ClientEarth sues FCA over inadequate climate disclosure

What’s happening? Non-profit ClientEarth has filed a case against the UK’s Financial Conduct Authority (FCA), accusing it of acting unlawfully in approving oil and gas firm Ithaca Energy’s prospectus. ClientEarth said Ithaca Energy’s disclosures do not adequately explain climate-related risks or how significant these risks are. The FCA’s inability to spot this omission is problematic due to the company’s plan to develop new fossil fuel assets, the ClientEarth lawyers said. Investors are able to make more informed decisions by making use of climate risk disclosures from companies, ClientEarth said. (ESGClarity)

Why does this matter? ClientEarth often takes legal action against companies regarding their failure to act on climate change – for instance, earlier in the month ClientEarth filed a lawsuit against the Board of Directors at Shell for failing to manage the climate risks faced by the company. However, this is the first time ClientEarth has taken legal action against a regulator for failing in their duties.

Stranded asset risk – The FCA is unable to approve a prospectus unless it fulfils the criteria of the UK’s prospectus regulation. These rules require companies to disclose all relevant risks to investors. ClientEarth has said that Ithaca Energy’s plan to develop new oil and gas projects, including the Cambo and Rosebank oil fields in the North Sea, presents risks to investors due to carbon lock-in and stranded assets.

A report has previously estimated that more than $1tn in profits could be lost from stranded fossil fuel assets. Additionally, a report from the International Institute for Sustainable Development has said that the development of new oil and gas fields is not compatible with the 1.5C target set by the Paris Agreement.

Despite these risks linked with its activities, Ithaca Energy does not properly explain them in its prospectus, ClientEarth said. Failing to provide this information as well as information on how the company’s business will be affected by the achievement of the Paris Agreement prevents investors from making an informed assessment of how Ithaca will be affected by the net zero transition, the group added.

Investors demand action – Providing this information is vital, particularly since some investors such as Sarasin & Partners have said they will vote against company directors and auditors where there is insufficient action to align operations and strategies with a 1.5C pathway. Additionally, Rathbones Investment Management has said that ensuring company accounts are aligned with a 1.5C future is a critical part of its commitment to become a net zero investor.

Rise in climate lawsuits – Environmental activists have increasingly been using legal action to drive change at companies, governments and now regulators. The number of climate lawsuits filed globally has more than doubled since 2015, according to the London School of Economics.

In June 2022, Friends of the Earth and ClientEarth challenged the European Commission over plans to fast-track 30 gas projects worth a total €13bn ($14bn). The NGOs claimed that methane emissions from the schemes were not considered, breaking EU climate laws.

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