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Energy Litigation Update – October 2021

Going Straight to the Source: How Litigation Is Being Positioned To Prevent Export Credit Agencies from Financing Fossil Fuel Projects

Although climate litigation has already been brought in various forms in many countries around the world, NGOs and other interest groups are continuing to find new and innovative ways to challenge the legality of fossil fuel projects – with the latest litigation strategy aimed at attacking project financing.  

Historically, the focus of climate litigation has been on the following:

  1. Claims against companies involved in the processes of extracting, refining and selling fossil fuels, including in relation to the public disclosures made by those companies regarding their approach to climate change issues. 
  2. Claims seeking to force governments to take specific steps to work towards their emissions reductions targets. These include an injunction obtained by Urgenda Foundation against the Netherlands in December 2019, which compelled the Dutch Government to reduce its emissions, and successful claims by four environmental groups against France in February 2021 for failing to fulfil its obligations to mitigate global warning by decreasing greenhouse gas emissions. 

  This year has seen a new approach being taken by potential claimants, with a move towards using strategic litigation against Export Credit Agencies (ECAs) to prevent them funding overseas fossil fuel projects.  Those claims are seeking to leverage from nation states’ obligations under international law to challenge the legality of funding fossil fuel projects, and to determine the manner in which pre-existing funding arrangements are managed going forward.  By targeting the funding, rather than just the effects of the projects, interest groups are now starting to attack what they consider to be the true source of the problem – the economic support for the projects.  

Two notable recent developments (which are considered in more detail below) are:

  1. a substantive legal opinion commissioned by the campaign group, Oil Change International, which analyses the legal bases on which further action may follow against ECAs (the Oil Change Opinion); and
  2. the English High Court’s decision to grant permission to Friends of the Earth to commence a judicial review against UK Export Finance (UKEF) (the state-owned ECA of the UK) regarding its decision to fund a natural gas project in Mozambique.

 

ECAs and Their Funding of Fossil Fuel Projects

ECAs are typically established by nation states to help to create and support overseas opportunities for domestic exporters. Most G20 countries have at least one ECA, usually an official or quasi-official branch of government, which provides government-backed loans, credit, insurance and/or guarantees to support overseas infrastructure projects, including energy projects.  

The conduct of ECAs is often directly or indirectly governed by certain international legal obligations (primarily because their conduct may be attributed to the nation state).  In those circumstances, all the relevant international obligations binding on the nation state are arguably applicable to determine the lawfulness of the conduct of the ECA.

In terms of the scale of ECA funding, the Oil Change Opinion (at paragraph 7) states that, between 2016-2018: (a) ECAs from G20 countries provided USD 40.1 billion annually to support fossil fuel activities (coal, oil and gas across the upstream, midstream and downstream sectors) compared to only USD 2.9 billion for clean energy (solar, wind, geothermal, tidal); and (b) 78.6 percent of all ECA energy financing was given to fossil fuel-related projects/activities - representing an increase from the 76.6 percent given in the pre-Paris Agreement period (2013-2015).  It is this sort of funding activity that interest groups want to prevent.

 

Legal Developments and Analysis

The key premise of the Oil Change Opinion is that there is a legal obligation on nation states (and, by connection, ECAs) to ensure that the projects they fund align with their commitments under the UN Framework Convention on Climate Change and the Paris Agreement.  

It is argued that ECAs that support fossil-fuel related projects are failing to act in accordance with:

  1. Article 2(1)(c) of the Paris Agreement, which requires nation states to make finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development; 
  2. the temperature goals laid down in Article 2(1)(a) of the Paris Agreement, which include pursuing efforts to limit the temperature increase to 1.5°C above pre-industrial levels; and/or 
  3. the requirements of Article 4 of the Paris Agreement, requiring nation states to pursue measures to mitigate climate change.

The Oil Change Opinion argues that, in accordance with these international laws, ECAs are required to stop financing new fossil fuel projects and to decrease the funding of existing fossil fuel projects.  For example, it suggests that ECAs should proactively avoid locking-in fossil fuel-related emissions, as these are inconsistent with the progressive and ambitious approach required to satisfy the long-term strategies defined by the Paris Agreement. 

A recent example of the how the above legal arguments are being used in a live claim can be seen in the Friends of the Earth action against UKEF, which is currently before the English High Court.  In April 2021, Friends of the Earth was granted permission to pursue a judicial review allowing it to challenge UKEF’s decision to provide around USD 1bn of taxpayer money to help finance Total’s USD 20bn liquefied natural gas project in Mozambique’s Cabo Delgado province. 

In summary, Friends of the Earth’s position is that UKEF:

  1. made its decision to fund the project on the incorrect basis that it was consistent with the UK and/or Mozambique’s commitments under the Paris Agreement; and
  2. failed to consider essential issues, or carry out the necessary analysis, to determine properly if supporting the project aligned with the UK’s and Mozambique’s obligations under the Paris Agreement.

According to the Friends of the Earth website, a full hearing is expected to take place later this year.  

 

The Future

The UKEF case should provide ECAs and other sector participants with greater clarity about how funding decisions made by ECAs are impacted by the Paris Agreement and English law (if at all).  Nevertheless, a number of major European ECAs have shown that they are not willing to wait for the outcome of that case and have, instead, already taken proactive steps to head-off future litigation.  For example, UKEF has vowed not to provide any further financing for oil, gas or thermal coal projects from 31 March 2021, and in April 2021 a new alliance, the Export Finance for Future coalition (the E3F Coalition) (comprising Denmark, France, Germany, the Netherlands, Spain, Sweden and the UK), formally committed to ending ECA support for fossil fuel projects generally.

Interestingly, while those developments will likely reduce the risk of litigation against future decisions by ECAs from nation states involved in the E3F Coalition, they will not prevent action being taken against ECAs (a) in relation to their historic funding decisions (including how they continue to operate existing funding facilities), or (b) from nation states that have not made equivalent commitments to the E3F Coalition.  

As a result of the continuing threat to ECAs, companies that have received (or are due to receive) the benefit of ECA funding for fossil fuel projects would be wise to reassess their own funding arrangements.  In particular, companies should consider what impact the UKEF case could have on their projects (assuming the Friends of the Earth judicial review is successful), as well as how other legal arguments could be framed to challenge the legitimacy of the ECA funding they have received or are hoping to receive in due course.  

Finally, if the risks associated with ECA funding become too great, it may be that companies in the fossil fuel sector turn exclusively to other financial institutions to provide financing for their projects (noting that it is already estimated that the world’s largest 60 banks have provided USD 3.8 trillion of financing for fossil fuel companies since the Paris Agreement was signed in 2015).  However, given that a number of the banks have recently announced their own commitments to aligning financing portfolios to the goals of the Paris Agreement, it may be that, in those circumstances, NGOs and other interest groups simply re-direct their strategic legal efforts away from ECAs and towards finding a new legal route through which to hold the financial institutions to their newly stated climate change commitments.