SEC Takes Action Against Fraudulent ESG Disclosures

As the US Securities and Exchange Commission (SEC) and other government agencies have increased their attention on Environmental, Social, and Corporate Governance (ESG), there has been speculation that companies would soon be at greater risk of ESG litigation. While the reputational impacts of non-compliance with a company’s stated ESG objectives can be significant, companies have thus far largely escaped legal consequences. This could be changing, as we start to see more activity from the SEC and its ESG Task Force.

 

SEC v. Vale SA

On April 28, 2022, the SEC filed a civil action suit against a Brazilian corporation, Vale SA (Vale), in which the SEC alleged Vale had violated securities laws by making false and misleading disclosures about the safety and stability of its Brumadinho dam. The SEC alleged that, prior to the 2019 burst dam that led to the death of 270 people and widespread environmental damage, the company had concealed material information from its dam safety auditors and falsely claimed in sustainability reports and other public statements that 100% of its audited structures had been certified to be in stable condition.   

What This Means for ESG Reporting

The lawsuit demonstrates that the SEC is taking seriously its commitment to identify false and misleading ESG disclosures and related misconduct. With the recently released proposed climate disclosure requirements, we can expect to see increased enforcement actions related to statements on climate risk, however, this action signals that the SEC is likely looking beyond just climate risk to broader ESG issues.

Greenwashing, the practice of providing misleading information regarding a company’s sustainability credentials, is a stated priority for the SEC in 2022. The Vale suit serves as a warning to public companies that greenwashing ESG performance may come at a high price. Companies will need to bring a heightened level of rigor into their ESG reporting and other ESG-related materials, as the SEC has put registrants on notice that it will not hesitate to prosecute companies that make false or misleading statements in ESG disclosures, financial statements, or even marketing materials and blogs. Precision and accuracy will be key.

Public companies should prepare for mandatory climate disclosures and heightened scrutiny of ESG disclosures generally and take steps to ensure the statements they make are accurate.  They will need to perform a thorough assessment of relevant ESG risks and opportunities, identify the data required to meet their reporting needs, and enhance their internal controls to ensure data integrity and accountability. Companies that have not already begun to incorporate material ESG issues into their governance and risk management programs should do so now to avoid being the target of an SEC enforcement action.

Special thanks to Eleanor Gass for co-authoring this article.

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