Climate activists are taking to the courts and winning. In recent weeks, responsible investors have welcomed major court victories against the German government and Shell over emissions targets, and against the Australian government over coal.
However, legal action flows both ways, and the Dutch government is facing a €2.4bn bill for two lawsuits from German utilities RWE and Uniper over its plans to phase out coal by 2030. While still in the very early stages, this kind of legal action can send a chill through other countries developing or improving their decarbonisation plans – and could make climate action trickier and more expensive.
Both RWE and the Dutch government “may have arguments to be sustained”, says Elvezio Santarelli, an Italy-based Partner at Watson Farley & Williams, who specialises in arbitration and litigation cases in the energy and infrastructure sectors. He notes, however, that predicting the results will be difficult, because these will be the first two “really big cases” before an arbitration tribunal where the contrast between the Paris Agreement and investor remedies under international treaties are addressed.
And the cases present investors with a dilemma.
“On the one hand, if you are an RWE shareholder, you might be inclined to support the litigation in an effort to mitigate your short-term climate transition risks; but on the other hand, by doing so you are effectively delaying reaching the Paris Agreement,” says Vincent van Bijleveld, Director of ESG Investing at Dutch consultancy Finance Ideas. If more utilities and energy companies follow the footsteps of RWE and Uniper, he warns that investors will have to consider if it's still possible to continue holding and engaging these companies, and “if you really want to be in a position as an investor where you’re in Paris Agreement litigation”.
Both RWE and Uniper told RI they are not opposed to the Dutch coal phase-out, but that they are entitled to compensation. “We do not consider it right that the law does not provide for compensation for the resulting disruption to the company’s property,” said an RWE spokesperson, while a Uniper spokesperson said it “is convinced that a state cannot encourage long-term investments first and then deprive the investment of its ground only a few years later without any compensation.”
The lawsuits are being brought using the Energy Charter Treaty (ECT), which includes an Investor State Dispute Settlement mechanism (ISDS) allowing investors to challenge governments on changes in law that impact their business. The size of the claims can often be magnified by demands for compensation for lost future profits in addition to the initial investment. A raft of cases have been filed by asset managers and other investors over the past decade related to retroactive or abrupt changes to renewable energy subsidies across a range of European regimes. A fair number of claimants have been awarded pay-outs – for example, cases filed against Spain by major infrastructure investors including Foresight, InfraRed Capital Partners and Antin were successful. RWE’s then renewables branch Innogy – now a separate company – also won a €28m claim against Spain over renewables subsidies (although it has been reported Spain is seeking to annul the award).
Some worry the RWE and Uniper cases could open the floodgates to a similar flurry of legal action, both by utilities and asset managers. Private equity companies are increasingly picking up fossil fuel assets and, according to a report looking at “compensation for stranded fossil fuel assets”, PE firms and other financial investors make up more than half of ISDS claimants under the ECT.
‘If you are an RWE shareholder, you might be inclined to support the litigation in an effort to mitigate your short term climate transition risks – but on the other hand, by doing so you are effectively delaying reaching the Paris agreement’ – Vincent van Bijleveld, Finance Ideas
Climate champions, of course, don't believe RWE and Uniper have credible cases, but emphasise they could still be a barrier to rapid climate action.
“The companies that are suing governments are the same that have been dragging their feet for the past 20 years,” says Amandine Van Den Berghe, a Trade and Environment Lawyer for NGO ClientEarth. “They’ve done everything they could to slow down climate action and now they’re trying to seek compensation for their stranded assets”. But often, the mere threat of a case brought under the ECT can prove an effective method of obtaining compensation, she adds – often being “used as a means of pressure [rather] than an actual claim”.
Germany, still smarting from the €2.4bn it was forced to pay energy companies as part of its nuclear phaseout, has agreed a €4.35bn compensation package for coal power operators. Czech energy firm Leag was handed €1.73bn in return for an agreement not to sue under the ECT. Notably, at the start of March, the European Commission launched an investigation into whether the compensation plans breach state aid rules.
Meanwhile, the tribunal for the RWE case has now been appointed, while Uniper confirmed its intention to file a case in April. Like Santarelli, Van Den Berghe agrees it is difficult to predict the outcomes, but if the arbitrators do rule in favour of the two companies, she says “it would only confirm what civil society has been saying for years: that the investment treaties including the ECT are a risk to climate action.”
The huge sums of compensation involved in ECT cases may also give pause to other governments drawing up similar measures. Santarelli says that the prospect of an ECT case is unlikely to deter governments altogether from fossil fuel phaseouts, but the presence of several potential cases could weaken the plans.
Van den Berghe agrees. “[RWE and Uniper’s] strategy is probably also to send a very strong signal across Europe because other countries are legislating on closing down coal power plants and taking other measures for the energy transition. They don’t really need to win the case to actually win their strategy.”
Governments may follow Germany’s footsteps and “negotiate higher compensation than they would do otherwise,” she said. “It may also be that they completely change the timeline or the level of ambition of the original climate measures.”
Efforts to modernise the ECT – which was signed in 1991 in a bid to protect western investors in post-Soviet fossil fuel infrastructure – have been underway since 2009, and the EU has proposed changes it says will ensure the Treaty facilitates climate action and transition in line with the European Green Deal and the Paris Agreement. The latest round of negotiations on reform finished earlier this month and the Commission said “substantial progress” was made.
‘[The] companies that are suing governments are the same that have been dragging their feet for the past 20 years’ – Amandine Van Den Berghe, ClientEarth
However, changing the scope of the ECT is no mean feat. Any change to the treaty requires the unanimous support of all 54 signatories, and it is unlikely that large fossil fuel producers such as Kazakhstan or Azerbaijan will agree. According to reports by Euractiv, diplomatic documents concerning a previous round of negotiations this year show that Kazakhstan “openly rejected” the EU’s proposals.
States may freely leave the treaty, as Italy did in 2015 when cases against its renewables subsidy changes started coming in, but investments made while the state was a signatory are protected for another 20 years. France, Spain and Poland have joined calls for an EU exit as talks remain stalled.
Earlier this month, a coalition of more than 400 civil society groups signed an open letter calling on the EU to withdraw from the ECT before COP26, and to “stop pushing its expansion to countries in the global south”.
However, while the treaty covers an estimated €344.6bn of fossil fuel infrastructure, it also provides protection to renewables investors. “Some commentators are saying that [leaving] is a short-term vision”, says Santarelli. “The problem is not the entire structure of the ECT […] Eliminating the ECT to support environmental agreements, means also eliminating a tool for the protection of renewables.”
A Dutch government spokesperson, commenting on the RWE case, said the state is “preparing to conduct these international arbitration proceedings and will conduct defence on both the jurisdiction of the tribunal as well as the content of the dispute”.
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