Can banks financing AI data centres be held liable for water, energy impacts? What a BIICL report says

Banks financing data centres and artificial intelligence (AI) infrastructure in India could face environmental litigation over water and energy impacts, a report published by the British Institute of International and Comparative Law (BIICL) has suggested.

The report, authored by Senior Advocate Shyam Divan and Advocates Ria Singh Sawhney, Sugandha Yadav and Shaishir Divatia, identified the sector’s expansion as a potential basis for claims concerning environmental harm associated with bank financing.

“Looking ahead, the rapid expansion of data centre and artificial intelligence infrastructure financing in India, which carries significant and increasingly well-documented local water and energy impacts, may in time provide the factual basis for the first concrete Bank Local Impact Claim brought in this jurisdiction,” it stated.

The report used the term “Bank Local Impact Claims” to describe cases or complaints against banks concerning local environmental damage caused by projects they financed.

This was an analytical category developed for the study, not an established category of legal action in India. Such claims need not involve climate change and financing a harmful project would not, by itself, establish a bank’s liability.

The authors reasoned that localised damage could be easier to establish causally than the indirect harm associated with emissions from activities financed by banks.

Titled Banks and Climate Litigation: India Report, the study examined potential proceedings against banks and regulators through public interest litigation (PIL), the National Green Tribunal (NGT) and shareholder actions.

It distinguished claims concerning climate change from those involving local environmental impacts of bank-financed projects. The latter need not have a climate-related dimension.

The report identified a PIL against a private commercial bank, with the Reserve Bank of India (RBI) joined as a respondent, as the most promising primary route. A strong case could involve financing a demonstrably harmful project while making misleading climate disclosures.

Crucially, the proposed claim would concern the bank’s own failures to assess risks or comply with legal obligations.

“The cause of action proposed in this Report does not ask the court to hold the bank vicariously liable for the borrower’s pollution. It asks the court to hold the bank to account for its own breach of its own duties,” the report explained.

The authors drew on constitutional environmental rights, directors’ duties under Section 166(2) of the Companies Act and applicable risk-management and disclosure requirements. They also proposed approaching the NGT against the RBI over its failure to finalise binding climate-related disclosure and risk-management norms.

Such proceedings could seek a deadline for notifying rules, interim reporting and continued Tribunal monitoring. Evidence of air, water or land damage from a financed project could help demonstrate the environmental consequences of the regulatory gap.

However, the report acknowledged that the NGT’s jurisdiction was confined to questions arising under specified environmental statutes. It suggested invoking the Environment (Protection) Act’s broad definition of environment to support jurisdiction.

Shareholders could separately approach the National Company Law Tribunal, alleging that a bank board’s systematic failure to consider climate risks was prejudicial to public interest. This route faces a high threshold under Section 242, requiring circumstances that would justify winding up the company on just and equitable grounds, although winding up itself need not be ordered.

A separate writ petition could ask constitutional courts to compel the RBI to discharge its supervisory duties. The authors considered this route legally better supported, while recognising judicial deference on national economic policy.

The report also acknowledged that Indian environmental laws principally regulated polluters and did not currently impose direct environmental due diligence obligations on lenders. Establishing a causal link between financing and particular harm would also pose difficulties, it said.

The proposed routes therefore remained untested. The report said that it had identified no publicly reported bank climate claim pending before Indian courts.

[Read Report]