In R (on the application of Friends of the Earth Limited) v (1) The Secretary of State for International Trade / Export Credits Guarantee Department (UK Export Finance) (2) Chancellor of the Exchequer1 [2022] EWHC 568 (Admin) the High Court was asked to overturn a decision of UK Export Finance (“UKEF”) to provide up to USD 1.15 billion export credit support in relation to a USD 20 billion Area 1 liquefied natural gas (“LNG”) facility in Mozambique. In refusing to overturn the decision, the High Court reaffirmed that public authorities were granted a wide margin of discretion in such decisions due to them being a complex, policy laden exercise, with no predetermined, or recognised, methodology for the assessment. That said, it will be important for energy industry participants to understand that the decision also makes clear that there are boundaries to the exercise of such discretion.

Facts

The Claimant, Friends of the Earth (“FoE”) brought an application in the High Court for a judicial review challenging the decision of the First Defendant, UKEF, supported by the Second Defendant, the Chancellor of the Exchequer, to provide up to USD 1.15 billion in export finance and financial support in relation to an LNG project in Mozambique.

UKEF’s remit is to ensure that no viable UK export fails for lack of finance. UKEF provides no finance itself, nor does it have any net cost to the taxpayer; instead it operates like a financial institution, carrying out banking and insurance business in support of UK exports. No public funds are used by UKEF nor does it make investments itself – rather, UKEF provides export credits (whether that is guarantees, insurance, grants or loans) in relation to the supply of UK goods and / or services to overseas buyers, essentially ‘shoring up’ the UK export.

Under the Export and Investment Guarantees Act 1991, UKEF has delegated powers from the Secretary of State under Section 1(1) to “make arrangements which the Secretary of State considers are conducive to supporting or developing (whether directly or indirectly) supplies or potential supplies by persons carrying on business in the United Kingdom of goods, services or intangible assets (including intellectual property) to persons carrying on business outside of the United Kingdom.” Under Section 1(4) of the Export and Investment Guarantees Act 1991, “the arrangements that may be made under this section are arrangements for providing financial facilities or assistance for, or from the benefit of, persons carrying on business; and the facilities or assistance may be provided in any form, including guarantees, insurance, grants or loans.”

The investment decision in question that FoE wished to challenge was UKEF’s decision to provide up to USD 1.15 billion in export finance and financial support to a development of offshore deepwater gas production facilities, 50Km from the coast of Northern Mozambique, connected to an onshore gas receiving and liquefaction facility (the “Project”). The Project is operated by Total E&P Mozambique Area 1 Limited and financed by MOZ LNG1 Financing Company Limited, who both appeared in FoE’s judicial review proceedings as interested parties, making submissions in common cause with the two Defendants.

Whilst the investment decision (in the affirmative) was made by UKEF, the Chancellor of the Exchequer’s consent to the decision was also required as the proposed support for the Project was planned to exceed £200 million. Consent was also required because the funding of the Project, given its environmental impact, was recognised to be contentious. The Treasury duly consented, following consultation with UKEF.

FoE brought judicial review proceedings to challenge UKEF’s decision, and the Chancellor of the Exchequer’s consent thereto, on a number of grounds.

The Issues

Following permission being granted by Thornton J in April 2021, FoE applied to the High Court for a judicial review of UKEF’s decision on the following two grounds:

  1. The decision was based on an error of law or fact, specifically that funding for the Project was based on the erroneous consideration that the Project was compatible with the UK’s obligations under the Paris Agreement and / or Mozambique’s ability to meet its commitments under the Paris Agreement.
  2. The decision was otherwise unlawful, as in reaching its conclusions, UKEF failed to take into account material considerations.

Both grounds were based on the premise that UKEF’s climate change report in connection with the Project was inadequate, primarily because it did not quantify the Scope 3 emissions2 arising from the use of the LNG that would be produced by the Project. In fact, the Project would produce 805 million tonnes of CO2 over its lifetime, using 0.1-0.2% of the world’s remaining carbon budget – this was not set out in UKEF’s climate change report.

FoE argued that UKEF, in order to determine whether providing UK public finance for the Project was consistent with the UK’s obligations under the Paris agreement, should have considered whether (i) the Project was consistent with the long-term temperature goals of the Paris Agreement and (ii) the Project was compatible with the UK’s obligations to make finance decisions consistent with a pathway towards low greenhouse gas emissions and climate resilient development and / or to provide financial resources to assist Mozambique to mitigate, adapt and to achieve a speedier reduction in its emissions than would otherwise be possible.

In furtherance of its argument, FoE asserted a number of factual grounds on which UKEF’s climate change impact assessment was deficient, based on issues that FoE claimed it did not deal with or take into consideration.

In response, the Defendants disputed FoE’s “hard-edged” approach to the interpretation of the Paris Agreement. The Defendants contended that the Paris Agreement contains broad objectives, rather than strict obligations, and that the correct test was “tenability” – was UKEF’s interpretation of the Paris Agreement tenable? They argued that it was, as it was based on the judgement that the Project would foster climate change resilience in Mozambique and increase the country’s ability to adapt to the adverse impacts of climate change.

Furthermore, the Defendants asserted that compliance with the Paris Agreement was not at any stage a decisive or determining criterion for their decision – rather climate change impacts and the Paris Agreement were considerations that ought to be taken into account alongside other factors in reaching their decision. Specifically, the Defendants pleaded that the Paris Agreement did not require any contracting Party to meet any specific emission reduction level or take any particular action to reduce emissions – in fact it imposes no enforceable obligation on individual states to implement its goals in any particular or specific way.

In addition, the Defendants contended that the scope of enquiry that should be undertaken and the factors to consider were matters for UKEF as decision maker to decide, subject only to irrationality limits. They argued that most of the matters relied upon by FoE were in fact considered by the Defendants. However, there was no obligation at law, as such, to take these factors into account and there was no established methodology setting out how a decision maker such as UKEF should evaluate projects with regard to their climate change impact or consistency with the Paris Agreement.

Decision

In reaching his decision, Stuart-Smith LJ had regard to the principle set out in Secretary of State for Education and Science v Metropolitan Borough of Tameside [1976] 3 All ER 66, known as the Tameside principle. The Tameside principle requires that public bodies undertake a sufficient inquiry prior to making a decision, per Lord Diplock at 696 [1977] AC 1014 at 1065: “[T]he question for the court is, did the Secretary of State ask himself the right question and take reasonable steps to acquaint himself with the relevant information to enable himself to answer it correctly?”. However, Stuart-Smith LJ affirmed that, as set out in R (Refugee Action) v SSHD [2014] EWHC 1033, what needs to be taken into account and what enquiries should be made are highly contextualised, and are matters for the decision maker.

In Stuart-Smith LJ’s summation, UKEF’s decision depended on the assessment of the climate change effects of a long-term project. This was a complex, policy laden exercise, with no predetermined, or recognised, methodology for the assessment. As such, UKEF should be afforded a wide degree of discretion. FoE’s arguments were that UKEF failed to have proper regard to the climate impacts of the Projects. However, in any event the Project would go ahead, with or without the funding. The decision was therefore not about emissions. It was about whether or not to provide finance. This was a multi-faceted decision, involving political, economic and scientific factors. Since a high degree of policy judgment was involved, it was appropriate for the decision maker to adopt a less rigorous approach to climate change analysis than if that had been the only material factor.

Stuart Smith LJ stated that the nature and scope of the enquiry that a decision maker is required to undertake depends upon the nature of the decision which that decision maker is making. Where it is a complex political decision, a wide margin of appreciation will be given. The Court should be wary of reaching a “hard-edged” interpretation of international treaties. In interpreting the Paris Agreement, Stuart Smith LJ took the view that the test to applied was whether or not the view that the Defendant took is “tenable”, as per Heathrow Airport Ltd and others v HM Treasury and HMRC [2021] EWCA Civ 783, as opposed to a “hard-edged” exclusive meaning. The language of the Paris Agreement was too opaque and high level to generate “hard-edged” legal obligations. In this regard a less strict approach to interpretation will be applied where the language of a treaty is aspirational. The Paris Agreement, rather, should be approached as a composite package of aims and aspirations. As such, UKEF’s application and interpretation of the Paris Agreement was acceptable, as it was based on an understanding that the Project would bolster climate change resilience and adaptability in Mozambique.

Stuart-Smith LJ was of the view that UKEF was entitled to a significant margin of appreciation on the facts, conducting an exercise of assessing climate change in the context of a long-term foreign Project – the first government department in the UK to do so, with no established or internationally recognised policy for evaluating climate change impacts of a project. Therefore, whilst UKEF did not, on the facts, undertake a full blown environmental assessment, it did undertake climate change considerations, considering the Paris Agreement and taking steps to inform themselves about the impacts from outside bodies. Their analysis led them to understand that the emissions would be significant. UKEF decided to proceed anyway. It had the discretion to do so, and according to Stuart Smith LJ, a more rigorous analysis was unlikely to have had an impact on this decision.

Mrs Justice Thornton’s view

Mrs Justice Thornton agreed with Stuart-Smith LJ that the Court was bound to afford considerable respect to UKEF’s decision making. However, Mrs Justice Thornton was of the view that UKEF failed to discharge its duty of inquiry in relation to the calculation of Scope 3 emissions, and erred in its judgment that a high level qualitative review of the impact was sufficient – it was not. Mrs Justice Thornton concluded that UKEF failed to make reasonable and legally adequate enquiries in relation a climate risks in decision making, depriving minsters of a legally adequate understanding of the scale of the emissions of the Project.

Mrs Justice Thornton concluded that UKEF’s Climate Assessment and its failure to quantify Scope 3 emissions, as well as other deficiencies, meant that it did not fulfil its stated purpose and deprived UKEF and Ministers of the full evidence base on which to base decisions. She concluded that there was no rational basis by which to demonstrate that funding of the Project was consistent with the Paris Agreement’s commitments, given the Climate Assessment’s omissions and flaws.

As two judges heard the application andthere was not consensus between them, ultimately the claim failed given the judgment of Stuart-Smith LJ. Permission to appeal has been granted.

Comment

It is notable that, despite the undeniable political interest in this dispute, both judges stressed that their conclusions did not, and were not intended to, address the merits of the Project or the climate change considerations at play in the decision making. Whilst this is not unexpected, in the highly politicised and fast-evolving sphere of climate change, this will be disappointing to activists, pressure groups and prospective claimants seeking to bring challenges of this nature. That said, Mrs Justice Thornton’s comments regarding Scope 3 emissions may encourage further challenges seeking to broaden the scope of the considerations a public body must bear in mind when making decisions where similar environmental and climate change factors arise.

The UK has committed, through the Climate Change Act 2008 (as amended in 2019) and the Paris Agreement, to meet certain targets with relation to greenhouse gas emissions. Further, the Environment Act 2021 sets targets for improvement of various environmental features, including air and water quality. The use of judicial review, anchored to these commitments, as a tool to hold the government to account, and to call into question governmental approvals, consent or support for energy sector projects with an environmental impact, is significantly on the rise.

Although there have been no notable successes so far, the potential for delay or derailment of projects or policies is significant, and there are signs that the cases are gaining traction, with permission being granted for judicial review. Examples include:

  • Cox & Ors, R (On the Application of) v the Oil and Gas Authority and others [2022] EWHC 75 (Admin) (judicial review of OGA’s strategy for UK oil and gas on the basis it did not align with the UK’s climate change commitments – challenge dismissed),3
  • R (Plan B Earth & Others) v The Prime Minister & Others [2021] EWHC 3469 (Admin) (permission refused for a judicial review claim in relation to government action on climate change),

  • Bennett v Cumbria County Council (judicial review of council’s decision to grant planning permission for a new coal mine – the case ultimately settled),

  • R (on the application of Friends of the Earth) v Heathrow Airport Ltd [2020] UKSC 52 (Supreme Court reversed decision that the planned expansion of Heathrow Airport was unlawful on climate change grounds, determining that the UK Government had taken proper account of the UK’s climate change commitments).4

In addition, the threat of judicial review to projects, such as the development of the Cambo field in the North Sea, has been used as a mechanism by climate change activists to seek to drive corporate behaviour and decision making at potential investors.

Section 38 of the Environment Act 2021 sets out a new mechanism of environmental review, which will be distinct from judicial review, with amendments to the CPR being required to establish the mechanics of the process. Once this is up and running, it may well be that a rise in environmental reviews of governmental decisions follows.

In this regard, the judgment in R (on the application of Friends of the Earth Limited v (1) The Secretary of State for International Trade / Export Credits Guarantee Department (UK Export Finance) (2) Chancellor of the Exchequer; interested parties reaffirms the notion that a significant margin of discretion should be afforded to public bodies in their decision making, particularly where an exercise of judgment is required. However, is also reaffirms that the High Court will take an active role in reviewing whether a decision falls within that margin of discretion.

Permission to appeal has been granted.

Judges:

Lord Justice Stuart-Smith

Mrs Justice Thornton

Reference:

R (on the application of Friends of the Earth Limited v (1) The Secretary of State for International Trade / Export Credits Guarantee Department (UK Export Finance) (2) Chancellor of the Exchequer; interested parties (1) Total E&P Mozambique Area 1 Limitada; (2) MOZ LNG1 Financing Company Limited [2022] EWHC 568 (Admin)