Introduction:
With the advent of Artificial Intelligence (AI), there has been an increased need for data centres that consume large amounts of electricity and water. Data centres comprise powerful computer systems used for the processing and storage of data and consume water for cooling purposes and vast amounts of energy to work continuously. This poses several questions of groundwater depletion, pressure on local water resources and energy use. In this context, the British Institute of International and Comparative Law (BIICL) released the Banks and Climate Litigation: India Report on 27 October 2026. The report considers whether banks funding environmentally damaging activities, including AI data centres, can be sued. It highlights the idea that banks could be liable for the failure to assess the risks or any other legal duties.
Background:
There is an increased need for large-scale data centres, which need large amounts of electricity and water for their functioning. These centres run strong servers all the time, leading to generation of huge amounts of heat that necessitates the use of water-based cooling processes. Increased requirement of natural resources creates problems related to depletion of underground water, shortage of water, high consumption of electricity and environmental degradation. So far, liability related to the environment had been limited to industries and companies whose actions were causing pollution and damage to the environment. But due to the increasing role of banks in funding big infrastructure projects, there have been some questions about the environmental responsibilities of banks. In this context, the British Institute of International and Comparative Law (BIICL) released the Banks and Climate Litigation: India Report on 27 October 2026. The report analyses whether or not banks may be sued in case of environmental damage caused by the projects they finance, especially if such banks do not recognize any substantial risks to the environment or have themselves fulfilled any of their legal obligations. The report discusses the idea of ‘Bank Local Impact Claims’.
Key Points:
- Liability of Bank: Simply financing an environmentally damaging project does not necessarily mean that the bank is liable for its damages. It needs to be shown that the bank has failed to assess environmental risks or comply with its legal obligations.
- Legal and Constitutional Bases for Action: Article 21 of the Constitution, Section 166(2) of the Companies Act, 2013, and any relevant laws pertaining to banking risk management and disclosure may be used as bases for bringing a case against banks.
- Four Potential Legal Actions: The report points out four possible ways in which the legal process can be started:
- Public Interest Litigation (PIL) against a private bank.
- Case filed in NGT against the RBI.
- Action by shareholders against banks in NCLT.
- Writ petition against the RBI in constitutional courts.
- Damages Related to Local Environment: Damages related to local environment like groundwater depletion and water pollution may be easier to prove than those related to global impacts of climate change.
- No Statutory Obligations Imposed by Law: Under Indian law, there is no statutory obligation imposed on the lender as a result of financing a project.
- Establishing Causation Can Be Tough: In addition, it can be difficult to make an appropriate legal connection between the bank’s decision-making and failure in relation to the negative impact on the environment caused by the project in question.
- Environmental Accountability: The report stresses the importance of looking at the banks’ environmental risk management rather than only at the companies responsible for environmentally damaging projects.
Analysis:
This report is an important milestone in the journey towards understanding environmental responsibility in the banking sector. The importance of this report is in the fact that it looks at banks not as financial institutions, but as organisations whose funding decisions may impact on environmentally damaging actions. This is seen from the applicability of section 166(2) of the Companies Act, which mandates the directors to look into the interests of the community and the protection of the environment. But for this to lead to liability for the funding decisions, there must be proof of breach. Also, Article 21 of the Constitution gives constitutional protection to the right to a healthy environment. However, banks cannot be made liable for all the violations committed by the borrowers. This is because creating liability for banks through these laws is difficult. The litigation pathways suggested in the report have not been tested before, and the NGT’s jurisdiction is constrained by the NGT Act.
Conclusion:
BIICL’s report focuses on the issue of reconciling technology advancement with environmental protection efforts. While AI data centres facilitate technology and economic growth, their increasing use of resources such as water and electricity poses great dangers to the environment especially where there are few natural resources. The report investigates whether banks undertaking the projects may be legally culpable for their negligence in the identification of environmental risks, non-compliance with laws and responsible financing. It also draws attention to the need for effective regulatory measures for banks, corporate governance and environmental risk assessment. Nonetheless, the proposed legal framework lacks any judicial support in India, and merely financing a dangerous project would not suffice to hold banks liable. Overall, it advocates for increased awareness of environmental responsibilities by considering the possible legal duties of financiers apart from project developers.
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Written by – Krittika Sengupta
