New study highlights growing risk of climate litigation to corporations

The study (38 pages / 1.09MB PDF), conducted by the Centre for Climate Change Economics and Policy at the University of Leeds and Grantham Research Institute on Climate Change and the Environment at the London School of Economics, used a database of filings and decisions in more than 100 climate-related lawsuits against US and European-listed companies between 2005 and 2021 to examine the impact of climate litigation on businesses’ value.

The study suggests that climate litigation filings, or unfavourable court decisions, reduced businesses’ value by 0.41% on average. The impact was greatest for so-called ‘carbon majors’, for whom the effect of a litigation filing impacted value by -0.51%, while the effect of negative decisions was also larger for these businesses, at -1.50%. 

It is interesting to see evidence that financial markets respond negatively to climate change litigation when those cases are decided against companies and even just when cases are started.

Of course, this is just one of the many negative effects of climate change litigation on organisations: other effects felt from the outset of a claim or threatened claim include reputational risks, management time diverted from core business activities and expenditure on legal costs. 

The report found that there were no significant effects for filings or decisions before January of 2019, which  highlights changing attitudes to climate litigation, and shows that this is something investors are increasingly aware of.

As climate litigation develops and increases in frequency, it would suggest that the impact on companies may become more pronounced.  The report suggests that the “tide started to shift for the climate litigation movement as it started to find success”.

Many cases are still stuck in procedural challenges and have not yet had a final judgment, while public interest in climate litigation has also been rising rapidly in recent years. Therefore, although the percentage effect on average seems rather marginal, given the speed that climate litigation and public interest in it is growing, this is not a trend that corporations, lenders or investors can afford to disregard. 

The economic impact on companies is perhaps more vivid when the percentage figures are translated by the report into actual amounts. A rough estimate, albeit one that the report states should be treated with caution, suggests that the average economic cost of a negative decision in litigation in this area is $360 million. 

The report also finds increased market responses for cases in which novel legal approaches are attempted – perhaps because these attract more interest or have a greater element of surprise that investors have not factored into stock prices. This is interesting as claimants – especially activist non-governmental organisations (NGOs) – are now using creative ways of framing climate change claims.  

Any negative market reaction that follows climate litigation is likely to be only part of the picture. Given their ability to grab news headlines, other forms of climate activism can also have a real impact on public perception. Further research might be able to examine how the stock market changes in the aftermath of a significant climate protest, for example.

The report also notes that just under 10% of climate litigation cases are filed against corporations. The vast majority of cases were filed against government bodies or other entities in 2021. The report does not, however, cover the impact of climate change litigation filings or decisions on the approval ratings of government bodies.

Potential implications for businesses

The study highlights the financial risk that stakeholders in carbon-intensive industries are increasingly exposed to. Those risks include the negative effects of being accused of greenwashing.

The report touches on the case between the Commonwealth of Massachusetts and Exxon, in which Exxon Mobil was accused of misleading consumers through greenwashing campaigns and failing to make material disclosures to its investors about climate change risks. More and more countries countries are making climate-related financial disclosure mandatory, and this increased transparency could have an impact on the amount of litigation they are exposed to.

The report will strengthen the arguments of boards or executives who want to invest more in mitigating their company’s emissions or other climate damaging behaviour. It could help make it clear that while taking action has costs, not taking action can also reduce the value of the business and expose it to material financial risk.

Co-written by Beth Pendock of Pinsent Masons.