Analysis of 108 climate lawsuits over the past two decades has found that they had an impact on the share price of polluting companies.
- Communities and individuals are increasingly turning to courts to hold governments and high-emitting corporations to account for their contribution to global warming.
- A filing or an unfavourable court decision in a climate case cut corporate value by 0.41% on average.
- Although the percentages are relatively small, they are evidence that climate litigation should be considered a financial risk.
A new working paper by the London School of Economics’ Grantham Research Institute, Impacts of climate litigation on firm value, analyses how climate lawsuits have affected share price performance. Researchers compiled a database of filings and decisions relating to 108 climate change lawsuits against US and European-listed corporations between 2005 and 2021.
Rise in climate litigation
Communities and individuals are increasingly turning to courts to hold governments and high-emitting corporations to account for their contribution to global warming – and are starting to find success. Annual cases have grown from below 10 to over 200 by 2021. In that same year, 10% were filed against corporations and the remainder against government bodies or other entities.
There is an increase in cases with strategic ambition, which is when the claimants’ motives go beyond the concerns of the individual litigant and aim to bring about some broader societal shift – including advancing climate policies, creating public awareness, or changing the behaviour of government or industry actors.
The role of litigation in affecting “the outcome and ambition of climate governance” was recognised by the Intergovernmental Panel on Climate Change Working Group III in 2022, in a document approved by representatives of every member state. Indeed, taking matters to court has become an instrument to enforce or enhance climate commitments made by governments.
For example, nonprofit organisation ClientEarth sued the UK over its inadequate net zero strategy and won: the High Court ruled that it breached the Climate Change Act and needs to be strengthened. In Canada, First Nations communities of British Columbia took legal action against an outdated piece of regulation enabling the mineral exploitation of indigenous land.
In the corporate world, cases have mostly affected polluting sectors such as food and agriculture, transport, plastics and finance. For instance, major companies such as Shell (LSE: SHEL) and Danone (PAR:BN) have been accused of malpractices such as greenwashing and lack of effective action.
How it impacts companies
The study’s causal analysis estimated that a filing or an unfavourable court decision in a climate case cut corporate value by 0.41% on average. The largest stock market responses were found for cases filed against those defined as ‘Carbon Majors’ – the largest emitters operating in the energy, utilities, and materials sectors – reducing their value by 0.57% following case filings and by 1.50% following unfavourable judgements.
Larger market reactions are observed in ‘novel’ cases involving a new form of legal argument or in a new jurisdiction. No statistically significant effect on firm value was found in filings against ‘non-Carbon Majors’.
Although the numbers are small, back-of-the-envelope calculations suggested that the average economic benefit of a positive decision is $197 million, and the average economic cost of a negative decision is $360 million. Moreover, according to the researchers, a decline in share price could influence climate risk assessment from investors.
For defending corporations, rising climate litigation risks may exacerbate well-known physical and transition risks associated with climate change. This may not be just an issue for the company, but also for the individual directors: personal claims have been identified as a potential area of growth, which could have an impact on their professional and personal lives.
Beyond the fall in share prices, defendants would incur immediate costs such as legal fees and fines, plus longer-term consequences such as higher insurance costs and changes to credit ratings, as well as difficulties to access capital. There are also non-tangible costs, such as reputational damage, a drop in staff morale and fraying relationships with stakeholders.
An important risk factor
Lenders, financial regulators and governments should consider climate litigation risk as a relevant financial risk in a warmer future, according to the researchers. Because the number of cases is rising exponentially, the trends observed so far are likely to evolve and intensify.
Claimants are already finding new, creative ways to take legal action: for example, in early 2023, ClientEarth bought a few shares in Shell and sued it as a shareholder. The claim got dismissed at the first step, but the nonprofit is looking for ways to appeal.
Companies need to ensure that they set up credible, science-based and effective transition plans, and then implement them, to ensure that they are protected against this risk. A culture of transparency and close communication with stakeholders on how to move forward in a way that benefits communities, the planet and the business are all strategies likely to limit the chances of ending up in court.