The volume of climate litigation has increased exponentially over the past 10 years. However, uncertainty about legal outcomes and related costs means that so far, lawsuits have not impacted credit quality. Bruno Bastit, Global Corporate Governance Lead & Sustainability Research Director, and Tommy Englerth, Sustainable Finance Associate Director at S&P Global Ratings, explore:

The cumulative number of climate-related cases launched has more than quadrupled over the past decade, rising from 581 in 2013 to 2,410 in 2023. S&P Global Ratings believes this reflects both societal pressure and an increasing awareness of the impacts of climate change – particularly as data on physical climate and transition risks become more accessible worldwide.

Yet measuring the strategic and financial impacts of climate litigation remains complex. Many climate cases are still pending, meaning it has been difficult to predict the financial impact it may have on corporates. Moreover, there is relatively little data publicly available when it comes to litigation costs.

 Scope of climate-related lawsuits is evolving

As the number of climate-related lawsuits has increased, litigation has spread across countries and sectors. Historically, climate-related lawsuits were mainly seen in the US, but they are now being filed across the globe: in 2023, lawsuits were filed in 75 different jurisdictions compared to just 24 in 2017.

There has also been an evolution in the sectoral spread of climate litigation. While oil and gas companies have traditionally been subject to the majority of climate-related lawsuits, cases are progressively being filed against companies in other sectors – particularly leisure, consumer products, financial institutions, chemicals, and utilities.

In addition, the legal basis of litigation is widening. In the US, there is a growing trend of climate-accountability lawsuits, where mainly oil and gas companies are sued with claims arguing climate-related damage.. The targets of climate-related lawsuits have also expanded, with an increasing number of cases being filed against companies’ boards of directors.

Strategic and financial impacts hard to discern

While the number and scope of climate-related lawsuits is increasing, it has been difficult to measure the potential impacts of climate litigation on corporations.

One of the main hurdles in translating climate litigation risk into financial impacts is the high degree of uncertainty about when a case will end and what the final ruling will be. Legal outcomes are highly variable and depend on factors such as jurisdiction, the nature of claims, the strength of legal arguments and the willingness of parties to settle or appeal. Consequently, litigation risk must be assessed on a case-by-case basis.

Another challenge is ascertaining the costs related to climate litigation. There is currently relatively little publicly available data on specific, direct costs that have been incurred, defended, or settled as a result of climate-related cases.

One possible way to estimate direct costs is to look at companies’ own reporting. However, due to the unpredictability of time horizon over which any potential penalty must be paid and the size of any potential penalty, the financial impacts of physical climate risks and climate transition risks would not necessarily be specifically earmarked in companies’ balance sheets.

Indirect costs– which include opportunity costs or intangible costs, such as reputational damage – are also difficult to estimate with any degree of accuracy.  A recent study by the London School of Economics found a causal link between climate litigation and the stock price of carbon-intensive companies, suggesting that an unfavourable legal outcome reduces the share price of such firms by an average of 1.5%. However, such a mild decline in share price would generally have no, or limited, bearing on S&P Global Rating’s assessment of a company’s creditworthiness.

Insurance could become more difficult to contract

The amount and type of insurance coverage purchased by a company that has been named as a defendant in a climate-related lawsuit could play an important role in that company’s ability to absorb associated costs. However, insurance cover for climate litigation may become more difficult to contract as the number and severity of such lawsuits increase.

For now, S&P observes that insurers’ existing products that are covering claims from climate litigation claims have seen rather low claims of severity. However, insurers have identified climate litigation as a key risk and are reviewing the wording of policies to include more specific language regarding whether climate-related cases are covered – and in what circumstances.

As the legal landscape evolves, new legal strategies emerge, and the scope of said litigation broadens, it remains to be seen how the insurance sector will respond if legal precedents are set in future climate-related lawsuits.

Looking ahead, as the physical impacts associated with climate change become more pronounced, more entities could face a rising number of courtroom challenges. While to date, climate litigation has not had a material impact on issuers’ creditworthiness, S&P Global Ratings expects climate-related lawsuits may be one of many mechanisms by which transition risk crystalizes for issuers.