Impacts of climate litigation on firm value

Communities and individuals are increasingly turning to courts to hold governments and high emitting corporations to account for the adverse consequences of climate change and are starting to find success. For defending corporations, rising climate litigation risk may exacerbate well-known physical and transition risks associated with climate change. Yet, little is known about the impacts of climate litigation against corporations. Here we provide the first robust evidence. We construct a comprehensive database of filings and decisions relating to 108 climate change lawsuits worldwide against US and European-listed corporations between 2005–2021. Our causal analysis estimates that a filing or an unfavourable court decision in a climate case reduced firm value by -0.41% on average, relative to expected values. The largest stock market responses were found for cases filed against Carbon Majors, reducing firm value by -0.57% following case filings and by -1.50% following unfavourable judgements. 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.