Drax Group (Drax) announced on Thursday that it was subject to an investigation by the Financial Conduct Authority (FCA), as confirmed by the FCA later that day.

The investigation covers “the period January 2022 to March 2024 relating to certain historical statements regarding Drax's biomass sourcing and the compliance of Drax's 2021, 2022 and 2023 Annual Reports with the Listing Rules and Disclosure Guidance and Transparency Rules”.  Drax confirmed that it would cooperate with the FCA.

Background to Drax

Drax is a FTSE 250 company, engaged in renewable power generation, the production of sustainable biomass and the sale of renewable electricity to businesses. It is the UK’s largest single source of renewable electricity, with its power plant near Selby producing nearly 5% of the UK’s electricity, burning compressed wood pellets. Its four biomass domes are taller than Blackpool Pleasure Beach’s roller coaster ‘The Big One’, and store up to 80,000 tonnes of biomass, producing around 14 terawatt-hours (TWh). Drax maintains that its biomass generation qualifies as renewable on the basis that it forms part of a ‘closed carbon cycle’: CO₂ released during combustion is reabsorbed by the growth of sustainably managed forests over time. In its reports, Drax emphasises that most pellets are made from sawmill residues and low-grade wood, and that sustainable sourcing practices, backed by certification schemes and internal monitoring, ensure that overall forest carbon stocks continue to increase. 

Recent concerns around sustainability

However, the FCA’s investigation follows recent concerns over the sourcing of its wood for the biomass pellets. 

• In 2022, a BBC documentary alleged that Drax was cutting down old-growth forests in Canada to produce its biomass pellets, contrary to Drax’s assertion that its biomass is sustainably sourced.
• In August 2024, following its own investigation, Ofgem found that Drax had not complied with its mandatory requirement to give Ofgem accurate and robust data on the exact types of Canadian wood it utilises. Drax accepted that it had weak procedures, controls and governance which resulted in inaccurate reporting of data about the forestry type and sawlog content it used. Drax agreed to pay £25m towards a voluntary redress scheme and resubmit its profiling data for Canadian-sourced wood pellets.
• Further concerns were then raised in March by a whistleblower, a former Drax head lobbyist, who alleged that Drax was using unsustainable wood and could not prove that it only sourced sustainable wood.

Off the back of these concerns, the FCA is now investigating whether Drax made misleading statements to the market over its sourcing of wood for its biomass production.

Environmentalists argue that carbon accounting by the biomass industry is flawed, since the production of carbon by burning biomass is immediate, whereas it can take decades to grow new trees to absorb the equivalent amount of carbon. Further, the House of Commons public accounts committee has warned that the biomass industry was potentially ‘marking its own homework’ on the question of sustainability. 

Where around £22 billion in biomass-related renewable energy subsidies is understood to have been distributed since 2013 (including over £7 billion to Drax), Drax and other companies are reliant on government funding. There are consequently significant questions around whether biomass production is as sufficiently green as Drax and other renewable companies make out to justify this level of public funding.

Against that backdrop, the FCA’s investigation will turn on whether Drax’s reporting met the standards expected of any listed company. The key obligations under the FCA’s Listing Rules (LR) and Disclosure Guidance and Transparancy Rules (DTR) can be summarised as follows: 

What the FCA rules say (in plain English):

LR focus on how listed companies behave and what they disclose to the market, including:

• Listed companies must ensure market disclosures are accurate and not misleading
• Listed companies must have proper systems and controls to support compliance
• Premium-listed companies must act with integrity and avoid creating a false market
• Annual reports must include climate-related disclosures consistent with the Task Force on Climate-related Financial Disclosures (TCFD)

DTR focus on ongoing transparency and reporting obligations, including:

• Reports and announcements must not be false, misleading or deceptive
• Inside information must be disclosed promptly if it could affect investor decisions
• Annual reports must include audited accounts, a management review, and a balanced disclosure of principal risks (including environmental matters)
• Corporate governance statements must explain risk management and internal controls over financial reporting (covering the robustness of sustainability disclosures)

These requirements mean that the FCA’s investigation will likely focus squarely on whether Drax’s annual reports and market statements gave a fair, accurate and complete picture of its biomass sourcing and sustainability claims.

Potential impact of the FCA’s investigation

While the FCA’s investigation will be focussed on the specifics around Drax’s sustainability practices and market disclosures, it remains to be seen what longer-term impact the FCA’s investigation may have on the wider issues around the biomass - and indeed wider renewables - industry. 

The investigation is likely to give more oxygen to the questions that the industry is facing, and renewables companies will be under increasing pressure to justify and evidence their sustainability.  In particular, they will need to place additional focus on the accuracy of any statements they make to the market with regard to their green credentials. For Drax, this means demonstrating in a way that is verifiable that all biomass is sustainably sourced as claimed.

It is worth noting that the FCA already has long-standing powers to act where listed companies make misleading statements in their reports or market announcements – this investigation is not a new expansion of its remit. However, what makes the Drax case noteworthy is the FCA’s decision to apply those tools specifically to ESG-related disclosures. This reframes sustainability claims as a market integrity issue, not merely a reputational or consumer marketing issue. 

If the FCA ultimately concludes that Drax’s annual reports overstated its green credentials, this would suggest an enforcement climate where misleading ESG statements, like any other material misrepresentation, can trigger the same enforcement tools as financial disclosures. That could include restatement obligations, financial penalties, or public censure. Other listed renewables companies should expect the FCA to probe more deeply into how they evidence their green claims, particularly where these underpin subsidy support or investor funding. 

Renewables companies will keep a concerned eye out for how the FCA’s investigation progresses, and whether any findings in due course will have a direct impact on their reporting obligations as well as the wider industry. The lesson is clear: ESG claims are no longer just reputational – they are regulatory disclosures carrying investigations and enforcement risk.

Burness Paull has leading investigations and financial services regulatory practices.

• Our cross-practice investigations and inquiries team has wide-ranging experience across numerous practice areas, and first-hand experience of dealing with a wide range of regulators, prosecuting authorities, semi-regulatory bodies, professional regulatory bodies and public inquiries.
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If you are reviewing the robustness of your own ESG disclosures in light of this investigation, our teams are on hand to help you benchmark against FCA expectations - please get in touch to discuss your needs.

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