This article is a part of OGR's Litigating the Climate Emergency series on how human rights and strategic litigation might best be leveraged in the climate action movements.
Climate change litigation is expanding rapidly as a governance tool for strengthening climate action and seeking redress for its effects. In the past three years, a new wave of climate change lawsuits have been filed against major carbon emitters—the so-called Carbon Majors. There are over 40 of these climate cases worldwide, 33 of which are in the US.
Climate litigation against Carbon Majors aims to reshape the thinking about energy production and the consequences of global warming. This type of litigation advocates a shift from fossil fuels to renewables and draws attention to the vulnerability of coastal communities and infrastructure to extreme weather and sea level rise. In addition, it articulates climate change as a legal and financial risk. Ultimately, the aim is to drive behavioural change and/or to guide adjudication. But is climate litigation against Carbon Majors capable of delivering these hopes?
The impact of climate change litigation is still an under-explored question. Socio-legal researchers use qualitative methods to investigate the potential of legal strategies for the pursuit of social change, and signal a degree of scepticism in relation to the transformative potential of climate litigation. However, little is known at this stage about the economic costs and impacts of climate litigation.
In this short article I explore what it means to assess the economic impacts of litigation against Carbon Major companies. More specifically, I focus on a not so obvious type of impact: drops in share prices associated with litigation. Through analysis of stock reaction to other types of litigation, I hope to provide initial thinking on investigating the potential reputational losses resulting from strategic climate litigation against Carbon Majors.
Direct and indirect costs of litigation
Because strategic litigation against Carbon Majors is intended to change the behaviour and, ultimately, the business models of companies that significantly contribute to GHG emissions, understanding the economic impact of these claims is critical. At present however, such assessments remain elusive and are limited by insufficient exploration of methodological and interdisciplinary questions about how to measure litigation’s impact.
An assessment of the economic impacts of litigation involves measuring both direct and indirect costs. Direct economic impacts are easier to calculate. For plaintiffs, there are the attorneys’ fees, the costs of a communication campaign, court costs to bring and pursue the case, and often also experts’ fees. All added, bringing a case can be prohibitively expensive. For supporters, there is also an opportunity cost incurred; engaging in litigation can lead to diverting resources away from other strategies.
For the defendants, direct impacts include legal and administrative costs, legal fees, fines, and awards of damages. These can occur at a pre-filing stage, during the legal proceeding itself, and after the final judgement, award, or decision. The exponential increase in climate harms globally means that Carbon Major corporations may be liable to pay billions of dollars’ worth of damages for existing as well as future climate harms, and not all climate change damage is covered by insurers.
In addition to these direct costs, litigation also has indirect financial impacts, which are harder to calculate. They include increasing premia under liability insurance policies, increasing capital costs, and impacts on market valuation.
Measuring the impact on stock prices resulting from strategic litigation
Litigation can affect the market valuation of listed companies. Investors may react to the direct cost of a lawsuit. Investors may also react to a reputational damage and anticipate potential reputational losses by selling their shares. In addition, investors may react if they expect an increase in climate litigation against the entity and try to anticipate potential costs by selling their shares in the entity.
The impact of litigation on stock prices is measured through event studies—a methodology widely used to examine shareholder wealth consequences of different types of lawsuits. Event studies assessing the impacts of litigation have been undertaken of tobacco, asbestos, and environmental litigation in the USA. In tobacco litigation, unfavourable litigation announcements were found to cause share prices to fall relative to those in reference industries.
Factors causing this revaluation of share prices include the prospect of high legal fees, significant liability or settlement payments, and reputational cost. The financial impact of strategic litigation was equally if not more significant on the asbestos industry. Researchers estimate that between 1976 to 2004 at least 73 companies filed for bankruptcy as a result of the costs of asbestos litigation and the prospect of future liability.
Within the field of environmental regulation, both actual and potential environmental lawsuits were found to lead to falls in share prices. The Volkswagen emissions scandal of 2015 (“Dieselgate”) stands out, with the disclosure of the breach by the Environmental Protection Agency leading to a loss in market value of around 30% in several days. Dieselgate had significant spillover effects, with American automobile companies all experiencing falls in their share values. Furthermore, following Dieselgate, share price drop in response to failures to meet environmental standards increased, reflecting heightened scrutiny of the automotive industry by investors.
Developing an understanding of the costs and impacts of strategic climate litigation is crucial not only within academic circles, but also for the legal professionals, claimants, defendants, funders, and individuals that are involved in or affected by the outcomes of these cases.
But event studies have not yet been carried out to assess the eventual impact of climate litigation against major oil companies.
Although these studies looked at different industries and types of cases, they suggest that strategic litigation can impose detrimental financial impacts on share prices of the industries against which cases are brought. These financial impacts were, in the tobacco and asbestos cases, exacerbated by additional suits or unveiling damaging internal documents tracing a pattern of concealment and misrepresentation. The impact of disclosure has also been particularly severe, as it might unveil greenwashing, which in turn is found to lead to additional litigation, losses in reputation, consumer trust, and corresponding market share.
Beginning a research agenda
The possibility of share values influencing corporate behavioural change has been well discussed. Decades of law and finance literature suggest that litigation risk and actual litigation can have significant long-lasting effects on defendant firms, its executives and directors, with further ramification on corporate activities, policies, behaviours, and outcomes. Would that also be the case for climate litigation against Carbon Majors?
The climate lawsuits filed against Carbon Majors have already imposed significant direct costs to both plaintiffs and defendants. An assessment of indirect costs suffered by Carbon Majors companies could show whether, in addition to the direct costs, these companies are suffering—or will suffer—drops in share values that are significant enough to drive shifts in their policies and behaviour.
Developing an understanding of the costs and impacts of strategic climate litigation is crucial not only within academic circles, but also for the legal professionals, claimants, defendants, funders, and individuals that are involved in or affected by the outcomes of these cases. The indirect impacts of climate litigation against Carbon Major corporations constitutes one piece of a larger puzzle when considering whether and to what extent litigation operates as a governance tool capable of driving change corporate policies and behaviours.