Court refuses ClientEarth judicial review of FCA’s decision to approve Ithaca Energy prospectus

On 13 December 2023, English High Court denied an application for judicial review by the environmental law charity, ClientEarth, regarding the decision taken by the Financial Conduct Authority (FCA) to approve the prospectus of an oil and gas exploration company, Ithaca Energy Plc (Ithaca).¹

 

Key Takeaways

• This was a creative attempt by an environmental organisation to put climate change on the agenda using existing legal and regulatory regimes.
• The court held that, regardless of the potential environmental context, it would not intervene in relation to the FCA’s decision approving Ithaca’s prospectus, since it could not be proved that the FCA had erred in law, failed to take into account relevant considerations, or made an irrational decision.
• The court emphasised the primacy of the FCA’s authority in approving or rejecting a company’s prospectus.

 

Background

The issues arose as a result of Ithaca’s listing on the London Stock Exchange in 2022, the biggest public listing of that year. Ithaca’s prospectus was initially approved by the FCA pursuant to s87A Financial Services and Markets Act 2000 (FSMA) and published on 18 October 2022. ClientEarth raised concerns with the FCA regarding the document’s failure to properly address climate-related financial risks. Their complaints centred on the apparent conflict between Ithaca’s intention to build new fossil fuel infrastructure and the objectives set out in the Paris Agreement (a legally binding international treaty on climate change which entered into force in November 2016).

In light of ClientEarth’s concerns, the FCA published a revised and final version of Ithaca’s prospectus, which expanded on climate-related risks. However, ClientEarth were not satisfied with the changes and applied for judicial review of the FCA’s decision to approve the prospectus on three grounds:

1. Grounds 1 and 2: The FCA erred in law by approving the prospectus, since it failed adequately to disclose or describe the materiality (Ground 1) and specificity (Ground 2) of climate-related risks in breach of Article 16 of the Prospectus Regulation (EU) 2017/1129 (Prospectus Regulation); and
2. Ground 3: The FCA’s conclusion that the prospectus contained the necessary information, material to making an informed assessment of Ithaca’s financial position, in accordance with Article 6 of the Prospectus Regulation, was “rationally unsustainable” (Ground 3).

 

Court’s Decision

The High Court refused ClientEarth’s application on all grounds; stating that each one was “unarguable” and had “no realistic prospect of success”.²

On Grounds 1 and 2, it was held that Parliament had conferred upon the FCA the responsibility for approving a prospectus, and thus, it could only be challenged on public law grounds.³ The Court accepted the FCA’s submission that the requirements of Article 16(1) are not “hard-edged” (meaning that they required an evaluative judgment to consider whether they had been met). However, the Court noted that the FCA has a broad discretion to exercise its expert judgment, and the Court would not substitute its own view as to whether an issuer had disclosed risk factors that were “material” and “specific” to the issuer, unless the FCA had misdirected itself on the law when making its assessment. In this case the prospectus referred to the possibility of climate activism negatively impacting Ithaca’s ability to obtain approval for further development, as well as a potential material adverse effect on the hydrocarbon industry and the group’s business, financial condition and results of operation, which was sufficient.

On Ground 3, the Court held that ClientEarth had not satisfied the high threshold of proving that the FCA’s decision was irrational. ClientEarth pointed to a market technical note (TN 801.2) in which the FCA states that companies may need to address climate change and other ESG-related matters in a prospectus and suggested that Ithaca had failed adequately to do that. However, Ithaca’s prospectus identified the Paris Agreement as a material risk for the business, and even set out the differing views of ClientEarth and Ithaca on compatibility with the Paris Agreement. As a result, the FCA’s decision to approve the prospectus was not irrational.

 

Costs and the Aarhus Convention

ClientEarth raised a further, novel argument, that in the event its application was unsuccessful, it should not be liable for the costs of the application, on the basis that the claim was an “Aarhus Convention” claim (in which recoverable costs are limited by CPR 46.24).⁴ This applies to claims brought by members of the public for judicial review, which challenge a contravention of national law relating to the environment.

The Court accepted that ClientEarth was a member of the public for the purposes of the Aarhus Convention but found that it did not satisfy the environmental claim limb. The claim was about the decision to publish a prospectus, and therefore primarily concerned investor protection and the proper functioning of markets. While some of the risk disclosure requirements arising from the Prospectus Regulation may arise from environmental considerations, the purpose and effect of the Prospectus Regulation and s87A FSMA is to ensure the disclosure of risks that are financially material to the issuer and its securities; not to protect or otherwise regulate the environment. Any connection to the environment was therefore incidental and remote.

 

Significance of the Judgment?

ESG-related claims are becoming increasingly broad and complex in their scope. Shareholder activists and other stakeholders are continuing to identify new routes to try and exert pressure on companies to alter their ESG policies and practices, including via climate-related litigation against public financial institutions and regulators such as the FCA. For example:

• In 2021, the Australian case of Abraham v Commonwealth Bank of Australia⁵ was an early example of a case brought by shareholders of a financial institution which resulted in a bank being required to disclose internal documents to establish whether it was complying with its commitments on climate change.
• In 2023, using its position as a minority shareholder of Shell to give it standing to bring the claim, ClientEarth attempted to bring a derivative claim against the directors of the company citing Shell’s alleged failures to implement a climate strategy that would achieve the company’s net-zero targets. The claim was denied at the permission stage.

In this case, the Court’s acceptance of Ithaca’s disclosure of relevant risk factors in its Prospectus (available on the FCA’s National Storage Mechanism here), can provide some reassurance and guidance to companies with respect to the level of detail that is required when disclosing climate-related risks. The decision also emphasises the FCA’s primacy in its decision making: the Court will not overturn a decision to approve a prospectus unless it has grossly misdirected itself.

It is important to note that, although the stated aim of the claim itself was denied; the Court did accept that ClientEarth had standing to pursue environmental judicial review claims on a public interest basis, citing its expertise and its mission to ensure that public bodies act in accordance with their legal obligations in relation to the climate crisis. Companies, particularly those in the ENR sector, should continue to focus on mitigating risks associated with climate or environmental issues, including building robust ESG policies into their decision-making protocols at every level of the business, and being proactive in the identification and assessment of those risks.

Finally, the decision on costs and the Aarhus Convention may serve as a deterrent to future judicial review applications of this nature, as it is a reminder that applications will need to satisfy that the nature of the claim itself has a sufficiently close connection to the environment, and not just the nature of the decision being disputed.

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¹R (on the application of ClientEarth) v Ithaca Energy Plc [2023] EWHC (Admin), judgement available here.
²See judgment, [20] and [28].
³R (on the application of ClientEarth) v Financial Conduct Authority [2023] EWHC 3301 (Admin), [20-21] relied on.
⁴The Aarhus Convention, to which the UK is a signatory, is an international agreement promoting access to environmental information and public participation in environmental decision-making.
⁵Abrahams v Commonwealth Bank of Australia, NSD864/2021