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Global rules on foreign direct investment (FDI)
Cross-border acquisitions and investments increasingly trigger foreign direct investment (FDI) screening requirements.
Global | Publication | May 2022
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.
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.
FOE claimed that UKEF’s decision to finance the project was unlawful on two grounds:
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:
Mrs Justice Thornton conversely took the view that by failing to quantify the project’s potential emissions:
Whilst this claim (and similar challenges) have not yet had material success in the courts:
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.
Publication
Cross-border acquisitions and investments increasingly trigger foreign direct investment (FDI) screening requirements.
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