Why a landmark ruling from the world's top court puts financial markets on notice

CNBC

7 hours ago

Gripped by corporate earnings season and U.S. President Donald Trump's back-and-forth tariff policy, investors largely shrugged off a historic climate ruling from the world's top court.
But for some, the International Court of Justice's (ICJ) recent advisory opinion on state's legal obligations in the face of climate change could emerge as a watershed moment for financial markets.
Günther Thallinger, a board member at Allianz, one of the world's biggest insurers, said that close watchers of the ICJ's July 23 ruling described it as perhaps the most significant climate development since the 2015 Paris Agreement.
At the time, the pronouncement marked the ICJ's first-ever opinion on climate change and laid out that climate action is not optional.
The court said in a unanimous ruling that governments and countries have a legal obligation to protect the environment from greenhouse gas emissions, protect present and future generations from the climate crisis and to cooperate internationally.
Notably, the ICJ also found that fossil fuel production, including licensing and subsidies, "may constitute an internationally wrongful act which is attributable to that State."
The ruling, which was the brainchild of young law students in low-lying Pacific island states and championed by the government of Vanuatu, is widely expected to have far-reaching legal and political consequences.
Speaking in a personal capacity, Thallinger said that while the ICJ's opinion is based on existing law and conventions, the ruling could yet have meaningful ramifications for a vast range of assets — whether one cares about climate change or not.
"If one takes as an investor what the International Court of Justice just said, then a revaluation of these assets needs to happen. Every prudent investor must do this now," Thallinger told CNBC by video call.
"Even if they don't like the discussion around climate change, even if they would say they denigrate the Court of Justice completely, they must expect that, in some countries, some governments, some courts are going to follow this opinion," Thallinger said.
"If they follow this opinion, it has asset valuation implications, quite clearly. So, this opinion for investors, for capital market participants, really means something."
On the issue of licensing and subsidies, Thallinger said the ICJ's ruling could prove to be a significant development.
That's because licensing and permitting for the mining sector, for example, and government subsidies for fossil fuels could be at risk following the court opinion. The burning of fossil fuels such as coal, oil and gas is the chief driver of the climate crisis.
"If subsides are unlawful, then one should expect that subsidies are somehow stopped at a certain point in time," Thallinger said.
"Now, certain business processes live on these subsidies or at least benefit to a certain degree on these subsidies. And, as always for an investor, usually you look simply at the cashflow, and if the cashflow part is missing or all of a sudden becomes much smaller then that means another valuation," he added.
The U.S. and China, the world's two biggest carbon emitters, provided a mixed response to the ICJ's ruling.
"As always, President Trump and the entire administration is committed to putting America first and prioritizing the interests of everyday Americans," White House spokeswoman Taylor Rogers said in response to the court opinion, Reuters reported.
A spokesperson for China's Foreign Ministry, meanwhile, said the ruling has a "positive significance" for advancing international climate cooperation and sought to reaffirm the Asian country's status as a developing country.
Not everyone is as concerned about the ICJ's ruling from an investor standpoint.
"I feel like the wide spectrum of views that exist in the investor community on climate change, and the action that investors are supposed to take, will probably mean that the decision is a bit of a Rorschach test," Lindsey Stewart, director of institutional insights for Morningstar, told CNBC by video call.
"People are just going to see things that kind of confirm their existing view," he added.
A Rorschach test refers to a psychological assessment during which a person is asked to describe what they see in a series of inkblots.
Ida Kassa Johannesen, head of commercial ESG at Saxo Bank, said the ICJ's intervention is a non-binding advisory opinion, rather than a ruling, "and this distinction is crucial."
Companies with significant environmental footprints, such as those in the oil and gas, mining and heavy industry sectors, are likely to face increased litigation risk, which could affect their costs, valuation and reputation, Johannesen told CNBC by email.
"As a result, investors and particular large institutional investors may begin to reallocate capital away from high-risk sectors to manage exposure to climate-related legal and reputational risks," she added.
Saxo Bank's Johannesen pointed out that the U.S. and China both expressed reservations about the ICJ's opinion, emphasizing its non-binding nature and calling for flexibility in climate action.
The Trump administration also recently signed into law the U.S. president's One Big Beautiful Bill Act, a package that is favorable to mining and oil and gas companies.
"All this sends mixed signals which would probably lead to fragmented market responses between the world's 2 largest economies and the [rest of the world], slow down global regulatory convergence and ultimately limit the (short-term) impact on markets and investor behavior," Johannesen said.
A spokesperson at ABP, one of Europe's largest pension funds, welcomed what they billed as "the spirit" of the court's opinion, but said they do not anticipate any short-term ramifications for financial markets.
"The ICJ's advisory opinion sends a signal that climate inaction may constitute a breach of international law. However, given its non-binding nature, we don't expect immediate changes in national policies or financial markets," an ABP spokesperson told CNBC by email.
The Dutch pension fund, which doesn't invest in fossil fuels and says it actively supports climate solutions, highlighted that Europe, for example, already has a lot of climate legislation in place.