ClientEarth’s judicial review bid denied: another setback for ESG challenges?

The High Court recently dismissed a renewed judicial review application by environmental non-governmental organisation (NGO) ClientEarth against a Financial Conduct Authority (FCA) decision.

The original application had been brought by ClientEarth in February 2022 and rejected in April 2023. The NGO had subsequently hoped to challenge the FCA’s approval of oil and gas company Ithaca Energy’s initial public offering (IPO) Prospectus, claiming the prospectus failed to meet certain regulatory climate related disclosure requirements.

Whilst ultimately unsuccessful, the action is an example of increasingly novel legal approaches taken by environmental groups to put pressure on companies and regulators to change their behaviours, the implications of which we consider below.

The Claim

Section 87A(1) of the Financial Services and Markets Act 2000 (FSMA) states that to approve a prospectus, the FCA must be satisfied that it contains the information required by the UK retained version of Regulation (EU) 2017/1129) (the UK Prospectus Regulation). Article 6(1) and Article 16(1), the relevant articles of the UK Prospectus Regulation, relate to the necessary information and risks to be disclosed which are material to an investor being able to make an informed investment decision.

ClientEarth’s claim was directed against the FCA rather than Ithaca directly by way of judicial review, but Ithaca participated in the proceedings as an interested party. For those not familiar, judicial review is a method of challenging the decisions of public bodies or authorities, like the FCA, where they have erred in their application of the law, failed to take into account relevant considerations, or taken decisions irrationally. ClientEarth argued that in approving Ithaca’s prospectus the regulator had:

• Erred in its application of the UK Prospectus Regulation, as the prospectus failed to meet the disclosure requirements on its climate-related risks required under Article 16, and
• Acted irrationally in concluding that the prospectus contained all necessary material information for investors on Ithaca’s financial position and prospects, as required under Article 6.
  
  

The FCA robustly defended the application, arguing that it is not part of the FCA's function, when approving a prospectus pursuant to s87A FSMA 2000, to evaluate the extent to which a prospectus may or may not promote climate change mitigation or net- zero targets.

The Decision

The Court dismissed ClientEarth’s application, holding that:

• There was no arguable case that the FCA had erred in its application of law; the FCA’s interpretation was “plainly correct” on a natural reading and, in any case, as an expert regulator, it was entitled to make an exercise of judgment in coming to its decision.
• The claimant did not “come close to demonstrating” that the FCA acted irrationally, which was a “high hurdle” to overcome.
  
  

Notably, the Court also refused to classify the claim as "environmental" for costs purposes. The Aarhus Convention limits costs recoverable between parties where a claim is brought by judicial review in relation to laws relating to the environment. The judge held that the relevant law in this case was not sufficiently related to the environment to trigger protection for ClientEarth, a decision which could discourage similar claims being brought in future.

Implications

The decision affirms the FCA’s discretion in exercising judgment and provides more certainty to firms that decisions made by regulators are unlikely to be reversed by third party environmental challenges. This is relevant not only to corporate issuers, but also more broadly to firms regulated by the FCA and other regulatory bodies.

On the other hand, the judgment does not show that the FCA could not in other circumstances have been found to have acted irrationally or in error. It was notable that the judge largely agreed with the FCA’s interpretation of the law in this specific case and did not solely rely on a respect for the FCA’s broad discretion.

Unsuccessful claims of this sort may also still serve to place scrutiny on regulators and put companies such as Ithaca under the public spotlight for their climate-related practices. A recent paper from the Grantham Research Institute on climate change and the environment found that the mere fact of litigation can materially impact the share price of a company. The risk of litigation may therefore encourage some firms to take a more cautious line with their climate-related disclosures and practices.

ClientEarth had sought to intervene back in November 2022, when Ithaca was preparing to list. The NGO wrote to the FCA outlining its concerns on Ithaca’s climate risk disclosures which resulted in some changes being made to the draft prospectus, although these changes did not go far enough for ClientEarth. This illustrates that NGOs are taking a targeted interest and are not afraid to intervene where they consider companies are not doing enough to disclose and address climate risks.

It also remains open that firms may be directly challenged or reported to regulators in relation to insufficient or inaccurate climate-related disclosures.

This case comes at a time of increasing regulation in relation to climate change and sustainable finance. The Task Force on Climate-related Financial Disclosures (TCFD) reporting requirements, which apply to premium or standard listed companies, are being extended on a phased basis for asset managers, life insurers and FCA regulated pension providers. For authorised firms, the FCA’s anti greenwashing rules will apply from 31 May 2024 and for firms in scope the new sustainable investment labelling and disclosure rules will also come into force during 2024. Find out more here.

With thanks to Leo Salem, current trainee in the team, for their help in preparing this briefing.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, February 2024