With thanks to Hector Riberio and Madeline Hallwright.
A decision by the UK’s export credit agency (UKEF) to back a liquiefied natural gas project in Mozambique has been unsuccessfully challenged by Friends of the Earth (FOE) in judicial review proceedings. The campaigners claimed that the decision was unlawful as it was not aligned with the UK and/or Mozambique’s Paris Agreement commitments and failed to take into account relevant considerations, including the project’s Scope 3 emissions. In a split two judge panel, the court found that the decision was lawful, concluding that the decision making process of the UKEF was multifaceted and involved balancing different policy considerations, including not only climate change but also the eradication of poverty in Mozambique. Friends of the Earth has been granted permission to appeal.
Financial institutions are increasingly the target of ESG-based challenges as campaginers seek to divert capital support away from fossil fuel and other high emitting projects. However, this decision highlights the reluctance of the English courts to intervene in the decision making of public bodies and what are seen as matters of policy.
Summary of facts
In June 2020, UKEF made the decision to provide financing and support worth up to $1.15 billion for a liquefied natural gas project in Mozambique as part of its remit to support UK exports. In the leadup to this decision UKEF took into consideration the Paris Climate Change Agreement and reached the conclusion that funding the project was compatible with the UK and Mozambique’s commitments.
In September 2020 FOE brought a legal challenge against UKEF’s decision, seeking judicial review of the decision on the basis that it was unlawful. Underlying the decision was a report prepared by UKEF, which FOE argued was inadequate as it did not quantify the Scope 3 emissions of the project.
Grounds for challenge
FOE claimed that UKEF’s decision to finance the project was unlawful on two grounds:
- It was based on an error of law or fact, namely that the project and its financing were compatible with the UK and/or Mozambique’s commitments under the Paris Agreement. FOE said it was not.
- In reaching the decision to finance the project, UKEF had failed to take into account certain essential factors, particularly the quantity of greenhouse gases generated by the project.
The challenge was heard by two judges in the High Court. The panel was split meaning that FOE’s challenge failed, although permission to appeal was readily granted.
Both judges emphasised that the court’s role in judicial review was limited to reviewing the lawfulness and not the merits of UKEF’s decision and that UKEF was entitled to exercise discretion in reaching its decision. Lord Justice Stuart-Smith concluded that:
- UKEF’s duty to inform itself was defined by the nature of the decision it had to take. In this respect:
- The project would have gone ahead with or without UKEF’s support and the decision would not have had any material impact on the emissions of the project.
- It had to weigh up various different considerations, including political policy and economic and scientific judgement.
- UKEF therefore had a wide margin of appreciation and was only required to undertake a low intensity review.
- UKEF was not required by law or public policy to take into account the project’s Scope 3 emissions.
- The requirements of the Paris Agreement are not “hard edged” but a “composite package of aims and aspirations”. UKEF’s approach to interpreting compliance with the Treaty was at least “tenable” which was all that was required in the circumstances.
Mrs Justice Thornton conversely took the view that by failing to quantify the project’s potential emissions:
- UKEF had failed to discharge its duty of inquiry.
- Its decision to rely only on the factors which it did was unreasonable.
- There was no rational basis for UKEF’s conclusion that the project was consistent with the Paris Agreement.
Whilst this claim (and similar challenges) have not yet had material success in the courts:
- FOE is appealing and may still prevail; and
- its position (and those of other campaigners) has arguably already found some traction, given the shift in government policy since the start of the case. In December 2020 the UK government announced that it would no longer finance non-UK fossil fuel projects. Subsequently, at the 2021 COP26 climate summit, an agreement was put forward to end new direct public investment in fossil fuels by the end of 2022. The 39 signatories of this agreement include the UK, US, Canada, Germany, France, and the European Investment Bank.
The rise of climate based legal challenges against financial instutitions, together with policy changes at government level, may herald tighter access to capital and insurance for energy intensive businesses. Public bodies, like UKEF, are particularly vulnerable to challenge as their decisions can be judicially reviewed. Earlier this year, for example, we reported in a non-financial context on the challenge to the Oil and Gas Authority’s (now the North Sea Transition Authority) new strategy. To the extent that backing from the public sector is required to make a project bankable (which it often is for large scale infrastructure developments for example), that support may be more difficult to obtain moving forward.
The full judgement can be found here.