FCA faces judicial review over fossil fuel company’s climate disclosures

Corporates aren’t alone in facing increasing greenwashing-related risks this year. Regulators are also being pulled into the spotlight and this could impact their approach to matters such as approving company prospectuses.

ClientEarth is seeking the High Court’s permission to pursue a judicial review of the UK Financial Conduct Authority’s (FCA) decision to approve Ithaca Energy Plc’s (“Ithaca”) prospectus last year. This is because, the NGO claims, the prospectus failed to adequately describe the climate-related risks faced by the company as required by law.

ClientEarth argues, for example, that:

• the way in which Ithaca’s prospectus addresses climate risk is too broad, as Ithaca “does not appear to explain how these risks affect its business specifically, or how significant these risks are for the company”, as they allege is required by the UK Prospectus Regulation[1]; and
• the prospectus fails to explain “how its business model and financial prospectus would need to change, or be affected, if the Paris Agreement goals are to be achieved and what impact that would have on their key assets”, which includes, for example, oil and gas fields in the North Sea.

The NGO believes that this information is vital to investors in order to make an informed assessment of Ithaca’s financial position and should, therefore, have been provided in the prospectus.

Pursuing a judicial review case against the regulator, rather than challenging the company issuing the prospectus directly, is novel. Deciding not to, for example, put forward a claim under s. 90 or 90A of the Financial Service and Markets Act for an alleged misleading statement, is presumably driven by: (i) a desire to affect strategic change in the regulator’s approach; and (ii) a way of avoiding practical issues such as the need to show that loss was suffered as a result of reliance on the misleading statement.

It remains to be seen whether the court will approve the application. Regardless of the outcome, the headlines generated by the claim may impact the approach the FCA takes to approval of prospectuses. Businesses may in turn feel under pressure to articulate in more detail how climate risks apply to them when looking to make an initial public offering. It could also encourage actions by shareholders down the line, if they have invested on the basis of inaccurate information and suffered loss as a result, although such claims face a number of hurdles in practice.

The application comes as the FCA is focussing in on consumer and investor protection in the context of greenwashing (for example looking at bringing in an anti-greenwashing rule), so the challenge may prompt some further reflection on the regulator’s part.

[1] Prospectus Regulation (EU) 2017/1129 (retained EU law version)