Impacts of climate litigation on firm value

The study outlines some of the damaging repercussions of climate lawsuits filed against companies have for those companies, from direct costs such as legal fees, insurance costs, credit rating changes and fines, to reputational and morale-based impacts. 

The study quantifies the financial market response to climate lawsuits by compiling a dataset of corporate litigation cases against large publicly listed corporations from stock exchanges in the US and Europe (looking at 2005-2021). The dataset comprised of 108 climate-related cases against 98 corporations. The study combined this dataset with financial data to run “event study regressions” to determine whether returns were different around “litigation event days” when compared to returns without those events.  

The study finds that climate litigation produces negative market reactions, with case filings resulting in an “abnormal decrease” in share prices by -0.35% over 3 days (the day before filing, the day of filing and the after the filing). Even larger effects were found due to negative court decisions (-0.99%). The “combined cumulative average abnormal return” for filings and negative decisions was -0.41%. Positive court decisions increase abnormal returns modestly at 0.29%. 

With respect to Carbon Majors, the study finds their firm value was -0.51% for case filings and -1.50% for negative decisions, providing confidence that markets are responding appropriately to target the largest producers. For non-Carbon Majors, the study found the effect to be small. 

The study finds that larger and statistically significant effects are found after 2019, suggesting the increasing response of capital markets to climate lawsuits. It also finds that cases where novel claims are run increases the average abnormal return (-0.52% for all companies and -0.66% for Carbon Majors). 

With respect to impacts on the valuation of the business, the study suggests changes are small. However, “back-of-the-envelope" calculations indicate the average benefit of a favourable decision is $197 million and the average cost of a negative decision is $360 million. 

The true impact of litigation is likely to be larger than those found in this study as the study notes there may be greater impacts observed looking at a larger window of time, due to the gradual release of information across numerous events, and due to other indirect impacts that may occur. 

The study looks at lawsuits against companies, not cases against fossil fuel projects. However, it can be used to demonstrate the negative consequences to businesses of pursuing projects likely to be challenged through lawsuits. It also shows how significant litigation-related events and adverse decisions can affect capital markets (and therefore investment decisions), indicating the importance of looking at the wider consequences of decisions on fossil fuel projects.