ClientEarth’s renewed application for permission to apply for judicial review of the decision of the FCA to approve the prospectus of Ithaca Energy plc (Ithaca) has been refused by the High Court.

The high-level approach taken by the court to evaluating the risk factors in Ithaca’s prospectus and the Court’s emphasis on the expertise of the FCA as regulator in this area combined with the decision to refuse ClientEarth the cost protection afforded by the Aarhus Convention may serve to deter similar claims being brought in the future.

Factual background

The background to this claim concerns events leading up to Ithaca’s listing on the London Stock Exchange, hailed as the largest IPO of 2022.

On October 18, 2022, Ithaca’s registration document was initially approved and published by the FCA. After receiving correspondence from ClientEarth, the FCA, no doubt mindful of European Security and Markets Authority guidelines that set out when regulators should consider challenging issuers, wrote to Ithaca. Ithaca subsequently expanded the section of its proposed prospectus that dealt with climate change risk factors.

The final version of Ithaca’s 461-page prospectus, titled The Strength of the North Sea, was published on November 9, 2022 (the Prospectus). It made extensive reference to the risk factors associated with climate change and climate change activism, including a reference to ClientEarth’s High Court derivative claim against Shell. [1]

Grounds for judicial review

On February 8, 2023, ClientEarth commenced judicial review proceedings against the FCA alleging that the regulator’s decision to approve the Prospectus was unlawful. ClientEarth’s judicial review grounds were that:

• Ground 1: The FCA erred in law by approving the Prospectus in circumstances where the Prospectus failed to disclose, or describe adequately, Ithaca’s assessment of the materiality of its climate-related financial risks, in breach of Article 16 of the Prospectus Regulation.
• Ground 2: The FCA erred in law by approving the Prospectus in circumstances where the Prospectus failed adequately to disclose or describe the specificity of the climate-related risks associated with Ithaca’s securities, in breach of Article 16 of the Prospectus Regulation.
• Ground 3: The FCA’s conclusion that the Prospectus contained the necessary information which is material to an investor for making an informed assessment of Ithaca’s financial position and prospects, as required by Article 6 of the Prospectus Regulation, was rationally unsustainable.

The judgment

Mrs Justice Lang DBE’s judgment dated December 13, 2023 rejected ClientEarth’s renewed application for judicial review on all three of the above grounds; each ground was held to be unarguable and with no realistic prospect of success.

On Grounds 1 and 2, the court held that Parliament had conferred upon the FCA responsibility for approving the Prospectus and, therefore, any challenge to the FCA’s decision could only be made on public law grounds. The court described the FCA as an expert regulator, and the court would not substitute its views, or ClientEarth’s views, for the considered judgment of the FCA.  

On Ground 3, the judgment notes that the Paris Agreement was identified as a material risk for the business in the Prospectus, ClientEarth and Ithaca presented competing arguments as to its compatibility with the Paris Agreement and the difference of views was referenced in the Prospectus.

For the purposes of determining which party was responsible for the legal costs of the case, the court held that this claim was not covered by the Aarhus Convention[2] for the purpose of CPR 46.24(2)(a), which affords costs protection to a claimant and limits its liability to the other party to £10,000 ($12,600). The court found that there was not a sufficiently close connection to the environmental factors regulated by the Aarhus Convention, and even if ClientEarth’s claim succeeded, it would not have significant environmental benefits.

What conclusions can we draw? 

The omission of any reference in the Prospectus to the fact that one of the International Energy Agency’s Net Zero Report pathway key milestones was no new oil and gas projects beyond 2021 likely motivated ClientEarth to commence judicial review proceedings against the FCA.[3] The International Energy Agency (IEA) is an intergovernmental organization made up of 31 member countries accounting for 80% of global energy consumption and 62% of global energy consumption.

The Prospectus makes over a hundred references to the IEA, including stating that the trends identified by the IEA are “emblematic of a shift in the energy landscape since the Paris Agreement”.[4] However, prior to the COP 26 held in Glasgow in 2021, one of the key milestones identified by the IEA in its Net Zero pathway published in May 2021 was that there was no need for investment in new fossil fuel supply and that “beyond projects already committed as of 2021, there are no new oil and gas fields approved for development in our pathway, and no new coal mines or mine extensions are required”.[5] 

This key milestone in the IEA’s Net Zero pathway is not mentioned in the Prospectus and ClientEarth’s position was that Ithaca’s planned business operations failed to adequately describe the climate risks associated with Ithaca’s activities, including the development of the Cambo and Rosebank oil and gas fields in the North Sea.

The High Court judgment refusing ClientEarth permission to proceed with its claim against the FCA does not address this aspect in any detail, in light of the Court’s emphasis on the regulator’s expertise in its area. Whether the high-level approach taken in this decision will deter future claims of a similar nature is uncertain. Climate activists are unlikely to be willing to compromise on what they consider that the science of climate change demands. Indeed, the Prospectus acknowledges that climate-related litigation is likely to continue and that there may be an increase in climate-related litigation and challenges.[6]

Future reporting requirements, based on the Task Force on Climate-related Financial Disclosure, may also impose more specific quantitative climate reporting obligations on energy companies attempting to raise funds to finance their operations for new oil and gas production and development activities in the North Sea.

Determining that the cost protection afforded by the Aarhus Convention does not apply to this kind of claim may serve as a deterrent to future judicial review applications of this nature against the FCA. That decision is consistent with the Court’s view that whilst the FCA is an expert regulator in financial matters it is not an expert in environmental matters, including assessing the materiality of the risks associated with energy and climate change.

Full judgment citation: R (on the application of ClientEarth) v Financial Conduct Authority v Ithaca Energy plc [2023] EWHC 33001 (Admin)

[1] Page 18 of the Prospectus

[2] An Aarhus Convention claim is defined by CPR 46.24(2)(a) as “a claim brought by one or more members of the public by judicial review or review under statute which challenges the legality of any decision, act or omission of a body exercising public functions” which is within the scope of Article 9(3) of the Convention and other provisions

[3] ClientEarth litigation against the FCA FAQs document dated February 2023

[4] Page 126 of the Prospectus

[5] Page 20 of Net Zero by 2050: A Roadmap for the Global Energy Sector by the IEA

[6] Page 18 of the Prospectus