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Judicial review challenge of the UK FCA by environmental charity - spotlight on disclosure risks

ClientEarth (an environmental charity) is challenging a decision by the UK Financial Conduct Authority (the FCA) to approve a prospectus of an energy company on the basis that it contains inadequate climate-related disclosures.  Amongst other things, ClientEarth alleges that the prospectus did not explain how climate change risks affect the specific business of the company, or how significant those risks were to the company, and that it did not sufficiently cover the impact of the Paris Agreement on the company’s business and finances.  We consider here the key points for corporates arising from this claim for judicial review.

Global increase in climate litigation

Non-governmental organisations (NGOs) and pressure groups commence a significant amount of climate litigation worldwide, often in an effort to put pressure on companies to change their behaviours by trying to ‘name and shame’ them.  In addition, many NGOs report companies to regulators requesting that they take enforcement action in relation to climate-related impacts, disclosures and advertising, as shown by ClientEarth previously reporting numerous corporates to the Financial Reporting Council and the FCA in respect of climate disclosures in annual reports.

This year, we may also see a rise in judicial review challenges against regulators themselves in the context of both climate change and human rights.  This is the first time that ClientEarth has targeted the FCA and, depending on the outcome, it could set the scene for further similar challenges against different regulators.  Corporates may in turn experience greater regulatory scrutiny. Such developments highlight the need for corporates to strengthen their capabilities in managing enforcement risks, particularly in relation to climate-related disclosures and supply chain considerations.

Corporates’ obligations regarding disclosure of climate-related risk

Although the FCA’s recent focus has been on sustainability disclosure obligations in the financial services industry, it has taken significant steps aimed at enhancing the adequacy of climate-related financial disclosures by corporates, by applying Taskforce on Climate-related Financial Disclosures (TCFD)-aligned disclosure requirements to premium listed issuers and certain standard listed issuers.  Listed companies may also be required to make disclosures on climate-related and other environmental, social and governance (ESG) matters in certain circumstances under other provisions of the Listing Rules, Disclosure Guidance and Transparency Rules, Market Abuse Regulation and Prospectus Regulation.

In respect of prospectuses, the FCA has noted in a Primary Market Technical Note (December 2021) that, amongst other things:

  • Article 6 of the Prospectus Regulation requires a prospectus to contain all “necessary information which is material to an investor for making an informed assessment of (amongst other things) the assets and prospects of the issuer and of the reasons for the issuance and its impact on the issuer”, which could include consideration of significant changes to a company’s business in light of the UK Government’s net zero goal and the Paris Agreement.
  • Recital 54 of the Prospectus Regulation specifically refers to the potential inclusion of ESG risk factors in a prospectus, and that risk factors should be material and specific to the issuer and its securities, rather than any generic risk factors.

Primary Market Bulletin 42 (December 2022) includes a reminder that the FCA’s guidance on ‘Getting ready for TCFD-aligned disclosures’ may be of interest to prospective issuers in considering how climate-related risks and opportunities should be reflected in their prospectus. This includes improving internal processes, deepening familiarity with the TCFD’s recommendations, and engaging with investors to understand their disclosure expectations.

The FCA holds the important role of approving prospectuses, in effect acting as a gatekeeper to companies’ access to equity capital markets in the UK.  This function, in particular the qualitative assessment of climate risk disclosures to ensure that investors are enabled to make informed decisions, has come under scrutiny from ClientEarth.

The judicial review challenge relating to the FCA’s approval of the prospectus

This claim relates to the FCA’s decision to approve the prospectus of an energy company, which ClientEarth alleges had significant interests in oil and gas fields in the North Sea.

ClientEarth wrote to the FCA twice in advance of the listing of the energy company in late 2022, in order to raise its concerns about the alleged inadequacy of disclosure of climate-related risk in the prospectus.  The energy company added further information into the final prospectus, which was then approved by the FCA.  ClientEarth however argues that the FCA acted unlawfully by approving the prospectus, as it alleges that the energy company’s disclosures still failed to “adequately describe the climate-related risks faced by the company” and therefore breached the Prospectus Regulation.

The prospectus acknowledged the risks presented by climate change to the oil and gas industry, including noting that the effects of climate change may have a material adverse effect on the hydrocarbon industry and on the energy company.  Nonetheless, ClientEarth submits that the disclosures were too general in nature and did not explain how such risks affected the specific business of, or how significant the risks were to, that energy company.  ClientEarth alleges that the “FCA’s failure to spot this omission is particularly problematic” due to, amongst other things, the energy company’s intention to develop new fossil fuel assets.  ClientEarth also argues that the prospectus did not explain how the energy company’s business and finances “might be affected by full or even partial achievement of the Paris Agreement goal”.  It claims that these points result in a lack of necessary information for an investor to make an informed assessment of the company’s financial position.

A potential climate-related hearing on the horizon

The English High Court will now decide whether to grant permission for ClientEarth to bring the claim against the FCA.  If the claim proceeds, ClientEarth is seeking a declaration from the High Court that the FCA’s approval of the prospectus was unlawful.  ClientEarth is not, however, challenging the validity of the energy company’s listing nor arguing that the company should be delisted.

This claim focuses on the FCA’s accountability as approver of the prospectus, but that does not mean that it has no potential impact on corporates, other participants in the listing process or other regulators.  It serves as an important reminder that environmental charities (and other NGOs) will use strategic litigation to seek to put pressure on companies and regulators and drive the public’s attention to issues of concern for the NGOs.  If this particular claim is successful, it may also affect how the FCA performs its approval function (and potentially other functions) in the future. Regardless of the outcome, this claim highlights the importance of companies taking steps to ensure that their ESG-related disclosures are able to withstand the spectrum of potential challenges that such disclosures may trigger.