Climate Lawsuits Influence Big Polluters’ Share Prices
Climate litigation poses a financial risk to fossil fuel companies because it lowers the share price of big polluters. A study to be published in May 2023 by the London School of Economics and Political Science’s (LSE) Grantham Research Institute on Climate Change and the Environment examines how the stock market reacts to news that a fresh climate lawsuit has been filed or a corporation has lost its case.
The researchers hope their work will encourage lenders, financial regulators and governments to consider the effect of climate litigation when making investment decisions in a warming future, and ultimately drive corporate behavior that is environmentally–conscious.
Global Lawsuits
The study, which is currently under peer review, analyzed 108 climate crisis lawsuits around the world between 2005 and 2021 against 98 companies listed in the U.S. and Europe. It found that the filing of a new case or a court decision against a company reduced its expected value by an average of 0.41%.
The stock market responded most strongly in the days after cases against major carbon dioxide (CO2) emitters, which include the world’s largest energy, utility and materials firms, cutting the relative value of those companies by an average of 0.57% after a case was filed and by 1.5% after an unfavorable court judgment.
Although the drop in value of big polluters is modest, the researchers conclude that it is statistically significant and therefore meaningful in terms of the legal challenges. The lead author of the study, Misato Sato says the study dispels the long–held belief that the financial markets disregarded climate litigation.
The study findings are evidence supporting the reality of polluting firms (especially carbon majors) facing litigation risk, in addition to transition and physical risk. Researchers also found share prices fell more in reaction to new cases involving a novel form of legal argument or to cases filed in a new jurisdiction.
For example, when the Peruvian farmer and mountain guide Saúl Luciano Lliuya filed an unprecedented legal claim against German multinational energy company RWE AG in 2015, seeking compensation for its role in causing historical climate change that threatens his home, the energy giant’s relative value fell by 6%. It dropped again by 1.3% in 2017, when an appeals court allowed the claim to proceed.
Another important case with a more complex picture was brought against Royal Dutch Shell by the non–profit, non–governmental organization (NGO) Dutch Milieudefensie (Milieudefensie v Royal Dutch Shell 2021), which argued that the company had an obligation to reduce carbon emissions from its global operations,
Shell’s relative value actually rose by 1.9% when the lawsuit was filed in April 2019. But two years later, 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, it fell by 3.8%. Shell is appealing the decision, but in the meantime it must comply with the judgement.
After the Shell case was launched, there have been consistently larger effects on corporate share prices. A surge in climate litigation against fossil fuel firms and other polluting industries in recent years, with many cases challenging corporate inaction on the climate crisis and attempts to spread misinformation and disinformation, and companies are increasingly recognizing it as a financial liability risk.
National Lawsuits
For instance, British Petroleum p.l.c (BP) has been the subject of numerous climate–related claims, including those brought against the fossil fuel industry by towns, states and municipalities across the U.S., which are headed towards hearings at the Supreme Court (SCOTUS).
According to BP’s climate–related financial disclosures, published alongside its annual report in April 2023, changes in law and regulation, as well as shifting social attitudes, could have “adverse impacts” on its business by making it more likely to lose court cases and exposing it to greater environmental and legal liabilities, thereby reducing their financial liquidity and credit ratings.
Legal experts say they expect climate litigation to become a recurring theme in annual accounts as companies become subject to stricter disclosure rules. While litigation has affected share prices and credit ratings, there is yet no evidence that it is driving substantial changes in climate action among big polluters, although lawsuits could help influence corporate behavior.
Climate risk company Risilience, noted in an analysis that defending a major lawsuit was rarely perceived well by the market, with expensive payouts and reputation damage causing short–term valuations to take a significant hit. The analysis suggests that damages could amount to 5% or more of a company’s revenue in the event of climate litigation.
The company adds that the increasing willingness of regulators across the UK and Europe to clamp down on perceived greenwashing demonstrates additional financial risks for firms failing to present credible, ambitious and realistic climate–transition plans underpinned by transparent data.
With daily reports of extreme weather all over the world, the time for denial is over. Every day brings more alarming evidence of the accelerating levels of climate damage, and mounting reminders that people across the world are losing their livelihoods—and lives—due to deadlier and more frequent heatwaves, floods, wildfires, droughts, and uncharacteristic storms.
State Lawsuits
Supporters of a bill reintroduced this year requiring large corporations to disclose their carbon emissions argue it will empower consumers, disrupt greenwashing and help spotlight sustainable companies for others to model.
In January 2023, state Senator District 11 Scott Wiener (D–California) introduced the Climate Corporate Data Accountability Act (Senate Bill 253), a first–in–the–nation measure that would require all companies doing business in California with over $1 billion in revenue to report all of their carbon emissions to the public.
Transparency matters. This disclosure would make it harder for polluting companies to pretend that they have been benevolent actors, and easier for the public to hold them accountable for their failures. Senate Bill 253 is a major step to combating corporate greenwashing, which is a major obstacle to tackling the climate crisis.
Most greenhouse gas (GHG) emissions are released by corporations—in fact, 71% of historic global emissions can be traced back to just 100 corporations. Not only that, some corporations brazenly gaslight the public about it.
Fossil fuel companies, for the past 100 years, deliberately misled the public about the effects of burning fossil fuels and lied about their own (accurate) predictions of rising temperatures, thereby delaying climate action. Nowadays, fossil fuel companies engage in greenwashing when the spotlight is on them, only to back track on their promises to reduce their pollution when they fade from front page news.
Polluting corporations often reassure the public that they’re reducing emissions without actually putting any effort in changing their operations or products, making it difficult to distinguish the corporations only claiming to improve their practices from the ones actually doing so.
Youth social movements such as #JustStopOil and #FridaysforFuture, transit and environmental justice activists like the Central California Environmental Justice Network (CCEJN), and divestment campaigns show that people want stronger action by institutions and corporations to prevent the worst effects of climate change.
Some institutions, like the State of California, have made a $54 billion climate investment over five years, and the Federal Inflation Reduction Act of 2022 made a down payment on federal climate action for the next decade. Many corporations actively supported the Inflation Reduction Act, even though it paid for climate investments by raising the corporate tax rate.
It’s time for all corporations to move towards action and accountability as well. SB 253 would enable transparency at an institutional level, and allow regulators to take notice of the worst polluters while allowing businesses already tracking or reducing their emissions to highlight their sustainable practices.
Emissions reporting under SB 253 would follow an internationally–accepted standardized process, meaning it wouldn’t be difficult or expensive for billion–dollar corporations to implement. Companies that already report all of their emissions through the international Greenhouse Gas Protocol could just copy over their existing reports.
SB 253 wouldn’t only be for politicians in Sacramento. It makes individual–level climate choices easier. When the average American knows which corporations are polluting more than others, they can zero in and vote with their wallets. Younger workers are seeking employers that share their values, so people with job mobility seeking a sustainable place to work can do so.
Environmental, Social, and Governance (ESG) investing funds will have even greater visibility into the companies that are least dependent on fossil fuel infrastructure, providing greater security to those investing in the growing clean, renewable energy, low–carbon economy.
The three pillars of ESG are:
- Environmental—this has to do with an organization’s impact on the planet
- Social—this has to do with the impact an organization has on people, including staff and customers and the community
- Governance—this has to do with how an organization is governed. Is it governed transparently? Does it report honestly and clearly on its activities?
This legislation will also help strengthen social bonds. Most people have a low and declining sense of trust in business leaders, according to the Pew Research Center. Reversing the tide of misinformation coming from corporations about their emissions and requiring accountability will help rebuild flagging trust in institutions, which is necessary for both climate action and a healthy democracy.
Corporations are responsible for the bulk of greenhouse gas emissions (the world’s 20 largest companies, including fossil fuel producers, are responsible for one third of global carbon emissions), and corporate action is absolutely necessary to reduce future emissions and improve the lives of ordinary people.
If corporations are not able to hold themselves accountable, then perhaps the public should in their stead. There are no downsides to increased corporate accountability, especially where climate change is concerned. There are however some who denounce SB 253. Free–market proponents say the bill would lead to higher costs for consumers and fail to achieve the transparency it seeks. The public and political debate over the climate crisis has so far focused on individual responsibility, but based on current trends that focus has shifted to holding companies most responsible for carbon emissions accountable.
Sources:
Big polluters’ share prices fall after climate lawsuits, study finds
https://www.theguardian.com/environment/2023/may/22/big-polluters-share-prices-fall-climate-lawsuits-fossil-fuels-study
by Isabella Kaminski Mon 22 May 2023
Corporations are some of the worst polluters. This California bill keeps them honest
https://calmatters.org/environment/climate-change/2023/03/corporate-accountability-climate-transparency/
BY GUEST COMMENTARY MARCH 24, 2023
The 20 most polluting companies in the world
https://www.thecorporategovernanceinstitute.com/insights/news-analysis/the-20-most-polluting-companies-in-the-world-esg/
by Stephen Conmy on Apr 4, 2023
Largest corporate toxic air polluters in the United States in 2020, based on toxic score (in millions)*
https://www.statista.com/statistics/1043907/largest-us-corporate-toxic-air-polluters/
Published by Ian Tiseo, Feb 6, 2023
Revealed: the 20 firms behind a third of all carbon emissions
https://www.theguardian.com/environment/2019/oct/09/revealed-20-firms-third-carbon-emissions
by Matthew Taylor and Jonathan Watts, Wed 9 Oct 2019 07.00 EDT
Ad campaigns hide investment in a huge expansion of oil and gas extraction, says InfluenceMap
https://www.theguardian.com/business/2019/mar/22/top-oil-firms-spending-millions-lobbying-to-block-climate-change-policies-says-report
Sandra Laville Thu 21 Mar 2019 20.01 EDT