The UK's financial regulator has been hit with a legal challenge over its decision to approve the prospectus documents of an oil and gas company that allegedly failed to meet a legal requirement on climate-related risk disclosure.
Environmental law charity ClientEarth revealed it had lodged the suit with the High Court against the Financial Conduct Authority, alleging the regulator had failed in its legal duty when it approved the prospectus from Ithaca Energy, a company with significant interests in the controversial Cambo and Rosebank oil and gas fields in the North Sea.
Under current legislation, a company can only list on UK markets after the FCA has reviewed and approved its prospectus, which should provide a summary of the key information about the company and the risks potential investors might be exposed to.
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ClientEarth claims the regulator acted unlawfully when it approved Ithaca Energy's prospectus last November, a decision which enabled the oil and gas company to complete its initial public offering and list on the London Stock Exchange.
It is now up to the High Court to decide whether to grant permission for the claim, which has been filed as a judicial review case, can go ahead. The FCA has said it would call for the petition to be quashed.
"ClientEarth needs to obtain permission from the court before bringing this claim and the FCA intends to oppose permission being given in this case," a spokesperson said.
Robert Clarke, accountable finance lawyer at ClientEarth, said the prospectus had failed to set out the "massive risks" associated with its own plans to ramp up production of oil and gas in the North Sea which were "fundamentally incompatible" with global climate goals.
Energy and climate experts have warned that no new fossil fuel infrastructure should be developed if global temperature increases are to be capped at 1.5C, the limit set out in the Paris Agreement.
Despite acknowledging in broad terms that climate change, climate legislation, carbon pricing and shifting perceptions of fossil fuels "may have a material adverse risk" to the oil and gas industry, Ithaca Energy's prospectus stops short of setting out how climate change and associated regulations and market trends could affect its business specifically, nor does it detail how serious these risks could be, ClientEarth alleges.
Ithaca Energy is one of the largest players in the North Sea and the majority shareholder of the controversial Cambo oil field, which has become a key battleground for climate campaigners who have warned its development will undermine the UK's ability to meet climate goals. Oil supermajor Shell owns the remaining 30% of the field, but announced last year that it plans to sell its shares in the project.
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Clarke said the regulator's decision to approve the prospectus without questioning Ithaca Energy's climate risk reporting meant it was failing in its duty to protect investors.
"One of the financial regulator's main duties is to protect investors," he said. "A key way it does that is by ensuring companies that apply to list on the London Stock Exchange adequately disclose the risks associated with their activities, including climate-related risks, in the prospectus as required by law. In the case of Ithaca's listing, we believe the regulator has failed when it comes to this fundamental function by ultimately waving through Ithaca's prospectus even though legal requirements have not been met."
Clarke added that the prospectus approval "raises serious questions" about the credibility of the government's ambition to establish the UK as the world's first net zero aligned financial sector. "We welcome the FCA's recent moves to introduce new disclosure rules on climate but it's absolutely vital that it applies and enforces existing rules too, especially during the listing process," he said.
In response to the legal action, a spokesperson from Ithaca Energy said: "We note the response of the Financial Conduct Authority and at this stage it would not be appropriate for us to comment further."
