Climate litigation poses a financial risk to fossil fuel companies because it lowers the share price of big polluters, research has found.

A study to be published on Tuesday by LSE’s Grantham Research Institute 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 warmer future, and ultimately drive greener corporate behaviour.

The study, which is currently being peer reviewed, analysed 108 climate crisis lawsuits around the world between 2005 and 2021 against 98 companies listed in the US 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 carbon majors, 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 unfavourable judgment.

Although modest, the researchers conclude that the drop in the value of big polluters is statistically significant and therefore down to the legal challenges.

“We didn’t know before if the markets cared about climate litigation,” said Misato Sato, lead author of the study. “It’s the first evidence supporting what was suspected before; that polluting firms and especially carbon majors now face litigation risk, in addition to transition and physical risk.”

Researchers also found share prices fell more in reaction to novel cases involving a new form of legal argument or filed in a new jurisdiction.

For example, when the Peruvian farmer and mountain guide Saúl Luciano Lliuya filed an unprecedented legal claim against RWE in 2015, seeking compensation for its role in causing historical climate change that threatens his home, the German 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 Shell by the Dutch NGO Milieudefensie, 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 against the decision, but is supposed to comply in the meantime.

The researchers found consistently larger effects on corporate share prices after the Shell case was launched “suggesting capital markets are increasingly responding to climate litigation”.

There has been 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 companies are increasingly recognising it as a risk.

BP, for example, has been the subject of numerous climate-related claims, including those brought against the fossil fuel industry by towns, states and municipalities across the US, which are inching towards hearings in state court.

According to BP’s climate-related financial disclosures, published alongside its annual report in April, 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. Legal proceedings, it warns, “could reduce our financial liquidity and our credit ratings”.

Legal experts told the Guardian they expected climate litigation to be a recurring theme in annual accounts as companies become subject to stricter disclosure rules.

Sato said it was too early to say if litigation was driving substantial changes in climate action among big polluters, but evidence that lawsuits affected share price or credit ratings could help influence corporate behaviour.

Andrew Coburn, the chief executive of the climate risk company Risilience, noted 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. “Risilience’s analysis suggests that damages could amount to 5% or more of a company’s revenue in the event of climate litigation.”

Coburn added 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”.