Oil well with the pump jack in action. Alberta

As the shift to a low-carbon economy gains traction, there’s a growing risk of climate-related litigation facing Europe’s banks — which could, in turn, accelerate the low-carbon transition, Fitch Ratings says.

In a new report, the rating agency said that banks, like other corporations, face increasing litigation risk as the energy transition gains momentum.

“Climate activism in Europe has grown over the past two years, with increasing focus on banks that provide financing to fossil fuel sectors,” it said — with both investors and advocacy groups calling on banks to adopt targets for reducing their exposure to fossil fuel assets.

Many banks have pledged to reduce financing to the energy sector, and have committed to net zero by 2050, Fitch noted.

However, these kinds of promises may not be enough to stave off climate driven litigation, it said.

“Investors and other stakeholders will look out for any watering-down of targets or slippage in meeting them, and so the banks will have to keep their commitments credible and on track,” it said — adding that banks could also face indirect effects of climate litigation, if a large client is hit with legal action that impacts their cash flow.

Additionally, banks face rising regulatory risk from the growing focus on combatting greenwashing, the report said.

These legal and regulatory risks also add up to increased reputational risks, Fitch noted, as negative publicity in either sphere could also damage banks’ franchises.

In turn, this could also cause banks to step up their efforts to pull back from fossil fuel financing, it suggested.

“Climate-related lawsuits targeting banks could set precedents and spur banks to accelerate their carbon-neutrality strategies and their phase-out of fossil fuel financing,” it said.

“This would most likely have a modest impact on large European banks’ revenue in the near term. However, it could also increase credit risk on the run-off portfolios if large oil and gas customers were unable to find alternative financing,” it added.

In the meantime, Fitch said that it expects the banks to enhance their energy transition policies as they face growing scrutiny from investors and regulators.