Update on Energy Litigation – October 2021 | Quinn Emanuel Urquhart & Sullivan, LLP
Going straight to the source: How to position litigation to prevent export credit agencies from financing fossil fuel projects
Although climate disputes have already been brought in various forms in many countries around the world, NGOs and other interest groups continue to find new and innovative ways to challenge the legality of fossil fuel projects – with the latest litigation strategy aimed at attacking project funding.
Historically, climate disputes have focused on the following points:
- Claims against companies involved in the process of extracting, refining and selling fossil fuels, including public disclosures made by these companies regarding their approach to climate change issues.
- Allegations seeking to force governments to take specific action to work towards their emission reduction targets. These include an injunction obtained by the Urgenda Foundation against the Netherlands in December 2019, which forced the Dutch government to reduce its emissions, and the successful claims of four environmental groups against France in February 2021 for having failed to meet its obligations to mitigate the global alert by reducing greenhouse gas emissions. gas emission.
This year has seen a new approach taken by potential claimants, with a shift towards resorting to strategic litigation against export credit agencies (OCE) to prevent them from funding overseas fossil fuel projects. These claims seek to leverage nation-state obligations under international law to challenge the legality of funding fossil fuel projects and to determine how pre-existing funding agreements are managed in the future. By targeting funding rather than project effects, interest groups are now starting to tackle what they see as the real source of the problem – the economic support of projects.
Two notable recent developments (which are explored in more detail below) are:
- a substantive legal opinion commissioned by the campaign group, Oil Change International, which analyzes the legal bases on which further action could follow against ECAs (the Oil change notice); and
- the decision of the High Court of England to allow Friends of the Earth to initiate judicial review against UK Export Finance (UKEF) (UK State ECA) regarding its decision to finance a natural gas project in Mozambique.
ECAs and their financing of fossil fuel projects
ECAs are typically established by nation states to help 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-guaranteed loans, credits, insurance and / or guarantees to support infrastructure projects in the country. abroad, including energy projects.
The conduct of ECAs is often directly or indirectly governed by certain international legal obligations (primarily because their conduct can be attributed to the nation-state). In these circumstances, all relevant international obligations binding on the nation-state are arguably applicable in determining the legality of the conduct of the ACE.
Regarding the extent of financing of ECAs, the Oil Change Opinion (at paragraph 7) indicates that between 2016 and 2018: (a) ECAs in G20 countries provided USD 40.1 billion per year to support activities related to fossil fuels (coal, oil and gas through the upstream, intermediate and downstream sectors) against only 2.9 billion USD for clean energies (solar, wind, geothermal, tidal); and (b) 78.6 percent of all ECA energy funding has gone to fossil fuel-related projects / activities – an increase from the 76.6 percent granted in the lead-up to the Paris Agreement (2013-2015). This is the kind of fundraising activity that interest groups want to prevent.
Legal developments and analysis
The main premise of the Oil Change Opinion is that there is a legal obligation for nation states (and, therefore, ECAs) to ensure that the projects they fund align with their commitments under of the United Nations Framework Convention on Climate Change and the Paris Agreement.
It is argued that ECAs that support fossil fuel related projects do not act in accordance with:
- Article 2 (1) (c) of the Paris Agreement, which obliges nation states to make financial flows compatible with a path towards low greenhouse gas emissions and development resilient to change climatic;
- the temperature targets set in Article 2 (1) (a) of the Paris Agreement, which include continued efforts to limit temperature rise to 1.5 Â° C above levels pre-industrial; and or
- the requirements of Article 4 of the Paris Agreement, obliging nation states to take action to mitigate climate change.
The Oil Change Opinion argues that under these international laws, ECAs are required to stop funding new fossil fuel projects and cut funding for existing fossil fuel projects. For example, he suggests that ECAs proactively avoid blocking fossil fuel-related emissions, as these are inconsistent with the phased and ambitious approach required to meet the long-term strategies set out by the Paris Agreement.
A recent example of how the above legal arguments are used in a live claim can be seen in the Friends of the Earth action against UKEF, which is currently before the High Court of England. In April 2021, Friends of the Earth was granted leave to initiate a judicial review allowing it to challenge UKEF’s decision to provide approximately $ 1 billion in taxpayer money to help finance the natural gas project. Total’s $ 20 billion liquefied in the Mozambican province of Cabo Delgado.
In summary, the position of Friends of the Earth is that UKEF:
- took its decision to fund the project on the mistaken basis that it was in line with UK and / or Mozambique commitments under the Paris Agreement; and
- did not take into account the essential issues or perform the analysis necessary to properly determine whether the support provided to the project was in conformity with the obligations of the United Kingdom and Mozambique under the Paris Agreement.
According to the Friends of the Earth website, a full hearing is expected to take place later this year.
The UKEF case is expected to provide ECAs and other industry participants with greater clarity on how funding decisions made by ECAs are affected by the Paris Agreement and English law (if applicable). Nonetheless, a number of large European ECAs have shown that they are unwilling to wait for the outcome of this case and have, on the contrary, already taken proactive steps to avoid future litigation. For example, UKEF has committed to no longer provide funding for oil, gas or thermal coal projects from March 31, 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 United Kingdom), has formally committed to ending ECA support for fossil fuel projects by general.
It is interesting to note that while these developments will likely reduce the risk of litigation against future decisions of ECAs of nation states involved in the E3F Coalition, they will not prevent action from being taken against ECAs (a) in this regard. regarding their historic funding decisions (including how they continue to exploit existing funding facilities), or (b) from nation states that have not made equivalent commitments to the E3F Coalition.
Due to the persistent threat to ECAs, companies that have received (or are expected to receive) the benefit of ECO funding for fossil fuel projects would be wise to reassess their own funding arrangements. In particular, companies should consider the impact the UKEF case might have on their plans (assuming the Friends of the Earth forensic review is successful), as well as how other legal arguments might. be formulated to challenge the legitimacy of the funding they received from the European Court of Auditors. or hope to receive in due time.
Finally, if the risks associated with financing the ACE become too great, companies in the fossil fuel sector may turn exclusively to other financial institutions to finance their projects (noting that it is already estimated that the world’s 60 largest banks have provided $ 3.8 trillion in financing for fossil fuel companies since the signing of the Paris Agreement in 2015). However, given that a number of banks have recently announced their own commitments to align funding portfolios with the goals of the Paris Agreement, it is possible that, under these circumstances, NGOs and other interest groups are simply reorienting their strategic legal efforts on the part of ECAs and towards finding a new legal path through which to compel financial institutions to meet their newly declared commitments on climate change.