ECB Warns: Climate Rulings Create Legal Right to Protection, Heightening Financial Risk
SDG 13: Climate Action | SDG 16: Peace, Justice, and Strong Institutions
Institutions: Ministry of Finance | Ministry of Corporate Affairs | Ministry of Environment, Forest and Climate Change
The European Central Bank (ECB) Legal Working Paper Series, No 23 / November 2025, titled Human rights, the climate emergency, and the financial system, analyzes the far-reaching impact of a key legal precedent: the European Court of Human Rights (ECtHR) ruling in Verein Klima Seniorinnen Schweiz v. Switzerland. This landmark decision established that insufficient climate action by a state constitutes a violation of human rights (Article 8 ECHR). This principle was further reinforced by the International Court of Justice (ICJ)’s July 2025 advisory opinion.
The paper emphasizes that this jurisprudence creates a binding expectation that climate protection must carry considerable weight in Union policy decisions, putting pressure on key legislative areas like the sustainable finance framework. This judicial trend introduces two primary risks for the financial system:
Litigation Risk: Activist groups are increasingly using these human rights arguments to take action against private corporations and financial institutions.
Transition Risk: The risk that successful litigation will force governments to take more ambitious, potentially abrupt climate action within tight timeframes, leading to a disruptive and costly transition for the economy and the financial sector.
The ECB advocates for the proactive adoption of appropriate policy and regulatory measures now to ensure an orderly transition, rather than a sudden, disruptive one later.
The ECB paper is relevant for India because it establishes a powerful global legal precedent: Insufficient state climate action is a violation of citizens’ human rights (such as the right to life and health). This creates a blueprint for climate litigation in India, potentially leading to lawsuits to challenge the sufficiency of national climate targets set by the MoEFCC. The NHRC is consequently empowered to use this jurisprudence to advocate for robust, rights-based climate policies.
Crucially, the ruling heightens Transition Risk for India’s financial sector, a key concern for the Ministry of Finance (MoF) and the RBI. If courts or new policy mandates force rapid decarbonization (e.g., carbon taxes or banning high-emitting assets), it could cause widespread disruption to the loan portfolios of Indian banks and significantly impact corporate valuations. To avert a chaotic transition, SEBI and the MCA are under pressure to proactively enforce stringent corporate climate disclosure and transition plans now, ensuring the financial system smoothly aligns with India’s Net Zero by 2070 goals.
What is Transition Risk in finance?→ Transition Risk is the financial risk related to the process of adjustment toward a low-carbon economy. This risk arises from the introduction of new climate policies, regulations, and technologies, which can rapidly affect the profitability of businesses and the value of assets, creating financial risks for lenders and investors if the adjustment is too steep and disorderly.
Follow the full paper here: Human rights, the climate emergency, and the financial system