Court dismisses climate-related judicial review against FCA

Last year the environmental NGO ClientEarth sought permission from the High Court to bring a judicial review of the FCA’s decision to approve the prospectus of an energy company, Ithaca Energy, given the way that Ithaca Energy had framed its climate risk disclosures, as reported here. Permission was refused on the papers in April 2023 but ClientEarth renewed its application. In December, the High Court handed down judgment, again refusing ClientEarth’s application to bring a judicial review of the FCA’s decision. 

Basis of claim

ClientEarth’s case was that the FCA’s approval of the prospectus was unlawful on three closely connected grounds. ClientEarth submitted that the FCA erred in law by approving a prospectus which failed to disclose or adequately describe (i) Ithaca’s assessment of the materiality of its climate-related financial risks and (ii) the specificity of the climate-related risks to Ithaca’s securities, both of which ClientEarth submitted constituted breaches of Article 16 of the Prospectus Regulation (Grounds 1 and 2). ClientEarth also submitted that the FCA’s conclusion that the prospectus contained all necessary information material to an investor for making an informed assessment of Ithaca’s financial position was rationally unsustainable, because the prospectus did not contain sufficient information on the compatibility of Ithaca’s business plans with a Paris Agreement-aligned emissions trajectory (Ground 3). 

Ithaca Energy did include a general climate-related risk factor in its prospectus, noting that climate change, abatement legislation, changes to carbon pricing systems and political and societal perceptions of the production and use of fossil fuels may have a material adverse effect on the hydrocarbon industry. However, ClientEarth argued 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 did not explain how Ithaca’s business aligned with important sustainability objectives (such as the International Energy Association’s stance on the development of new climate change infrastructure or the Paris Agreement goals). ClientEarth argued that this information was necessary for investors to make an informed assessment of the company’s financial position.

The FCA’s Defence

The FCA argued that its responsibility for approving a prospectus is governed by Section 87A of FSMA 2000, which provides that the FCA may not approve a prospectus unless it is satisfied that it meets the requirements of the Prospectus Regulation and relevant provisions of FSMA. While the proper meaning and interpretation of Article 16(1) is a question of law for the Court (and provided the FCA does not misdirect itself in law as to that proper meaning), the FCA submitted that the Court may only interfere with the FCA’s application of Article 16(1) to a prospectus by reference to rationality.  Article 16(1) of the Prospectus Regulation requires that the FCA carries out an “evaluative judgment” to determine whether these requirements are met and the FCA argued that it is not the role of the Court to replace the FCA’s assessment with its own if the FCA’s assessment is rational.

On Ground 3, the FCA argued that ClientEarth’s submission that the FCA had acted irrationally by approving the prospectus was “unarguably wrong”. The FCA described its responsibility as ensuring that specific and material risks were adequately described and corroborated. The FCA was satisfied that this was the case, explaining that the prospectus did include some commentary on the impact of compliance with the Paris Agreement on the oil and gas industry.

Grounds 1 and 2

While ClientEarth did have standing to bring its claim, the High Court found that its case on these points was unarguable and did not have a realistic prospect of success. The FCA’s arguments were accepted entirely.

Substantively, Mrs Justice Lang also agreed with the FCA’s position that Article 16 of the Prospectus Regulation requires the disclosure of material risk factors, but that it does not require the issuer to disclose its assessment of risk and materiality. Similarly, there is no requirement for the issuer to disclose its assessment of risk and specificity: it is sufficient that the issuer provides risk factors which are specific to the issuer and that these risk factors are adequately described.  

Ground 3

Noting that demonstrating irrationality is a “high hurdle”, Mrs Justice Lang found that ClientEarth did “not come close” to demonstrating that the FCA had acted irrationally. ClientEarth’s argument was centred on the fact that Ithaca’s prospectus did not (in its view) go far enough to map Ithaca’s business against alignment with the Paris Agreement. But as the FCA submitted, Ithaca had drawn attention to this possibility and the divergence of views in its prospectus. 

ClientEarth’s claim is not an ‘environmental claim’

ClientEarth also sought to have its claim recognised as falling under the Aarhus Convention so that it could benefit from CPR 46.24, which limits costs recoverability in such claims. For a claim to fall under CPR 46.24 it must fall within scope of Article 9(3) of the Aarhus Convention, which relates to “administrative or judicial procedures to challenge acts and missions by private persons and public authorities which contravene provisions of its national law relating to the environment”.

On the basis that ClientEarth’s claim related to the application of Section 87A FSMA and the Prospectus Regulation, neither of which are provisions of law relating to the environment, the Court held that there was not a sufficiently close connection to the environment for ClientEarth to fall within scope of the Aarhus Convention or the costs regime under CPR 46.24.

Commentary

This case was the first in the UK to focus on the quality of a company’s ESG-related disclosures in a financial markets context, and it was brought following ClientEarth’s publication of its suggestions for new listing rules, which require more detailed climate disclosures.  However, given the discretion available to the FCA in approving prospectuses, and the expertise it has in this area, the claim was a difficult one to prosecute. 

Although claimants are bringing climate-related cases in a variety of creative ways, this latest dismissal follows the trend of courts, particularly in the UK, of holding a firm line and evaluating each claim strictly on its legal merits.