UK Treasury taken to court for RBS loans to Vedanta Resources

Ministers face embarrassment in the high court on Tuesday when the Treasury is forced to explain why the state-owned Royal Bank of Scotland has been lending money to the controversial mining firm Vedanta Resources, whose activities have been criticised by another government department.

The legal battle will highlight the financial support being given by the bank to a range of other companies engaged in activities such as coal mining and Arctic oil drilling - all of which could be considered contrary to wider policy commitments on climate change and carbon emissions.

Three campaign groups - World Development Movement, Platform and People & Planet - have brought the case. The Treasury argued at a preliminary hearing that it would not be right to consider climate change and human rights when it evaluated the "commercial" interests of RBS.

Rosa Curling, from the campaigners' law firm, Leigh Day & Co, said the Treasury's position was a misunderstanding of the law, "in particular the Companies Act 2006, and flies in the face of the government's wider policies on corporate social responsibility and climate change".

The Treasury, which has oversight of banks such as RBS after they were bailed out with public money, has brought in James Eadie QC, one of its chief lawyers, to defend its position.

Since the case was filed in June, the government has carried out a "green book" assessment of its environmental and human rights obligations with respect to its 70% holding in RBS, and concluded that it must manage its stake in a commercial way.

However, the three groups claim that the assessment was inadequate, and that taxpayers' funds invested in RBS should be spent only on projects that promote a "sustainable and ethical future".

Last week the UK National Contact Point, an arm of Lord Mandelson's business department, produced a scathing report on Vedanta accusing it of "disrespecting" the rights of indigenous people over its plans to build an opencast bauxite mine near the holy mountain of Niyamgiri, in the Indian state of Orissa. Vedanta said it "refutes the conclusions [of the report] and has complied in all respects with Indian regulations including consultations with the local community".

RBS was the lead financial adviser to Sterlite, which is 60% owned by Vedanta, in a recent takeover bid. The bank and its ABN Amro subsidiary gave letters of credit worth $100m (£60m) to Sterlite, which is India's biggest copper producer.

Kevin Smith, from Platform, said it was "total hypocrisy" for the government to criticise Vedanta's environmental and human rights record while allowing RBS to use public money to finance it. "The Treasury has a legal duty to ensure that RBS isn't using taxpayers' money to support companies that trample over human rights and trash the climate," he said.

RBS is also under fire for lending to Cairn Energy to drill in the Arctic, and to Hargeaves Services for opencast coalmining in Britain. Campaigners are incensed that ABN Amro holds a 4.75% stake in the mining group CGM Resources, which is opening a mine at Phulbari, Bangladesh.

Deborah Doane of the World Development Movement, which has been campaigning against the Phulbari mine, claims 40,000 people face eviction and 100,000 could have their water supply disrupted. "People in Bangladesh should not suffer due to the actions of a British mining company, and the British government must ensure our money is clean. So it has a moral and legal duty to stop these investments through its ownership of RBS," said Doane.

RBS said it recognised the reality of climate change and supported a transition towards a low-carbon economy.

"Over recent years we have been a leading arranger of finance to the renewable energy sector and take our responsibility to play our part in this seriously," it said.

"As a leading corporate and commercial bank, RBS has customers in almost all sectors of business. We are committed to supporting these customers as they address the challenges of progressively reducing their environmental impact. We only provide finance to projects which meet the environmental and social standards specified by the Equator Principles."