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Arguably the most obvious targets of ESG litigation (claims relating to environmental, social and corporate governance issues) are companies operating in the fossil fuel industry and other major greenhouse gas emitters.
Such claims frequently deploy novel lines of argument and, while these have been of mixed success, there is an increasing line of case law from various jurisdictions illustrating the courts’ unwillingness to dispose of such claims on a summary basis.
While litigation of that nature may initially seem remote to many UK-based lenders, in this article we look at why it (and other similar types of ESG dispute) may nonetheless present lenders with both litigation and credit risk, and how these risks may be managed.
As a starting point, it is worth recapping some of the key cases from the UK and abroad which are shaping the law in this area. Very broadly speaking, these fall into 2 groups:
Mitigating climate change
Parent company/value chain liability
ESG-related litigation can have a huge impact on a company’s reputation, legal spend and even its overall commercial viability. It is crucial for lenders to look ever more closely at how exposed their borrowers (and prospective borrowers) are to these sorts of claims and challenges, both as part of their assessment of lending propositions and general creditworthiness, but also with an eye on the potential for lenders themselves to become embroiled in litigation brought against their borrowers.
Notwithstanding the Minister’s recent successful appeal, the Sharma case provides a good example of the potential commercial risk to lenders involved in the funding of infrastructure projects anticipated to have a significant negative environmental impact.Such projects will typically be funded by a syndicate/club deal requiring a heavy time investment from members (particularly the agent) ‘up front’.If the project is the subject of a challenge (even if not directed at the borrowers, but the approving government minister/department) it could be stalled for a significant period of time, during which any number of variables going into pricing and other factors affecting members’ appetite for the deal may change. This could lead to the deal being rewritten and/or to disputes between members, or ultimately to the project/deal not proceeding at all.While neither Sharma nor the Packham challenge to HS2 succeeded, there is little doubt that challenges of this nature will continue to be brought and can still have a significant impact even if they do not succeed in the UK courts through the adverse publicity generated.
Lenders will no doubt already be very alive to the various pressures on borrowers whose activities significantly contribute to greenhouse gas emissions, and/or which operate in (for want of a better phrase) other high ESG risk sectors, which may translate into credit risk.In light of the Vedanta, Okpabi and Maran decisions, however, it is important for lenders to consider not just what activities their ‘direct’ borrowers are engaging in, but also to understand the activities of their subsidiaries and third parties in their value/supply chain (even if there is no direct relationship between these entities and the lender), and any ESG risks these may pose.Should any such risks eventuate, and subject obviously to corporate structures, levels of oversight and control and so on, there is encouraging authority for those affected to seek to hold the parent or instructing entity accountable, posing just the same credit risk to the parent’s lender as if its own borrower were (allegedly) responsible.
The parent/value chain liability claims are already testing hitherto established principles and boundaries about the circumstances in which one party may owe a duty of care to another.On the face of it, extending such claims to lenders as well might seem ‘a step too far’ but should not be discounted - a key characteristic of ESG litigation is the advancement of novel arguments and there is great interest in such claims in the litigation funding market.Taking a Maran-type situation as an example, if the buyer of a ship sought bank funding to facilitate the purchase, the lender would wish to know how the buyer proposed to pay the loan back, including details of the anticipated income and expenditure (including ship-breaking costs).It is not an inconceivable argument to say that a prudent lender would want to know, or ascertain, what the projected ship-breaking costs meant for the conditions in which the ship would be broken, and that if it nonetheless proceeded with the loan, either or both of the claimant’s propositions in Maran should apply equally to the buyer’s lender as to the entity selling the ship.
Increasing ESG litigation reflects the increasing global concern around climate change, and poor working conditions and ethical practices (and the profits that some companies make as a result). While the technical legal success or otherwise of such claims will of course vary on their facts, the way in which they are pleaded, and the jurisdiction in which they are brought, doors have been opened in this regard and there will be many instances in which even an ‘unsuccessful’ action nonetheless succeeds in bringing about positive change by an organisation through the reputational and commercial pressure it leverages.
Banks/lenders play an integral role in keeping almost any business running. Lenders need to be working in step with their clients to understand where ESG risks arise as part of their clients’ own operations, or that of their subsidiaries and value/supply chains, and responding accordingly – for example by requiring minimum heath and safety standards to be implemented, incentivising certain improvements, etc – as part of funding arrangements. This enhanced due diligence and constructive collaboration with clients will not only help reduce the risk of ESG-related adverse events occurring, and the litigation and credit risk that flows from those, but will also form a central part of banks’/lenders’ own ESG credentials where it is essential that their actions match up with their public commitments and disclosures.
 ExxonMobil are already defending an action brought by the State of Massachusetts in the US alleging the company has misled consumers and investors about its role in climate change; Commonwealth of Massachusetts -v- ExxonMobil Corp, Massachusetts Supreme Judicial Court, No. SJC-13211
 Vedanta Resources Plc and Konkola Copper Mines Plc -v- Lungowe and ors  UKSC 20
 Okpabi & ors -v- Royal Dutch Shell Plc and Shell Petroleum Development Company of Nigeria Ltd  UKSC 3
 Hamida Begum -v- Maran (UK) Limited  EWCA Civ 326
 In Maran, the buyer was said to be a cash buyer
10 May 2022
Legal Director London
Partner, Financial Services Disputes & Investigations London
Insights 20 JANUARY 2022