Climate Change

Climate lawsuits against major polluters linked with fall in their stock prices: Study

Big emitters hurt the most by new cases and unfavourable verdicts in climate litigation

By Preetha Banerjee
Published: Wednesday 24 May 2023
Photo: iStock__

The civil society holding polluting companies accountable for causing climate change has not only helped grant climate justice but also changed how investors perceive these companies. A new working paper is the first to quantify this impact. 

The analysis found that company share prices dropped in the days following a fresh climate lawsuit or a negative court verdict, news organisation The Guardian reported.

The report was based on a working paper by the The Centre for Climate Change Economics and Policy and the Grantham Research Institute on Climate Change and the Environment, London School of Economics and Political Science. 

The researchers looked at how the market reacted to 108 lawsuit filings and verdicts against 98 companies listed in the United States and Europe from 2005 and 2021.

They found that “climate litigation filings or unfavourable court decisions reduced firm value by -0.41 per cent on average”.

Companies that emit the most, termed ‘Carbon Majors’ in the study, were affected the most, the findings showed. Their value dropped by -0.57 per cent following a new lawsuit against them and by -1.50 per cent after an unfavourable judgement. These companies include those operating in energy, utilities and materials sectors. 

They also identified another major factor that hurt market sentiments the most: New cases including “a new form of legal argument or in a jurisdiction that has not previously seen a case”.

A similar trend was not seen for cases that are not Carbon Majors, the authors wrote. 

Over a three-day window from the day before, or and after the filing, new cases led to an abnormal decrease in share prices by -0.35 per cent, the report noted.

During the study period, the number of climate litigation in a year grew to over 200 from 10. The first case of climate ligitation against a corporation was in 1995. Though the initial cases were unsuccessful, they garnered the necessary attention to historical emissions and climate injustice. 

A couple of such cases mentioned by the authors are: Comer vs Murphy Oil (2005), where residents and property owners from the Mississippi Gulf Coast sought damages related to Hurricane Katrina and Kivalina vs Exxon (2008) where coastal Alaskan residents facing the threat of a rising sea level filed a case seeking financial damages for the potential relocation. 

In the second decade of the millennium, climate litigation picked pace, driven by an explosive analysis of carbon emissions by 90 fossil fuel and cement producers by Richard Heede published in 2014 as well as the Paris Agreement the following year. 

A growing number of verdicts against the polluting companies also encouraged the civil society to become more litigious in their fight against climate change. “For example in 2017, in Lliuya vs RWE, a German appeals court deemed as admissible a Peruvian farmer’s claim that higher water levels near his farm were caused by carbon emissions from RWE,” the analysts wrote. 

The verdict against Royal Dutch Shell mandating the company to nearly halve its carbon emissions by 2030 also inspired the public, according to the authors of the report. 

“We find consistently larger and statistically significant effects after 2019, of all filings (-0.34 per cent), filings against Carbon Majors (-0.55 per cent) and negative decisions (-1.55 per cent), suggesting capital markets are increasingly responding to climate litigation,” they added. 

The cost of such cases, especially for the large emitters, is much more than the average cost of defending a major litigation case, the authors found. “The average economic cost of a negative decision is $360 million,” they observed.

This can lead to lower cash flows and reputational risks, thereby hurting the overall market value of the companies, they added. 

The researchers hope their research will induce lenders, financial regulators and governments to consider climate litigation risk as a relevant financial risk in the current scenario. 

Voices against environmental degradation by coporates is growing louder by the day. Just this week, the annual general meeting of Shell held in London was disrupted by climate activists. 

Amid growing environmental consciousness and public concern about their future in a warming world, the researchers believe falling stock prices due to climate litigation will shape corportate behavious for the better. 

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