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We’ve previously discussed various types of litigation being brought against companies that emit significant amounts of greenhouse gases. These cases are on the rise in 2023 and show no signs of slowing down. Much of this litigation is new and many of these cases will take years to resolve. Some experts are wondering about the impact to companies after such a lawsuit is filed, but before a final judgment is rendered.

A new study from the Grantham Research Institute and the Center for Climate Change Economics and Policy examines this question from the standpoint of stock price. The study found that a defendant firm’s stock was negatively impacted by both the filing of new climate lawsuits and disfavorable opinions issued by courts in existing suits. The study is unique in its attempt to quantify the costs not of losing a climate lawsuit, but of publicly defending against one.

The Study

The new study looked at 108 resolved and ongoing climate lawsuits in the US and EU and examined how those suits impacted the defendant company’s stock price. The authors note that the most pronounced effects came from suits against “Carbon Majors” which constitute the highest emitters in the energy, utility, and materials sectors. Among these companies, stock prices dropped an average of 5.7% after a climate lawsuit was filed, with more drastic losses occurring when the suit is based on novel legal theories. Additionally, negative preliminary rulings and verdicts in existing cases reduced company values by an average of 1.5% further.

The authors conclude that the average total reduction of a company’s value stemming from a negative court decision was $360 million. This far outpaces the average cost of defending a major litigation case which was $3 million. Additionally, firms were found to gain less value on average from positive court decisions, like the dismissal of a plaintiff’s claims. Positive decisions only resulted in an average gain of $197 million in market value. The authors warn against taking their findings too literally because their figures include outliers. Even with this in mind, the numbers help us see litigation risk – even without considering the lawsuit outcome – as a tangible and costly expense to high-emitting companies.

The study contextualizes the current trend of climate lawsuits historically and examines lawsuits dating back to 1995. The initial wave of climate litigation in the late 90s and early 2000s went in favor of defendant companies. Those losses made climate litigation unattractive for plaintiffs and resulted in fewer cases being filed and less media attention being paid to climate litigation. However, since 2015 there has been renewed interest as the world reckons with climate change. More cases are being filed using new and existing legal theories and they show no signs of slowing down.

What this Means

Examining these figures, I can’t help but wonder if the risks posed by climate litigation are settling in for investors. After all, a company’s stock price is primarily based on perceptions of investors. The companies in this study didn’t lose $360 million of value on average because a negative court ruling deprived them of equipment or goods. They lost that value because investors were paying attention and perceived them as being less valuable.

To me, this suggests that financiers are becoming more sensitive to legal risks surrounding climate litigation – and the effects seems o be more long-lasting than they are transitory. Fewer investors are asking if Carbon Majors will see material financial impacts from a final judgment, yet more are asking when those rulings will come, and for how much. As more investors shift their thinking in this area, the effects of future litigation may become more pronounced.

This study adds to the existing literature on how climate litigation risk is changing the business landscape. In the realm of shareholder suits, we’ve written about one study which found that companies alter disclosures in response to disclosure-based lawsuits brought against industry peers. Additionally, we’ve covered how the insurance sector is beginning to evaluate climate litigation risk as a factor in determining coverage for directors’ and officers’ (D&O) liability insurance.

These items taken together indicate that there is a larger world of impacts stemming from climate litigation risk than just the possibility of a negative verdict. The body of litigation around climate related issues is growing. The Guardian reported on a new greenwashing case against Delta Airlines based on their use of carbon offsets. Greenwashing cases like this are becoming common and greenwashing is only one facet of climate litigation. There are also shareholder suits, tort claims, and SEC enforcement actions to name a few. The increase in climate litigation is changing behaviors across the business spectrum, from disclosure practices as mentioned above, to investors, to insurers, and as more time passes and more data is compiled, we’ll get a clearer understanding of how businesses are being impacted outside of the courtroom.

For those wanting to keep up with climate and other ESG litigation, I recommend checking out our Subject Area: Compliance / Enforcement / Litigation where you can find information on civil litigation, regulatory enforcement, and more.

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The Editor

Zachary Barlow is a licensed attorney. He earned his JD from the University of Mississippi and has a bachelor’s in Public Policy Leadership. He practiced law at a mid-size firm and handled a wide variety of cases. During this time he assisted in overseeing compliance of a public entity and litigated contract disputes, gaining experience both in and outside of the courtroom. Zachary currently assists the editorial team by providing research and creating content on a spectrum of ESG… View Profile