NGO brings climate-related judicial review against FCA

The NGO ClientEarth has brought an application for permission to bring a judicial review against the UK’s Financial Conduct Authority (FCA), alleging that the FCA’s approval of an energy company’s prospectus was unlawful as the prospectus did not adequately disclose the climate-related risks associated with the company’s activities. This case continues the trend of strategic litigation being brought in a climate context to influence policy, but it is the first climate-related case brought against a financial regulator in the UK.

Basis of claim

The FCA approved Ithaca Energy’s prospectus in November 2022. ClientEarth’s case is that the approval was unlawful, as the FCA cannot approve a prospectus unless it is satisfied that it meets the requirements of the Prospectus Regulation, including certain risk disclosure requirements.

Ithaca Energy did include a climate-related risk factor in its prospectus, noting that climate change, abatement legislation, changes to carbon pricing systems and political and societal perception of the production and use of fossil fuels may have a material adverse effect on the hydrocarbon industry. However, ClientEarth says that the prospectus did not meet the requirements of the Prospectus Regulation as the risks it disclosed were too general in nature and the prospectus does not explain how Ithaca’s business aligns with important sustainability objectives (the International Energy Association’s stance on the development of new climate change infrastructure or the Paris Agreement goals). ClientEarth argues that this information is necessary for investors to make an informed assessment of the company's financial position.

Context and next steps

This is the second case that ClientEarth has brought in a financial services context; it has previously brought an action against the Belgian National Bank to try and influence the ECB’s review of its monetary policy strategy and, in particular, to encourage the ECB to make changes to its corporate bond purchase programme to make it less favourable to carbon-intensive companies (see our report of the initial case and the withdrawal of the appeal here and here).

In this case, ClientEarth’s application for judicial review should be seen in the context of the position paper it published in August 2022 advocating how the FCA, in its capacity as listing authority for the UK, should amend the listing regime to take account of climate-related risks. Its specific recommendations are that the FCA should:

• make alignment to Paris Agreement goals a condition of listing for climate-exposed companies;
• treat climate-exposed listings as “high risk” transactions subject to heightened scrutiny during the eligibility review; and
• issue clear and authoritative guidance to the market explaining its approach to climate-exposed listings.

The High Court will now decide whether to grant permission for the judicial review to be brought. Given the implications that this case could have on the approach to disclosure of climate risk in financial markets and the potential associated impact on valuations, the progress of this case will be of interest to a wide range of companies and their advisors.