Impacts of climate litigation on firm value
Communities and individuals are increasingly turning to courts to hold governments and high emitting corporations to account for the adverse consequences of climate change, and they are starting to find success. For defending corporations, the rise in climate litigation risk may exacerbate well-known physical and transition risks associated with climate change – yet little is known about the impacts of climate litigation against corporations.
The authors of this paper provide the first robust evidence on these impacts. They construct a comprehensive database of filings and decisions relating to 108 climate change lawsuits against US and European-listed corporations between 2005 and 2021. They show that climate litigation filings or unfavourable court decisions reduced firm value by around 1%. They identify conditions that would lead to a bigger effect, such as cases against the largest emitters, or ‘Carbon Majors’, and cases involving novel legal arguments. The results offer the first robust evidence on climate litigation risk as a financial risk.
Key points for decision-makers
- The authors construct a comprehensive database of filings and decisions relating to 108 climate change lawsuits filed worldwide against US and European-listed corporations between 2005 and 2021.
- The thorough coverage enables the estimation of an aggregate market-wide effect that can be interpreted in a general context to inform the societal impact of climate litigation on firm value, despite the highly heterogeneous nature of climate lawsuits.
- They find a causal link between climate litigation and stock prices. A filing or an unfavourable court decision in a climate case is estimated to reduce firm value by -0.41% on average, relative to expected values.
- They also found the largest stock market responses are observed for cases filed against Carbon Majors (the largest emitters operating in Energy, Utilities, and Materials), reducing firm value by -0.57% following case filings and by -1.50% following unfavourable judgements.
- Larger market reactions are also observed in ‘novel’ cases, i.e. those involving a new form of legal argument or in a jurisdiction that has not previously seen a case.
- No statistically significant effect on firm value was found in filings against companies that are not Carbon Majors.
- The findings suggest that lenders, financial regulators and governments should consider climate litigation risk as a relevant financial risk in a warmer future.