Aligning finance flows with the energy transition is one of the three overarching goals of the Paris Agreement. This is set out in Article 2(1)(c) of the agreement, by which the signatories undertake to make “finance flows consistent with a pathway towards low GHG emissions and climate resilient development”.
In our December 2022 issue of Focus, we commented on the rapid increase in climate change-related litigation across the globe (the article is available here). Following on from that article, we report here on two recent cases concerning the role of finance flows in the energy transition, which throw into sharp relief, the importance of taking into account climate change information when making investment decisions.
In the first decision, the claimant, Friends of the Earth, was ultimately unsuccessful in challenging the decision of the UK Government to provide US$1.15 billion in financing for a liquified natural gas (LNG) project off the coast of northern Mozambique.
The claimant had sought judicial review of the investment decision made by UK Export Finance (UKEF), arguing that the decision was taken unlawfully because: (1) UKEF wrongly assumed that it was not possible to assess the project’s scope 3 emissions (i.e. the emissions resulting from the use of the LNG) accurately; and (2) UKEF considered that the project was likely to decrease emissions because LNG is a “transition fuel” that would displace other fossil fuels like coal and oil. The claimant argued that there was no rational basis on which UKEF could have concluded that the investment was in accordance with the Paris Agreement.
At first instance, the Divisional Court was split, with Stuart-Smith LJ, after a detailed consideration of the information relied upon in the decision-making process, rejecting the challenge to UKEF’s decision on the basis of a “low intensity” review, given that UKEF’s decision involved balancing a number of different public interests, and given the limited scope for a domestic court to determine issues of international law. Thornton J., on the other hand, while agreeing that she should accord UKEF a broad margin of discretion, nevertheless found that UKEF had been unreasonable to adopt a high-level qualitative review of the impact of the project, rather than conducting a detailed analysis of the project’s scope 3 emissions.
In a judgment issued on 13 January 2023, the Court of Appeal dismissed the claimant’s appeal. The appeal entailed a consideration by the Court of the standard that a domestic court should adopt when considering a complex unincorporated international convention like the Paris Agreement. The Court held that although it was entitled to review the legality of UKEF’s decision about whether or not the investment was in accordance with the Paris Agreement, that the standard of review was a low one, with the Court only considering whether the view taken by UKEF was “tenable”, rather than whether it was correct.
The Court refused to interfere with UKEF’s decision to provide financing for the project, holding that “it cannot possibly have been irrational for the respondents to decide to provide finance for the project, when they were being advised that the project could, in some scenarios, align with the UK’s obligations under the Paris Agreement. That was at least a tenable view”.
The challenge in this case accordingly did not succeed. However, the case is a significant reminder that decision makers (in this case, the UK government) can be called on to justify their financing decisions.
In this case, as noted by the lower Court, the decision was a “first of a kind” one, and there was no established methodology setting out how a decision-maker such as UKEF should evaluate projects with regard to their climate change impact or consistency with the Paris Agreement. The decision thus met the “light-touch” threshold set out by the Court for reviewing decisions in these circumstances. Nevertheless, it should be noted that as the information and the methodological tools available to decision makers improve over time, the standards of what is expected in order to reach a “tenable” view will become correspondingly more robust.
Friends of the Earth v BNP Paribas
On the other side of the Channel, on 26 October 2022, Friends of the Earth France, Notre Affaire à Tous and Oxfam France served a summons on the French multinational bank, BNP Paribas. In what they say is the first climate-related litigation brought against a commercial bank, the three NGOs are seeking to hold BNP responsible for financing fossil fuel-intensive projects, under the French law on the duty of vigilance.
This legislation imposes a duty on multinational French companies to publish a document identifying their own activities and those of their subsidiaries, main suppliers and subcontractors, both in France and abroad, that could pose a risk to human rights, human health and safety, and to the environment. Unlike the UKEF case which concerned the decisions of a State in the context of its international law obligations, this case concerns the actions of a private-law entity, in the context of domestic legislation. The litigation is in its early stages, but it will be interesting to see the extent to which the French courts are prepared to adopt a more robust level of scrutiny in this context.
Implications for investors
Climate-related financial information is in principle becoming more accessible (if not always easy to analyse and compare), with companies and financial institutions increasingly making disclosures of climate-related risks and opportunities. In the UK, large companies and financial institutions have, since 6 April 2022, been required to provide this information in line with the Financial Stability Board’s Taskforce on Climate-related Financial Disclosures (TCFD) recommendations. Voluntary TCFD and other disclosures elsewhere in the world are also becoming more common.
As the two cases reported above demonstrate, the uses to which this information is put are likely to come under ever-greater scrutiny. There is a growing need, for both public and private bodies, to take proper account of this information in their decision-making process.
Natasha Peter, Partner
Rinku Bhadoria, Partner
  EWCA Civ 14
 Para. 56.
 Para. 48.
 Loi n° 2017-399 du 27 mars 2017