilst we are yet to see such claims against financial institutions in the UK, it may only be a matter of time, and some have in the meantime faced regulatory action by the ASA for advertisements that gave a misleading impression of their climate contributions.

Additionally, recent years have witnessed the initiation of “anti-climate” or “backlash” cases – largely in jurisdictions outside the UK – which aim to delay regulations and claims that promote climate action. For instance, a pension fund in the US has been challenged for allowing ESG objectives to influence its investment management strategy. Linked to this backlash and political pressure, particularly in the US, the Net Zero Banking Alliance recently announced that it will cease operations, as have certain other industry coalitions dedicated to advancing global net zero goals through their activities.⁴ Therefore firms, particularly those with a global footprint, also now need to navigate these competing demands and tensions, which are often cross-border.

How could climate liability litigation risk materialise for financial institutions?

UK-based financial institutions could face a range of direct climate liability claims in the English court.

Particularly relevant are the risks of “turning off the taps” claims in relation to the financing of high emissions industries, clients or projects. The legal issues in such claims would not be straightforward; however, this is a topical area that has attracted adverse publicity, and one where we expect claimants to be creative. Claims against financial institutions in jurisdictions outside the UK have relied on arguments founded in corporate due diligence obligations and duties of care, and claimants may draw on similar arguments in England and Wales. For example, tort principles could be deployed and extended to argue that firms have a duty of care to mitigate foreseeable climate-related harms. Or it could be argued that directors, in allowing the financing of these industries, are failing to promote the success of a firm.

We also expect an increase in “polluter pays” cases – where damages are sought based on defendants’ alleged contribution to climate change harm – as fundamental hurdles that claimants have faced previously are overcome. Proving links between corporate activities and climate change has presented a challenge for claimants seeking to establish corporate liability for historic emissions, but developments in climate attribution science may change that. Notably, the German court recently found that in principle, emitters can be held liable based on their share of global emissions. While the obvious targets for such claims are high emissions industries, no sector is immune and the increasing use of data centres for AI and other technologies could have an impact on greenhouse gas emissions. Read more about that interplay in our article here.

Linked to both “turning off the taps” and “polluter pays” cases is the greenwashing risk if the impression firms are giving about their ESG credentials is said to be inconsistent with their financing activities, or with their own climate impact. This is something that regulators are alive to – the ASA has taken action in this area, as mentioned above, and see our article on the FCA's Anti-Greenwashing Rule – and claimants can be expected to follow suit.

In addition to these more direct litigation risks, climate liability litigation against clients, counterparties and governments may expose firms to indirect risks too. The recent ICJ Advisory Opinion on Climate Change found that States have a duty to regulate the climate activities of private actors, and this could lead to a tightening of legal and regulatory requirements. Although not legally binding, the ruling carries significant legal and moral authority on States’ climate responsibilities under international law. You can read more about this Opinion in our article here.

As for litigation against clients and counterparties, firms could be impacted indirectly by litigation against a client debtor which then affects that client’s solvency, for example; or if customers associate the client’s harmful activities with the financing firm, leading to reputational harm.

Practical tips to manage risk

These risks may present a concerning picture, but we set out below steps that financial institutions can take to address their exposure. These involve assessing the extent of historical risks for climate liability as much as mitigating against future ones.

• Monitor litigation trends and regulatory developments in order to assess current and future exposures to litigation risks – including indirect risks arising from cases against counterparties, clients or government. Our global ESG Litigation Guide may be a helpful starting point.
• Monitor developments in the status of the climate and significant changes in scientific understanding and attribution science.
• Ensure board-level oversight of climate-related activities and risks, to ensure that they are consistent with corporate values and risk appetite, and that their interaction with regulatory, fiduciary and contractual duties is clearly understood. Consider training of relevant internal teams to ensure understanding of the risks.
• Proactively engage with the firm’s value chain, including investors, to ensure alignment on strategy – it is important to have a clear strategy for what financing is offered and why, for example.
• Embed robust ESG due diligence processes across clients, counterparties and suppliers.
• Review ESG disclosures, advertisements and transition plans to ensure they are credible, data-backed, and legally defensible – if in doubt, seek specialist advice.
• Consider following guidance specifically tailored for financial institutions on how to approach targets aligned to the Paris goals to limit average global temperature rise. For example, the Science Based Targets initiative (SBTi) recently released a Financial Institutions Net-Zero Standard, aimed at enabling firms to set net-zero aligned targets for their financed activities.⁵
• Consider the extent to which existing insurance coverage provides adequate protection against these emerging risks and where there may be gaps in cover; be alert to problematic or unduly wide climate-related exclusions to insurance policies. Again, if in doubt, seek specialist advice.
• Plan for what to do in the event of a claim, ensuring appropriate procedures would be triggered – including for seeking legal advice – after a dispute has arisen.

Moving forward

Climate liability litigation is no longer a theoretical prospect for UK financial institutions – it is a present and growing challenge. However, there are steps firms can take to assess, manage, and mitigate this evolving threat. Proactive monitoring, robust disclosures, and strategic legal planning will be key to navigating the climate liability litigation landscape.

If you have any questions about this article, or any of the issues raised, please get in touch with one of the contacts listed.

Authored by Hannah Piper and Georgina Denton.