Climate litigation risk informing investor decisions

Individuals, civil society and other stakeholders are increasingly using the courts to challenge governments and high emitting corporates for the adverse effects of climate change. Globally, the cumulative number of climate change-related cases more than doubled between 2015 and 2022 with around a quarter of these brought between 2020 and 2022. Whilst climate litigation cases against corporates represent a relatively small proportion of cases, claims against corporates are also increasing and drawing in companies from a broader range of sectors outside of the fossil fuel industry.

With the increased risk of climate litigation, investors are starting to see climate-related litigation as a risk informing investment decisions. For example, researchers from the Centre for Climate Change Economics and Policy and the Grantham Research Institute on Climate Change and the Environment recently released a working paper on the effect of climate litigation on company market values. Researchers analysed court filings and decisions relating to 108 climate change lawsuits filed worldwide against US and European-listed corporations between 2005 and 2021, finding there is a causal link between climate litigation and stock prices.

The report estimates that the filing of a new climate-related court case or an unfavourable court decision in a climate-related case reduces firm value by -0.41% on average, relative to expected values.

Associated drops in market value suggest the economic costs of defending climate litigation may far exceed the more obvious direct financial costs of litigation such as damages and other penalties and legal defence costs, and investors are pricing in expectations of reputational damage and reduced future cash flows.

With the rise in climate litigation and investor awareness, companies should consider their potential climate litigation exposure as part of their broader ESG and climate transition risk management strategies.

Sato M, Gostlow G, Higham C, Setzer J, Venmans F (2023) Impacts of climate litigation on firm value. Centre for Climate Change Economics and Policy Working Paper 421/Grantham Research Institute on Climate Change and the Environment Working Paper 397. London: London School of Economics and Political Science.