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May 30, 2023

Climate litigation spooks shareholders (but not by much)

Little has been known on the impact of climate litigation on carbon majors, until a recent analysis now suggests they’re likely to take a hit.

By Daniel Flatt

Shell, climate litigation
Carbon majors, like Shell, are susceptible to stock price losses when confronted with climate lawsuits, but more research is needed. (Photo by Walter Eric Sy via ShutterStock)
  • An unfavourable climate court decision has cut stock values by -0.41% on average, according to new academic analysis.
  • The largest stock market responses were found for cases filed against big oil and gas companies, reducing firm value by -1.50% following unfavourable judgements.
  • Shareholders get especially nervy in “novel” cases involving a new form of legal argument or in a new jurisdiction.

There is emerging evidence that a bad day in court for a big oil company spooks investors and delivers a blow to its share price.

Academics at both the Grantham Research Institute on Climate Change and the Centre for Climate Change Economics and Policy have analysed the effect on a company’s valuation when it becomes embroiled in climate-related litigation.

Focused on climate change lawsuits against US and European-listed corporations from 2005 to 2021, researchers constructed an extensive database of filings and decisions in 108 climate change lawsuits worldwide, shedding light on the impact of legal actions on firm value.

According to the findings, each filing or unfavourable court decision in a climate case resulted in an average reduction of firm value by -0.41%, relative to expected values.

…The bigger they fall

The study also revealed the largest stock market responses were observed in cases filed against “carbon majors”, companies primarily responsible for greenhouse gas emissions. Following case filings, firm value decreased by an average of -0.57%, while unfavourable judgments resulted in a more substantial reduction of -1.50%.

Moreover, the analysis demonstrated that larger market responses were typically observed in cases categorised as “novel”; those involving new legal arguments or emerging jurisdictions, signalling the potential for greater financial repercussions.

Smaller oil and gas companies can breathe a sigh of relief. Filings against non-carbon majors did not show a statistically significant effect on firm value, researchers found.

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Nonetheless, the implications of these findings underscore the importance of climate change litigation and its potential financial consequences for the corporations involved. As climate-related concerns continue to gain traction globally, legal actions aimed at holding companies accountable for their contribution to environmental harm can impact their market valuation.

As one of the first of its type to look at the impact of climate litigation on stock valuations, the findings should be welcomed by all – but it’s important not to place too much weight on them just yet.

Climate litigation: More evidence is needed

Although the study suggests potentially positive news for those using legal routes to bring those responsible for influencing climate change to heel, it’s far from clear whether a bad day in court has a long-lasting impact on shareholder value, or whether the relationship is provably causal.

Take an example: In February this year, the NGO ClientEarth filed a case in the UK High Court against Shell’s board of directors for “failing to move away from fossil fuels fast enough”. It is the first case of its kind that is seeking to hold corporate directors personally liable.

Although Shell’s share price dipped suddenly around mid-February, very quickly it was at a year-to-date high by 1 March. The UK High Court dismissed the case on 12 May; presumably good news for Shell, but there was no discernible shift in share price.

Also, it’s worth asking what type of investor responds to such developments. A skittish day trader is not the same as a large US pension fund, and losing the latter is far more significant than the former.

Those unphased by legal opinions and the recent finding would be wise to know that court cases are becoming increasingly commonplace.

According to the Climate Change Laws of the World project at the Grantham Research Institute, up to May 2022, a total of 2,002 climate-related litigation cases were filed globally since 1986, of which approximately one-quarter were filed between 2020–2022 alone.  

As already evidenced, directors, corporates and governments are all vulnerable to attack. There are multiple examples of governments being slapped down for breaches of their own laws. A very recent case is in the UK, where the English High Court found the UK government’s plan for reaching net zero was unlawful on the grounds that it was too vague. It has since been ordered to publish an updated strategy.

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