Investment in energy infrastructure is in turmoil. Consider that large energy infrastructure projects are big investments. Ever since scientific evidence of climate change has called into question the use of coal-fired generators, how to build projects and finance these projects has been a challenge. Large utilities and the banking industry were seeking certainty in regulation – for no other reason than to have a clear baseline for investment purposes to evaluate what made sense (and cents) for a long term investment. And in the last Congress, the banking industry thought it would get some clarity. However, with the election earlier this month, it is clear the banking industry – indeed, all industry – now faces increasing uncertainty in federal climate change regulation and a patchwork of state and regional approaches. This means investment decisions in energy infrastructure, renewable energy, and other large-scale energy projects are in turmoil.
Last week, a report written by/for investment advisors for Deutsche Bank (“DB”) identified a by-product of climate change regulatory uncertainty and documented the trends in domestic climate change litigation. The report, titled "Growth of U.S. Climate Change Litigation: Trends and Consequences” concludes that US climate-related litigation is likely to triple this year over the suits filed last year. This spike in climate change litigation appears to be caused by lack of a clear federal policy, i.e., if environmental groups can’t get Congress to act, they will try to force policy change through the courts. Why is DB concerned? And why should any bank making an investment decision in energy infrastructure closely follow the trends in climate change litigation and regulation? Because without a clear federal policy, climate change policy may be dictated by the courts similar to the way tobacco litigation established US tobacco policy.
In a court-dictated climate policy era, banks need to understand the trends in litigation (and dictates of the courts) to make clear investment decisions, especially with respect to profitable projects for their investors. Uncertainty or not, investment in energy infrastructure will go on; the demands of our fuel-hungry society demand it. But the banks that will profit – and “weather the energy climate” – are the ones with the best understanding of litigation and regulation trends so that they can make the best investing decision for their investors – and thus adequately discharge their fiduciary duty to investors.