Investors have taken a decidedly collaborative approach to engagement and have avoided filing litigation to force companies to halt the expansion of carbon-intensive energy production. But the urgency of the climate crisis suggests that, perhaps, investors should look again. Legal action is often protracted, contentious, and expensive, but a recent case demonstrates that it also has a huge potential for impact. Litigation filed by the non-profit Client Earth, and supported by investors, helped contribute to the European utility Enea cancelling the construction of their 1,000MW coal plant Ostrołęka C. How did this happen?
Enea convened an extraordinary general meeting in September 2018 at which it was able to push through a resolution giving qualified consent to the development of the Ostrołęka C plant because of the Polish government's 51% majority stake in the company. Client Earth initiated legal action in the Polish courts a month later on the grounds that the project violated the fiduciary duty of executives to act in the best interests of shareholders. It posed an egregious financial risk to shareholders, Client Earth contended, because of increasing carbon prices, EU energy reforms, and the declining cost of renewables.
A report written by Carbon Tracker to support the case concluded that Ostrołęka C would return a negative profit over its lifetime without out-of-market capacity payments from the Polish state to ensure grid capacity. Yet the size of those payments was unclear, and EU reforms are likely to ban capacity payments to new plants with high carbon intensity rates. LGIM, Aviva, and other investors played a complementary role by engaging with Enea over the plant's financial risks. LGIM writes, for example:
'LGIM opposed the proposal at Enea's extraordinary general meeting in 2018. We also expressed our concern both in letters to the company and publicly in the press and our concerns were cited in a shareholder lawsuit against the company, filed by environmental law group Client Earth.'
In August 2019 the District Court in Poznań found that the resolution authorising the plant was legally invalid. In July 2020 the Court of Appeal upheld this judgement. Between these two rulings, in February 2020, Enea terminated their construction of Ostrołęka C.
Yet two factors complicate any assessment of the case. First of all, Enea has not yet given up on the site. It announced plans to refit Ostrołęka C as a gas-fired plant in June 2020, though has yet to raise the financing necessary to support the project. This qualifies the impact of Client Earth's legal victory, but certainly does not annul it: gas is less carbon-intensive than coal, and it remains unclear whether Enea's plans to adapt the site will succeed.
Second, Client Earth's litigation was one of several factors that led Enea to cancel the Ostrołęka C coal-plant eventually. Fitch warned the company that its financial rating could be downgraded if the project was completed, and EuroRating downgraded the financial rating of Enea's partner on the plant, Energa, explicitly citing the company's commitment to the Ostrołęka C plant as its main rationale.
Enea itself conducted an 'impairment test' – published in early 2020 as part of its financial report for the previous year – estimating its coal plants' projected write-down in light of increased CO2 costs. In the case of Ostrołęka C, it concluded that the 'recoverable value of this stake was determined at zero PLN'. In other words, its projected value was nil. The exact role this test played in Enea's decision-making is unclear, but it seems unlikely that the company remained oblivious to the plant's dire financial prospects. Even when incorporating this fact into the level of responsibility we attribute to Client Earth's legal campaign, however, the size of the outcome means it remains an impressive, high-impact intervention. Its victory is a proof-of-concept of the potential for climate litigation in the future.
 See p.42, ENEA S.A. Separate Financial Statements, 2019.