Court of Appeal dismisses challenge to UK Export Finance support for Mozambique LNG project

Introduction 

The English Court of Appeal has unanimously dismissed Friends of the Earth’s judicial review of UK Export Finance’s (UKEF) decision to provide a US$1.15 billion export finance package to a liquefied natural gas (LNG) project in Mozambique. The central issue in the appeal was whether UKEF had made an error of law when it concluded that funding the project was aligned with the UK’s obligations under the Paris Agreement.

In rejecting Friends of the Earth’s arguments, the Court took a narrow view of the standard of review when a domestic court is asked to review the compatibility of a public body’s decision making with an unincorporated international treaty, such as the Paris Agreement. It found that UKEF only had to reach a ‘tenable view’ of whether its decision was aligned with the Paris Agreement and that to discharge its duty of enquiry it need not have quantified the project’s Scope 3 emissions.

Background and procedural history

In June 2020, UKEF decided to provide US$1.15 billion in financial support to an LNG project in Mozambique, having found this to be within its statutory remit and aligned with the UK’s commitments under the Paris Agreement. This decision was subsequently approved by the UK Government. 

In September 2020, Friends of the Earth challenged the decision on the basis that it was not compatible with the UK’s obligations under the Paris Agreement and on the basis that UKEF had not taken sufficient information into account, particularly the projected Scope 3 emissions of the project.

At first instance, a two-judge panel disagreed as to whether UKEF had discharged its duty of enquiry and also the standard to which UKEF had to prove its decision was aligned with the Paris Agreement. Friends of the Earth was granted permission to appeal the High Court judgment, and the case was heard by the Court of Appeal in December 2022. 

Further background and detail regarding the arguments in the case can be found in our previous article on the High Court judgment.

Grounds for appeal

Friends of the Earth relied on the following three arguments in its grounds for appeal:

1. UKEF’s view that the project was in overall alignment with the UK’s obligations under the Paris Agreement had to be correct, not merely ‘tenable’.
2. There was no rational basis for UKEF to have concluded that its decision was compatible with the Paris Agreement as a whole and Article 2(1)(c) in particular (which relates to making finance consistent with climate goals).
3. UKEF failed to discharge its duty of enquiry to the standard established in the case of Tameside by not quantifying the project’s Scope 3 emissions before approving the export finance package.

Court of Appeal judgment 

The key points from the Court of Appeal’s judgment are:

1. First, the Court took a narrow view of the obligations imposed by the Paris Agreement, finding that Article 2(1) sets out the “aims” and “purposes” of the Paris Agreement, not “hard edged” obligations. The specific legal obligations are primarily found in Articles 4, 7, 9, 10, 11 and 13 of the Paris Agreement, including the obligation on state parties to meet their nationally determined contributions (Article 4), as confirmed in R (on the application of Friends of the Earth Ltd and others) v Heathrow Airport Ltd.
2. Second, where a decision-maker takes into account an unincorporated international treaty (like the Paris Agreement), the question for the courts is not whether the decision-maker’s view as regards that treaty was correct but merely whether it was ‘tenable’. Further, the Court made clear that this conclusion was not affected by the fact that the respondents had explicitly stated that they had formed a definitive view that their decision to approve the funding was compliant with the UK’s obligations under the Paris Agreement.
3. Third, the Court rejected Friends of the Earth’s argument that the decision was ‘irrational’ finding instead that there was:
   • a. significant uncertainty as to the Scope 3 emissions that the project would produce; and
   • b. evidence that the project could result in some net reductions in emissions.
   • The decision was therefore not irrational because it “could, in some scenarios, align with the UK’s obligations under the Paris Agreement” and that view was at least ‘tenable’.
4. Finally, the Court dismissed the argument that, because it had failed to obtain a quantitative estimate of the project’s Scope 3 emissions, UKEF had breached its Tameside duty to make reasonable enquiries. The Court confirmed that it is for the decision-maker, not the courts, to decide upon the manner and intensity of the inquiry to be undertaken (so long as they amount to reasonable enquiries). UKEF was not required to “assess [Climate Change] risks mathematically”. UKEF had also considered other factors, including the “far more difficult question” of whether the project would cause LNG to replace more polluting energy sources. UKEF’s decisions as to the quantification of the Scope 3 emissions and the adequacy of its final climate change report on the project were therefore well within the substantial margin of appreciation afforded to decision-makers. 

Commentary

This is an important decision for banks and other investors involved in large public-finance backed infrastructure projects. The judgment should provide some comfort to investors that, where a decision made by the UK Government is challenged on the basis of an unincorporated international treaty, such as the Paris Agreement, the English courts will only intervene in very limited circumstances. In any event, its practical relevance may be limited considering changes in government policy since UKEF’s decision. In March 2021, the UK Government said that it would “no longer provide new direct financial or promotional support for the fossil fuel energy sector overseas”. In the same year, at COP26, the UK signed up to an agreement to end new direct public investment in fossil fuels by the end of 2022. More recently, UKEF confirmed that it had not provided any support towards fossil fuel projects overseas for the 2021-22 financial year – a first for the UK’s export credit agency. 

On 20 February 2023, Friends of the Earth sought permission from the UK Supreme Court to appeal the decision.

The full judgment can be found here.

With thanks to Charlie Bevis (Trainee) for his assistance in preparing this article.