Research recently published by LSE’s Grantham Research Institute has found a causal link between climate litigation and the fall of defendant corporation’s stock prices. The research relates to 108 climate related lawsuits filed against 98 major publicly listed corporations listed in US or Europe stock exchanges during the period 2005-2021.
Climate change litigation has significantly increased in recent years (see article here for more information) in line with the increased awareness of the impacts of climate change and the urgency of taking action to contain it. Separate research from the institute showed that just over 800 cases were filed between 1986 and 2014, whilst over 1,200 cases have been filed in the eight years since. The Institute has calculated that around a quarter of the total number of cases were brought between 2020 and 2022.
What the data shows
The impact of climate litigation on stock prices
The research found that climate litigation leads to negative market reactions. On average, a filing or an unfavourable court decision in a climate case is estimated to reduce firm value by 0.41%, relative to expected values. Moreover, the largest stock market responses were, unsurprisingly, found 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 judgments. This is in contrast to non-Carbon Majors where the effect of climate litigation filings were small and statistically insignificant.
A recent phenomenon
Notably, the research found that while the first corporate climate litigation case recorded dates to 1995, it is only in recent years that capital markets have responded significantly to climate-related lawsuits. Indeed, the researchers found "no significant effect for filings or decision before January of 2019, even for filings against Carbon Majors, and negative decisions".
The research notes that this is likely due to the unsuccessful outcomes of earlier high-profile cases in response to which climate litigation against large corporations died down. Examples of these earlier unsuccessful cases include Comer vs Murphy Oil (2005) where residents and property owners from the Mississippi Gulf Coast sought damages related to Hurricane Katrina and Kivalina v Exxon (2008) where coastal Alaskan residents facing the threat of a rising sea level filed a case seeking financial damages for the potential relocation.
Growing global concern
However, the situation started to shift as governments worldwide began to take more decisive measures to tackle climate concerns. Academic research consistently revealed stronger connections between carbon emissions and climate change, while international agreement solidified around the objectives outlined in the Paris Agreement. Since 2019, consistently larger and significant effects have been found for filings (-0.55%) and negative decisions (-1.55%) against Carbon Majors.
Examples
Milieudefensie v Royal Dutch Shell
In 2019, Milieudefensie, an environmental organization, took legal action against Royal Dutch Shell, a major oil company, alleging that the company's activities were contributing significantly to climate change and violating human rights. The case aimed to hold Shell accountable for its environmental impact and demanded more ambitious climate action from the company. In 2021, following a ruling by the District Court of the Hague that Royal Dutch Shell had to reduce its carbon emissions by 45% by 2030 relative to 2019 levels, shares in Shell fell by 3.8%.
Lliuya v RWE
In 2015, Saúl Luciano Lliuya, a Peruvian farmer, took legal action against RWE, a German energy company. Lliuya claimed that RWE's carbon emissions contributed to climate change, which in turn threatened his home due to melting glaciers and increased risk of flooding. Lliuya argued that RWE should financially contribute to the protective measures needed in his community. When this claim was filed in 2015, RWE's relative value fell by 6%. It dropped again by 1.3% in 2017, when an appeals court allowed the claim to proceed.
Looking ahead
The prevalence of climate litigation is increasing and is expected to persist. This latest research shows how capital markets are increasingly responding to this rapid rise in climate litigation. Anticipated future cases will furnish additional data, enabling a more precise estimation of the impacts of climate litigation and a deeper understanding of the methods by which companies can mitigate legal risks. Considering the current influence on stock prices, the research concludes that it is crucial for lenders, financial regulators, and governments to acknowledge climate litigation risk as a significant financial concern in a progressively warmer future.
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