As the prevalence of climate change events have increased, so too has the number of climate related legal cases across the world. Such cases are being brought against both governments and high-emitter corporations, as individuals and action groups seek to hold them accountable for the consequences of their contributions to climate change. The claimants range from individuals to action groups and organisations, to local and state governments. With some finding success, we are likely to see more in the future as momentum (and legal precedent) builds. But what effect does such litigation have on companies and businesses? What risk does climate litigation represent?
Academic Researchers together with the Centre for Climate Change Economic and Policy and the Grantham Research Institute on Climate Change and the Environment have published a report on this very matter: Impacts of climate litigation on firm value.
The report collected and analysed filings and decisions relating to 108 climate change lawsuits globally against US and European-listed corporations, spanning the years 2005-2021. It aimed to quantify the financial market response to climate litigation. As investors and other stakeholders are increasingly looking to assess corporations’ climate-related risk, this is becoming ever more important.
The range of cases included in the study had a diverse range of claimants and defendants, with cases being brought by individuals and young people, to environmental organisations and local and state governments. There were cases brought against governments, corporations, financial institutions, industry groups and individuals. The nature of the cases involved varied from issues such as greenwashing, fraud, failure of fiduciary duties and, for ‘Carbon Majors’ (i.e., the largest emitters operating in energy, utilities and materials), a failure to inform the public of the risks of climate change at a time when they were aware of them.
Generally, it found that in the last two decades, the number of climate litigation cases has grown from below 10 to over 200 by 2021. Of these, just under 10% are filed against corporations, with the rest being against government bodies or other entities in 2021.
The report looked at both court filings against a defendant and court decisions. The analysis estimates that a court filing or an ‘unfavourable’ court decision in a climate case would on average reduce a firm’s value by -0.41%, in comparison to expected values. Case filings lead to an abnormal decrease in share prices by -0.35% over the 3-day window from the day before, of or after the filing.
So-called ‘Carbon Majors’ bear a greater impact (and the bulk of corporate climate litigation). For case filings against Carbon Majors, the firm value was reduced by -0.57% and for unfavourable judgments, this was reduced by -1.50%. Market reaction also tended to be larger in cases which involved a new kind of legal argument or took place in a new jurisdiction. For non-Carbon Majors, there was no statistically significant effect on firm value for filings only.
The report also looked at the general trend of climate litigation cases, with the first corporate case being recorded in 1995, and the 2000s seeing a set of lawsuits against Carbon Majors in North America. These, while attracting some attention, were ultimately unsuccessful. The report notes a transition for the climate litigation movement, around 2014/2015, when the number of climate litigation cases brought began to increase. However, before 2019, it didn’t find a significant effect on firm value for filings or negative decisions.
In terms of climate litigation risk, the trend started to change as climate litigation started to find success. There was a decisive increase in recent years in the number of ‘unfavourable’ decisions for firms and corporations. This appears to have corresponded with a greater effect in terms of risk, and from the year 2019, there were consistently larger and more significant effects for all filings and negative decisions. This would suggest that markets are increasingly responding to climate change. The impact of climate litigation on firm value has increased over the years (and is likely to continue to do so).
The nature of the cases brought has also changed over time. The earlier cases, for example against oil, gas and electric companies in North America, focussed more on damages and suing for compensation on the basis that the corporations’ actions had exacerbated damages suffered as a result of extreme weather events. Now, we see a broader range of cases, with litigation brought under public law, environmental law, tort/delict, human rights, constitutional law, criminal law and international law. Some cases are brought for illegal activities (e.g., greenwashing or fraud), but we have also seen cases brought for a failure of directors to comply with their fiduciary duties.
In summary, the report concluded that lenders, financial regulators, and governments should consider climate litigation risk as a relevant financial risk.
For corporations and other entities who are defending in climate litigation, there are of course other more tangible and direct consequences. For example, the legal fees involved in defending any claims, any fines or penalties imposed, higher insurance costs and other directly resulting costs. There are also the consequences of climate change itself which can affect a business’ operations, as well as any regulatory response from governments.
With the number of cases on the rise and likely to continue so, we should have more data in the future to analyse the impact of climate litigation with greater precision and detail. We are also likely to see further diversification in the kinds of claims brought, for example, there has recently been a greater focus on the human rights impact of climate change. There have also been greater efforts to hold the decision-makers, such as company directors, personally responsible for the company’s contributions. For example, ClientEarth’s action against the Board of Directors of Shell has attracted significant attention. One area which might be particularly risky to businesses is climate-washing, as businesses need to set out their plans, targets and credentials in a way which satisfies stakeholders and customers, but is also realistic and accurate.
We are also likely to see changes in the regulatory environment. In the UK, for example, the Competition & Markets Authority has developed its Green Claims Code to provide guidance to businesses about being honest with customers over their environmental impact. The Financial Conduct Authority has also introduced its ESG sourcebook, with rules and guidance on climate-related disclosures, aimed at increasing transparency on how firms are managing climate-related risks and opportunities.
This all comes against a backdrop of an increase in extreme weather events across the world, with devastating consequences reaching more land and more people each year.
Looking ahead, we can expect businesses to face increased pressures from investors and stakeholders to review and monitor their climate-related targets and policies. The risk associated with climate litigation needs to be properly addressed across the board.
If you need advice on how climate litigation might affect your business, please contact Megan Lawson.
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