Polluting companies could be liable for trillions in damages from climate lawsuits, reveals new research from the Oxford Sustainable Law Programme.

The study, published in Science, suggests investors and regulators are not sufficiently considering these dangers when assessing companies’ climate-related financial risks.

The research proposes a novel framework to evaluate these hazards, demanding a radical reconsideration of how climate litigation risks are quantified.

Associate Professor Thom Wetzer, lead author and Director of the Oxford Sustainable Law Programme, said: "Financial risk is the dominant frame through which investors and regulators engage with climate change.

"But climate risk analysis fails to satisfactorily account for legal developments."

He stressed that amidst escalating climate litigation and regulatory enforcement actions, current assessments "misrepresent" the "distribution and scale" of climate-related financial risks.

This misrepresentation results in investments in ill-advised projects and exposes both investors and regulators to unknown risks, exacerbating the financial pitfalls linked with climate change.

So far, 2,485 climate lawsuits have been filed worldwide.

Consequently, some of the planet's most substantial carbon emitters are facing increasing risks.

For instance, US oil and gas titan Chevron could be accountable for damages amounting to $8.5 trillion.

From 1990-2019, Chevron's profits were $291 billion in comparison.

Co-author, Dr Rupert Stuart-Smith, senior research associate at the Oxford Sustainable Law Programme, said: "It’s possible that Chevron’s business may in fact be net value destroying."

The study also shows how organisations responsible for designing frameworks for climate risk evaluations, like the International Sustainability Standards Board and The Network for Greening the Financial System, group legal risks with "transition risks" but provide "little to no detail" on their assessment.

Co-author, Dr Arjuna Dibley, head of sustainable finance research at Melbourne Climate Futures, said: "This suggests they see climate litigation as merely a peripheral risk, when recent events in the courts demonstrate that it is something far greater".

Greenhouse gas litigation not only threatens companies directly by way of successful lawsuits, but also indirectly by escalating borrowing expenses or by prompting policy amendments like subsidy reductions, emission reductions, or augmented disclosure requirements.

Dr Rupert Stuart-Smith added: "For these reasons, conventional assessments that do not meaningfully account for the effects of litigation misrepresent the true extent of companies’ climate-related financial risk."

Professor Wetzer and his team proposed a broad approach for evaluating climate-related legal risks, encompassing aspects like market-impact analysis, social cost of carbon analyses, and qualitative examinations.

He added: "Policymakers, investors, and companies have accepted the need to understand climate risk exposures.

"But doing so diligently means engaging with the law through research that combines legal reasoning with financial analysis and climate science.

"Else, they will continue to fly blind in their treatment of climate risk."