We previously wrote about the Securities and Exchange Commission (SEC) committing in 2022 to pursue companies that misrepresent or otherwise present misleading information to investors regarding issues that touch on Environmental, Social and Governance (ESG). It did not take the SEC ESG Task Force long to fulfill its pledge, as on April 28, 2022, the Task Force filed the first complaint against a Brazilian mining company for allegedly presenting fraudulent information to investors regarding the safety of its dams, which touches on both “E” and “S” factors related to ESG.
The latest action by the SEC underscores the incredible importance of taking a measured approach to all types of advertising, marketing, ESG statements, or other information disclosures that touch on ESG factors. Companies that fail to do so are likely opening themselves up to significant risk of enforcement action and penalties. Investment firms that fail to do proper due diligence on companies included in portfolios run the risk of significant losses as ESG enforcement actions continue.
SEC ESG Task Force
In March 2021, the SEC formed the Climate and Environmental, Social and Governance Task Force (ESG Task Force) within its Division of Enforcement. Hand in hand with the legal world’s attention on greenwashing in 2021, the SEC’s ESG Task Force was created for the sole purpose of investigating ESG-related violations. At the same time, the SEC also announced that it intended to create rules for company disclosures related to ESG factors, including climate disclosures. The goal of the SEC ESG decision is to create standardized, comprehensive disclosure requirements, making it easier for investors to compare between companies.
The SEC’s actions were well-timed, as 2021 saw an enormous increase in investor demand for ESG-related and ESG-driven portfolios. There is considerable market demand for ESG portfolios, and whether this demand is driven by institute influencers or simple environmental and social consciousness among consumers is of little importance to the SEC – it simply wants to ensure that ESG activity is being done properly, transparently and accurately.
Vale Mining Company ESG Misrepresentation Allegations
Vale S.A. is a publicly traded Brazilian mining company that produces a significant portion of the world’s iron ore. On April 28, 2022, the SEC ESG Task Force filed a Complaint in the New York federal court alleging that Vale misrepresented information about the safety of its dams prior to the catastrophic 2019 collapse of the Brumadinho dam at the Córrego do Feijão iron ore mine in Brazil. The dam collapse killed 270 people and impacted Vale with a $4 billion loss.
More specifically, the Complaint alleges that Vale was in violation of antifraud and reporting provisions in the securities laws by manipulating dam safety audits, securing false stability declarations for the dam, and misleading governments, communities, and investors about the dam’s stability by way of ESG statements and regulatory filings.
The SEC is seeking injunctive relief, disgorgement of profits, prejudgment interest and civil penalties.
Significance of SEC ESG Task Force Charge
The Complaint filed in the New York court is significant because it shows that the SEC is committed to pursuing companies that it believes are deliberately misrepresenting ESG related information to the public and to investors. While the Vale example was certainly chosen as the ESG Task Force’s first Complaint because the SEC believed that it had strong evidence against the company, other publicly traded companies must pay close attention to disclosures or statements made that touch on ESG factors. Disclosures must be scrutinized closely for accuracy, while sound and reasonable marketing statements that touch on ESG factors must be the standard for companies to follow.
CMBG3 Law LLC has represented clients in ESG’s environmental and social related issues for years. We regularly consult with private equity, banking, and investment world firms to identify future risk potentials from portfolios under consideration, and assist issuers and investment world firms alike with ESG related issues. For more information about our ESG and risk assessment consulting services, please contact John Gardella (617-279-8225).