SEC Whistleblower Lawyer Blog
The Securities and Exchange Commission (SEC) has explained that “as investor demand for climate and other environmental, social, and governance (ESG) information soars, the SEC is responding with an all-agency approach” that reflects the risks and opportunities of ESG and climate investing. The agency is putting its policies into practice this year, and investigations are leading to increased enforcement.
The SEC’s ESG-Related Institutional Actions
The SEC announced the creation of the new “Climate and ESG Task Force” within its Division of Enforcement in 2021. In addition to an emphasis on identifying material gaps or misstatements within firms’ disclosures of climate risks under existing rules, the SEC promised the new task force would be developing initiatives—such as data analysis—to proactively identify ESG-related misconduct. At the same time, the task force would actively “evaluate and pursue tips, referrals, and whistleblower complaints on ESG-related issues.”
The SEC also broadened its reach: It issued an investor alert on ESG funds, and the Division of Examinations issued a risk alert for ESG investing. The Enforcement Division has already brought a number of ESG-related cases.
SEC Identified Problems With ESG-Investment Claims
Shortly after the task force’s creation, SEC chair Gary Gensler gave a speech outlining the scope of the SEC’s interest in ESG issues. For example, the SEC was concerned about asset management funds that promoted themselves as being “green,” “sustainable,” or “low-carbon” but provided no clear criteria defining these terms or measuring goals. Since then, the SEC has more formally explained the consequences of fuzzy ESG claims.
In a 2021 review, the SEC’s Examination Division found that, when it comes to actually managing investors’ portfolios, firms often disregard their clients’ ESG requirements. Many don’t have consistent protocols for assessing their ESG investments or mechanisms for implementing a given client’s specific screens. They can also be inconsistent in proxy voting, often claiming they’ll assess proxy proposals on a case-by-case basis but never doing so.
The review report also noted that investment firms rarely have any compliance mechanisms or other controls to monitor whether companies are fulfilling their ESG commitments. They aren’t ensuring that ESG-related public disclosures and marketing materials are accurate. And they aren’t exercising appropriate oversight over their ESG-focused advisers to confirm that they were following commitments made to the clients. Compliance personnel often have limited guidance on ESG-related performance metrics, so they can’t determine whether investments meet investors’ ESG goals.
Recent ESG-Related Cases
The SEC’s first ESG action after announcing the task force was a 2022 case against Vale S.A., a publicly-traded Brazilian mining company.
According to the SEC, Vale had made false and misleading statements about its safety and ESG practices for years. It manipulated safety audits and obtained fraudulent certificates of the stability of its dams, which did not meet internationally-recognized standards for potentially toxic byproducts. Vale maintained in sustainability reports and other public filings that the company was adhering to these strict standards until 2019, when one of the dams collapsed. The disaster killed 270 people, caused “immeasurable environmental and social harm,” and led to a loss of more than $4 billion in the company’s market capitalization.
The SEC alleged that Vale had violated the Exchange Act, the Securities Act, and SEC rules by knowingly or recklessly engaging in deceptive conduct when it claimed to investors that the dams were stable and when it filed false statements with the SEC.
The SEC settled the case in March 2023, when Vale agreed to pay $55.9 million in penalties and accept a permanent injunction against further violations of securities law.
Another illustrative case came in November 2022, when the SEC brought charges against Goldman Sachs Asset Management. The allegations in that case were closely related to the issues the SEC staff identified during its investigation of ESG investment firms.
According to the SEC, Goldman Sachs had marketed itself as having ESG investment strategies, even though there were no written policies or procedures for the implementation of those strategies. To the extent such policies did exist, the firm did not follow them. In response to the charge, Goldman Sachs acknowledged it had violated the Investment Advisers Act and related SEC rules, accepted censure, and agreed to a $4 million penalty.
The Takeaway: ESG Claims Have To Mean Something
While the field is still new and evolving, the SEC is making it clear that the same rules apply to ESG-related investing that apply in other contexts. ESG claims can’t just be feel-good marketing strategies with nothing behind them. Companies and investment advisers must provide accurate information to investors, and they must have compliance programs in place to make sure they’re delivering on their promises.
If you’re aware that a company is deceiving investors through false statements about their ESG practices, you should consider becoming a whistleblower. Silver Law Group and the Law Firm of David Chase have created a strategic alliance to represent SEC whistleblowers like you.
As SEC whistleblower attorneys with years of experience, we have an in-depth understanding of the SEC Whistleblower Program. With an SEC Enforcement lawyer on our team, we understand what the SEC is looking for and what it takes to submit a successful whistleblowing tip. We can help you submit a tip that is more likely to result in an award from a covered action. We’re here to help whistleblowers maximize their opportunity to receive a financial bounty. For a free, confidential consultation, contact us by email or call us today at (800) 975-4345.