Do environmental courts (EC) encourage firms to reduce their environmental impact? Our model shows varied firm responses to EC. We describe a firm's environmental social cost as an expected loss from climate litigation risk, which escalates post-EC. Firms hedge by reducing output, and heavier polluters reduce more. This holds for small price-taking firms. But larger firms with market power raise prices to reduce less output, despite being heavier polluters. Empirically, we measure firms' hedging by their reduced return sensitivity to climate policy news. The results align with the model: small firms show reduced sensitivity, and the effect intensifies monotonically from high to low ESG portfolio. In contrast, larger firms with low ESG scores show weak or insignificant hedges, suggesting the EC has limited impact on larger polluters.