Climate litigation as a financial risk: a direct causal link between climate litigation and share prices

A new working paper published by the Grantham Research Institute on Climate Change and the Environment (“GRI”) has found a direct causal link between climate litigation and share prices. While the impact of climate-related financial risks, including climate litigation risk, has been in the spotlight for a number of years, this paper establishes for the first time how markets are systematically taking these into account.

It found that court filings and unfavourable judgments reduced firm value by 0.41% on average, relative to expected values. It further noted that the market reacted the most strongly to cases filed against carbon majors, with an average drop in firm value of 0.57% following court filings and an average drop of 1.50% following unfavourable judgments. While the drops in firm value identified have been modest, they have been found to be statistically significant.

Notably, the paper did not find any statistically significant effect on firm value from court filings against non-carbon majors. However, this is subject to the qualification that many cases were subject to early stage procedural challenges and that stock market impacts may have not yet materialised.

In line with the growing awareness and interest in climate-related financial risks and climate litigation more broadly, the GRI working paper found that impacts were increasingly consistent and significant from 2019 onwards. If this trend continues, the financial implications of climate litigation can only be expected to further develop.

The paper was based on a study which analysed 108 climate change law suits filed worldwide against 98 companies listed in the US and in Europe, and published by the GRI, the same organisation that publishes an annual Global Trends in Climate Litigation Report (see our previous blog post). The 2023 edition of the Global Trends in Climate Litigation Report is expected to be published on 29 June.

For additional information on ESG and climate-related litigation, see our ESG Legal Outlook 2023, in which we identified litigation risks and greenwashing and as a key theme for 2023.

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