The environmental law charity ClientEarth has been unsuccessful in its request for judicial review of the UK's financial services regulator, the Financial Conduct Authority ("FCA"), in response to the recent IPO of Ithaca Energy Plc ("Ithaca"), an oil and gas producer with interests in the North Sea. 

The case was initially refused on the papers, but ClientEarth exercised their right to an oral hearing where the case was again refused. The Judge decided the case was unarguable on all grounds, ruling that the FCA had acted in accordance with its obligations, which did not amount to part of the UK’s environmental legislation and confirmed it is not the FCA’s purpose to protect or otherwise regulate the environment. Read the full judgment here.

Background 

A key responsibility of the FCA is to protect investors, and this case was brought against the FCA citing a failure to provide such protection. For the FCA to approve a prospectus under its Financial Services and Markets Act 2000 powers, it must be satisfied that the requirements of the Prospectus Regulation (EU) 2017/1129 (“Prospectus Regulation”) are met, including risk disclosure requirements. 

ClientEarth initiated their case for judicial review in February 2023, following Ithaca's successful completion of its IPO and subsequent flotation on the London Stock Exchange in November 2022. ClientEarth had twice written to the FCA following the initial approval of the registration documents in October 2022, ahead of the official flotation. ClientEarth argued that it was unlawful of the FCA to approve the prospectus due to its alleged failure to sufficiently detail the risks associated with the negative climate impacts of the company's business model.

Although the prospectus included some wording on climate-related risk factors and risks faced by the oil and gas industry generally, ClientEarth argued that the FCA omitted to adequately consider the impact of the intention to continue to produce new oil and gas and the knock-on this will have on the target limit of 1.5 degrees Celsius above pre-industrial levels as provided by the Paris Agreement. The prospectus was alleged to be too general, omitting adequate explanation of the significance of the risks or how the business model to continue to build oil and gas infrastructure conflicts with the International Energy Agency’s warning that to successfully limit warming to the Paris Agreement target, no new fossil fuel infrastructure should be built. 

The Decision

In April 2023, the case was refused on the papers. ClientEarth then exercised its right to an oral hearing and the case was heard in the High Court in December 2023. 

ClientEarth argued that the decision to approve the prospectus was unlawful on the following grounds: 

1. the FCA was wrong in law by approving the prospectus, due to the inadequate disclosure of Ithaca's assessment of the materiality of the climate-related financial risks, contrary to Article 16 of the Prospectus Regulation;
2. the FCA was wrong in law by approving the prospectus, due to inadequate disclosure of the materiality of the climate-related risks associated with the securities, contrary to Article 16 of the Prospectus Regulation; and
3. the FCA’s conclusion that the prospectus was sufficient and provided investors with an informed assessment of the risks and financial position of the company in accordance with Article 6 of the Prospectus Regulation was “rationally unsustainable”. 

The Judge decided that all grounds were unarguable and had no real prospect of success. 

In relation to Grounds 1 and 2, the information provided, as required under the Prospectus Regulation Article 16, was deemed satisfactory. This is a somewhat subjective criterion which the FCA, as regulator, has the authority to enforce, and which the court cannot substitute with its own view to the contrary, where it is considered the FCA has made a rational assessment.

Ground 3 was refused as the Paris Agreement had been listed as a material risk to the business, albeit with a contrasting opinion to ClientEarth on the business' compatibility with the Agreement. The court did not find that there was an irrationality in the FCA's decision to approve the prospectus on this ground. 

Ultimately there was no public law basis to uphold any of the grounds and therefore a judicial review would be unreasonable, as the FCA was considered to have acted within its remit and with rational decision making.

Conclusions

The decision highlights that the purpose of the Prospectus Regulation is to ensure companies make disclosures which properly inform investors, but the High Court has said that that obligation is not synonymous with an obligation to protect or regulate the environment, despite the existence of the Paris Agreement or any other environmental legislation.

It was therefore considered outside of the scope of the FCA's authority to provide an analysis of the extent in which a prospectus does or does not impact climate change, promote consistency with net zero or promote climate change mitigation. 

This is another case in a round of first instance decisions where ClientEarth have attempted novel litigation to progress its climate-focused agenda (see our recent post on the derivative action case brought by ClientEarth against Shell plc). 

In this case, the Judge did notably decide that ClientEarth had standing “to pursue the claim on a public interest basis because the subject-matter of the claim falls within its area of expertise (the environment) and its mission to ensure that public bodies act in accordance with their legal obligations in relation to the climate crisis”. However, the dismissal of the case can be seen as a reflection that although the UK has specific net zero targets, the legislation and regulation which might be necessary to ensure those goals are met will still take time to mature. The case highlights the role that financial services regulation in particular may be expected to play in decarbonising the UK. 

This article was written by Suzanne Padmore and Sasha Anisman.