Impacts of climate litigation on firm value

Communities and individuals are turning to courts to hold governments and high-emitting firms to account for the adverse consequences of climate change. Such litigation is part of a broader trend in which stakeholders are increasingly scrutinizing firms for their sustainability practices. For firms, rising climate litigation risk may exacerbate wider sustainability risks. Here we construct a comprehensive database of filings and decisions relating to 108 climate lawsuits against US- and European-listed firms between 2005 and 2021. We show that firms experience, on average, a 0.41% fall in stock returns following a climate-related filing or an unfavourable court decision. Cases filed against Carbon Majors, primarily the world’s largest fossil fuel producers, saw the largest stock market responses, with returns reducing by 0.57% and 1.50% following filings and unfavourable decisions, respectively. Markets respond more to ‘novel’ climate litigation involving new legal arguments or jurisdictions. Our findings suggest that climate litigation provides a way for stakeholders to challenge actual and perceived weaknesses in the sustainability practices of firms. We conclude that financial markets consider such litigation to be a relevant financial risk.