Impacts of climate litigation on firm value

This report suggests that climate litigation may have modest negative effects on firms’ stock prices. In order to assess the financial market response to climate litigation, the report utilised a dataset that comprised the majority of corporate litigation cases against major publicly listed corporations on US or European stock exchanges between 2005 and 2021.

The report found that negative stock price reactions were “modest but statistically significant” for large-cap firms while smaller firms experienced slightly positive returns. The authors noted that, while the impact was modest, the bulk of the corporate climate litigation was filed against the largest companies. The financial market appears to react to ongoing climate litigation rather than to an individual case or decision.

Diverse litigation profile

Climate litigation cases are diverse, covering a broad range of actions that arise from climate-related issues, including illegal activities such as deforestation, greenwashing, fraud, and failure of fiduciary duties. The report highlights that cases are continuing to diversify and evolve rapidly, and assurances that the financial market responds to climate litigation in an adverse manner are essential, especially as more communities and individuals file climate-related lawsuits against governments and corporations.

Empirical approach

Using the event-study methodology standard in financial research, the report calculated the difference between actual and expected stock returns as a means to quantify the financial market response to climate litigation. Using a model that captures dividend yields, volatilities, and correlations with the market, the study found that firm value declined by around 0.3% for the duration of a negative event for firms with equity markets listed in the U.S. or Europe.

The economic magnitude of financial market response

Sato et al measured the economic magnitude of the market reaction to climate litigation as the cumulative abnormal return in the window (-1,1) multiplied by the target firms’ market capitalisation in the same year. This catches the value that investors attribute to climate litigation filings and decisions, in terms of the price of a share when new information becomes available.

Recommendations

The study realised that, to understand the aggregate market-wide impact of climate litigation, firms must adopt best practices for assessing climate risks. The authors argued that climate risks can no longer be considered in isolation from other financial risks and that the financial impact of climate litigation on firms should be considered in the context of various other types of risks.