Our key takeaway: A new study on the effects of climate litigation on company valuation finds that companies facing climate-related lawsuits on average experience a loss in value. Although there are many factors at play that affect these findings, the average costs of a negative finding (around $360 million) tend to be higher than the average benefits of a positive finding (around $197 million)—not an insignificant matter for individual companies. Likewise, companies facing climate litigation are likely to deal with legal fees, higher insurance costs, changes to credit ratings, damage to their public reputation and loss of employee morale, irrespective of the outcomes. As climate change and its effects continue to accelerate, bringing with it a tangible increase in physical risk and transition risk that investors are already beginning to account for, the findings of this study will likely only continue to increase in relevance for companies. The paper advises companies to get ahead of climate litigation risk by putting in place robust net-zero targets and “credible” action plans to meet these goals. It’s also clear that companies will need to build the human resource capacity, expertise and internal buy-in to meet their public targets and, more critically, to prepare them for a warmer planet that is likely to bring significant impacts to both people and the bottom line.
Misato Sato, Glen Gostlow, Catherine Higham, Joana Setzer and Frank Venmans of the London School of Economics’ Grantham Research Institute on Climate Change and the Environment and the Centre for Climate Change Economics published Impacts of Climate Litigation on Firm Value (May 2023):
- Finding that climate litigation reduces firm value: The study “attempts to quantify the financial market response to climate litigation [by] compil[ing] a new dataset that represents a near universe of corporate litigation cases against major publicly listed corporations listed in US or Europe stock exchanges during the period 2005-2021.” Although climate lawsuits are “highly heterogeneous,” the authors note that this dataset is diverse enough that they can “estimate an aggregate market-wide effect that can be interpreted in a general context to inform the societal impact of climate litigation on firm value.” Overall, “a filing or an unfavourable court decision in a climate case reduced firm value by -0.41% on average, relative to expected values,” which the authors acknowledge is a “small change in valuation.” However, they also point out that this difference can be quite significant for individual firms. For example, they determine that "the average economic benefit of a positive decision is $197 million, and the average economic cost of a negative decision is $360 million” (while recognising that these numbers are influenced by large companies and are sensitive to outliers). This differs for different types of companies: “The largest stock market responses were found for cases filed against Carbon Majors, reducing firm value by -0.57% following case filings and by -1.50% following unfavourable judgements. No statistically significant effect on firm value was found in filings against non-Carbon Majors.” But the price of climate litigation is still clear: “these economic costs far exceed the average cost of defending a major litigation case ($3 million), suggesting that investors pricing in expectations of lower future cash flows and reputational risk.”
- “Novel” cases provoke larger market reactions: The authors report that valuation was lower, on average, for companies involved in a “novel” case, i.e., a climate case applying a new form of claim, in a new jurisdiction or involving a new industry. This may be attributable to the fact that "cases with novelty attracts more interest or has a greater element of surprise that investors have not already factored into stock prices.” The authors note that recent climate litigation has added a new lens onto previous trends: “The earlier corporate cases against oil, gas and electric companies in North American, much like in previous major controversies like tobacco and asbestos, were centred around damages and adaptation costs and sued for compensation based on claims that the actions of Carbon Majors exacerbated damages they suffered as a result of extreme weather events. The trend in more recent years is more diverse, with climate litigation brought strategically to advance effective action on climate change worldwide, using varied legal avenues including public law, environmental law, tort law, human rights and constitutional law, criminal law, securities law and international law.” In addition, climate-related cases are taking on different issues, ranging from deforestation to greenwashing to fraud to breach of fiduciary duties.
- “Climate litigation risk is a relevant financial risk in a warmer future”: The authors underscore the importance of these findings for companies and their stakeholders, especially as they anticipate that “[t]the total effect of climate litigation is likely to be larger than the effect we are able to attribute to filings and important decisions for three reasons”: the “anticipation effect” when a lawsuit is announced; the gradual release of information of the course of a trial; and the indirect impact of cases “brought against governments, financiers, pension funds, and university endowments which are brought as part of a broader strategy by social movements or organisations to increase the social and financial costs experienced by major corporate emitters.” Companies should not only take note of the increasing number of climate cases but also the additional data they can provide, as this information can be used by investors, lenders, regulators and governments to scrutinise potential climate impacts “more precisely.” Companies can also learn from new litigation what is needed to reduce their litigation risk, for example setting “credible” and robust net-zero targets and meeting those goals.