Climate litigation poses risk to fossil fuel share prices
A new study has found that climate litigation poses a financial risk to fossil fuel companies due to it lowering the share price of major polluters.
The research by the London School of Economics’ Grantham Research Institute, first published in the Guardian, outlined how the stock market reacted to when a new climate lawsuit was filed or a corporation had lost its case.
The study found that filing a new case or an unfavourable court decision in a climate case reduced a companies value by an average of 0.41%, relative to expected values.
It also revealed that the stock market responded most strongly in the days after cases against carbon majors. The relative value of those companies was reduced by an average of 0.57% following climate case filings and by 1.5% after an unfavourable judgment.
The research paper said: “Larger market reactions are observed in ‘novel’ cases involving a new form of legal argument or in a new jurisdiction. No statistically significant effect on firm value was found in filings against non-carbon majors.
“We conclude that lenders, financial regulators, and governments should consider climate litigation risk as a relevant financial risk in a warmer future.”
The study analysed 108 climate change lawsuits worldwide between 2005 and 2021 against 98 companies listed in the US and Europe.
In Grantham Research Institute’s study, a case study on Shell revealed that the oil and gas major’s relative value fell by 3.8% when a court at the Hague ordered Shell to cut its global carbon emissions by 45% by the end of 2030 compared with 2019 levels.
The researchers found “consistently larger and statistically significant effects” on corporate share prices after the Shell case was launched “suggesting capital markets are increasingly responding to climate litigation”.
As of September 2022, the number of climate cases filed reached 2419, compared to 1890 in February 2022, according to Norton Rose Fulbright's Climate Litigation Update. This marks an increase of more than 27% over a seven month period, indicating that climate litigation cases are on the rise. While some of these claims are aimed at governments, the law firm also sees a growing trend towards greenwashing claims against corporations.