July 23, 2003
Climate Change Litigation Could Affect Companies’ Market Value
by William Baue
In the near future companies could face the risk of being on the receiving end of climate change
lawsuits, a development that stands to impact shareowner value.
The February edition of the Columbia Journal of Environmental Law published an article by Yale Law School
graduate David Grossman demonstrating the legal feasibility of lawsuits holding companies
accountable for climate change. The effects of such litigation on companies’ market value
and shareowner value remains to be seen.
“This litigation could be a
catalyst or a trigger for markets to really look at climate change issues, not only with respect to
the expected costs of litigation, but also in terms of a general economic assessment,” said
Henrik Garz, director of equity strategy research at WestLB Panmure. WestLB Panmure is a Germany-based technology investment bank.
West LB recently published a report authored by Dr. Garz that reiterates the scientific
community’s consensus on the reality of climate change. Despite this consensus, markets have
yet to price climate change as a risk factor or differentiate companies that manage this risk well
from those that do not. Markets tend to be particularly shortsighted when it comes to perceiving
and pricing such long-term strategic issues, says Dr. Garz.
“Before September 11,
nobody really thought about the risks or effects of terrorist attacks on equity market valuations,
but afterwards, the threats of terrorism were more perceived and dominant, and this led the markets
to price in the effect,” Dr. Garz told SocialFunds.com. “Climate change litigation
will similarly arouse the interest of the markets and raise the perception of the topic.”
Although such lawsuits pose significant challenges and obstacles, climate change
litigation against companies in carbon-intensive industries such as oil and gas, electric
utilities, and automobile manufacturing seems inevitable. Carbon dioxide emissions are considered
to be primary contributors to global warming.
“It is only a matter of time before
companies like ExxonMobil (XOM) or General Motors (GM)
will be facing litigation,” said Jon Sohn of Friends of the Earth (FoE), a nonprofit environmental advocacy
FoE, in conjunction with Greenpeace and several western cities, filed one of the
first climate change lawsuits last year. The suit charges two U.S. government
agencies with failing to comply with National Environmental Policy Act (NEPA) requirements to
assess the environmental impact of projects they financed over the past decade.
Export Import Bank (Ex-Im) and the Overseas Private Investment Corporation (OPIC) provided over $32
billion in loans and funding to U.S. corporations for overseas projects without gauging the
potential contributions to global warming, the suit contends.
“The status of this
case is that the U.S. Government, instead of addressing the merits of the case, is trying to change
the venue to Washington, D.C., a move that would inconvenience the plaintiff cities that are all
out west--Oakland, Santa Monica, Boulder and Arcata,” said Mr. Sohn. “So the strategy
is much like that of the Bush Administration: avoid the real issues and undercut those holding them
Mr. Sohn remains confident that FoE and its co-plaintiffs will win
The states of Connecticut, Massachusetts, and Maine have also filed a climate
change lawsuit against another U.S. government bureau, the Environmental Protection Agency, for
failing to regulate carbon dioxide emissions under the Clean Air Act.
The blueprint for
climate change litigation was drawn by the 1998 Master Settlement Agreement that required tobacco
companies to pay states hundreds of billions of dollars in fines.
between tobacco and climate change litigation might be the consistent patterns of denial and
deception by various companies,” Mr. Sohn told SocialFunds.com. “The big difference is
that the financial liability is going to be much greater for climate change.”
Sohn also serves as U.S. coordinator for the Climate Justice Programme (CJP), an alliance of 70
environmental organizations, lawyers, academics, and individuals in 29 countries that support legal
cases to combat climate change.
“There will be some market impact, even if these
lawsuits are not ultimately successful,” Dr. Garz said, as they will raise awareness about
climate change as a material risk.