The FCA raises the ESG stakes, but receives scrutiny of its own

The FCA raises the ESG stakes, but receives scrutiny of its own


UK financial watchdog, the Financial Conduct Authority ("FCA"), issued a "Dear CEO" letter to asset managers last month, setting out its Asset Management Supervision Strategy.

The letter addressed its supervisory approach and priorities, which included ESG investing.  Interestingly, shortly afterwards, ClientEarth filed a judicial review claim against the FCA over its decision to approve the prospectus of Ithaca Energy plc, a company with interests in North Sea oil and gas fields.  This comes at a time when regulators such as the FCA are already under considerable pressure to address ESG concerns such as greenwashing and climate change disclosures, and it would seem that the FCA's attempt to address these issues is not keeping pace with activist expectations.

The FCA's "Dear CEO" letter

The FCA's "Dear CEO" letter, directed towards asset managers, notes the "increase in the prominence of ESG and sustainable investment products in Asset Managers' business strategies". The letter states that claims about ESG and sustainable investing risk being misleading or inaccurate, which may negatively impact the integrity of UK financial disclosures, and harm consumer confidence to invest.  Although the FCA choose not to use the term in their letter, this type of risk is commonly referred to as "Greenwashing", something we have recently written about in our Alternative Insights publication.  For more on the FCA's recent regulatory focus on asset management, see our detailed briefings on the FCA's scrutiny of TCFD disclosures and on the FCA's previous guidance on its supervisory priorities for alternative asset management firms

In its most recent letter, the FCA goes on to state that it intends to test whether firms deliver on claims made in communications with investors, with a focus on ensuring that governance bodies are appropriately structured to oversee and review management information about ESG and sustainability integration in investment processes. This suggests that the FCA will be paying close attention not just to claims about ESG credentials, but also in relation to the way in which firms scrutinise ESG credentials internally. 

Of course, prudent asset managers have been cognisant of "greenwashing" and other types of ESG risk for some time, but careful attention should be paid to the FCA's apparent reemphasis of these points.  Certainly, no firm should see ESG disclosures as "soft" statements (not least because of the introduction of mandatory TCFD disclosures) and approach them on the basis that they are essentially corporate marketing/PR: ESG disclosures can be used by claimant law firms to bring ESG-related litigation.  While multinationals have particularly felt the brunt of this over recent years, asset managers could also be subject to the same type of risk, particularly where their businesses have a global reach, and especially where they include subsidiary operations in challenging environments and emerging markets.  This is the driver of much of the parent company and value chain action that we have started to see in the UK.

The ClientEarth judicial review claim against the FCA

Climate change activists ClientEarth have filed a judicial review claim against the FCA relating to the approval of a prospectus issued by Ithaca Energy plc in November 2022. Under the FCA's Prospectus Regulation Rules, the FCA's approval is required for certain prospectuses, including in relation to risk disclosure obligations.  The core of ClientEarth's complaint is that the FCA, in approving the prospectus, failed to take account of the (alleged) inadequacy with which Ithaca described climate-related risks of the operation of its oil & gas activities. 

The prospectus in question did, in fact, contain a reference to climate-related risk factors (as ClientEarth acknowledges in its press release). However, ClientEarth state that:

"…the risks disclosed are of too general a nature to leave investors fully informed or to meet Prospectus Regulation requirements … the prospectus does not address the apparent conflict between Ithaca’s intention to develop new fossil fuel assets that would operate for decades and the International Energy Agency’s conclusion that no new fuel fossil fuel infrastructure can be built if the world is to meet a 1.5 warming target … Ithaca fails to explain how its business model and financial prospectus would need to change, or be affected, if the Paris Agreement goals are to be achieved … ClientEarth is also arguing that the above information is vital to investors if they are to make an informed assessment of the company's financial position and therefore should have been provided in the prospectus."

The judicial review claim is against the FCA, and Ithaca is not a party to it. Further, ClientEarth is not seeking to challenge the validity of Ithaca's listing but, rather, is challenging the FCA's approval of the prospectus.  In effect, it seems to be aimed at changing the standards the FCA will apply when it is asked to approve prospectuses in the future, rather than seeking any retrospective amendments to the Ithaca prospectus. 


It is fascinating to see how these pressures on the FCA play out. Just as the FCA is trying to raise the standard in one area of corporate disclosures, it is being pressed by activist groups to change (and in the eyes of activists improve) its own standards in another area.  How the FCA navigates this should be carefully followed (not to mention that other regulators in a similar position will, no doubt, be watching with interest).

ClientEarth's position is also very interesting.  In the recent past, it has seen the FCA's role in regulating listed companies as a key tool with which to drive its climate change activism.  In August 2021, ClientEarth referred Just Eat and Carnival cruises to the FCA for their alleged failure to "handle the impacts climate change and the energy transition will have on their businesses".  Now, however, it seems that ClientEarth is not content simply to pressure the FCA in respect of its approach to enforcement: it wants to change the way the FCA applies its own rulebook.

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