It has been hanging over the market since the successful Shell climate case: which company will receive the next summons from Milieudefensie? The exact name is not yet known (it will follow in January), but the fact that the NGO has opted for a financial institution, as was announced on Tuesday, is no surprise, according to experts.
Banks, insurers and pension funds are labeled by Milieudefensie as the “bankers of the climate crisis”, because of their significant financial support for fossil projects in the form of loans, or by helping companies with the issuance of bonds. But not only NGOs are critical. The legislator and regulators also demand more from this sector.
The European Central Bank requires banks to talk more intensively with their customers to find out how those companies are affected by the climate and environmental crisis and how they will adapt to it. Otherwise, they overlook potential risks on their balance sheet. The Dutch Central Bank stated in 2022 in an analysis that companies financed by Dutch banks are switching too slowly to sustainable alternatives to comply with the Paris Climate Agreement. For example, the energy companies to which banks provide loans are becoming sustainable too slowly, and the financed car manufacturers are still making too many petrol cars. “Oil extraction by companies in the loan portfolio of Dutch banks will actually increase in the coming years,” according to DNB, “while a decrease is necessary.”
Until now, supervision has focused on the consequences of climate change for the financial stability of banks, says Rens van Tilburg, director of the Sustainable Finance Lab, a research platform at Utrecht University. Think of a house that is lost to a flood. The mortgage is then not repaid, which is a risk for a bank. Van Tilburg: “Lately we have seen that regulators are also carefully looking more at the impact of financial players themselves on the outside world.”
More critical attitude
This more critical attitude is also reflected in new regulations, says Van Tilburg. “For example, with the new accounting rules that banks must also comply with from next year. They have to report very precisely on, for example, the CO2emissions, or deforestation they cause with their loans. New European banking rules may also concern the impact of banks on the outside world – but that is still a hot topic in the EU.”
Tim Bleeker, assistant professor of environmental liability at the Vrije Universiteit in Amsterdam, also sees that regulators and legislators are increasingly looking critically at the money flows that go to the fossil industry. “But filing a climate case goes a step further than stricter supervision.”
Milieudefensie is not the first in this, says Bleeker. There is a major French case against BNP Paribas, which according to prosecutors is the first climate case against a commercial bank in the world. The major bank is accused of being Europe’s largest financier of oil and gas projects. That case is in turn inspired by the success of Milieudefensie at Shell, a victory that will be tested on appeal in April.
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More transparency
The bank agrees with Milieudefensie that there should be more transparency about performance. Insurer NN also believes that it is good to make “interim results of our sustainability policy” better known.
The financials also criticize Milieudefensie’s approach. According to them, the NGO is moving faster than is realistic and seems to be focusing more on ‘disinvestment’ (stopping loans and other financing). The financial parties themselves have more confidence in the ‘commitment-approach’: maintaining a relationship with a company and then, as a financier or shareholder, demanding measures to become more sustainable.
Milieudefensie’s criticism is that too few concrete steps have been laid down with this ‘commitment’. “When is the limit full and will they stop financing? This is not fixed for the outside world and is therefore not verifiable.” The financial institutions refer to this as ‘work in progress’ in their responses. For example, NN will publish a report in the coming weeks on the principles surrounding their engagement policy, and it has already been announced that a second version will follow.
The question is whether financial institutions are making enough haste with their sustainability efforts. There may be an answer to this next year – not just for the one institution that may sue Milieudefensie in January. Both the ECB and DNB have announced that they will enforce sustainability policies in 2024. If a bank or insurer does not do enough about sustainability, a fine or reprimand may follow.