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August 01, 2023 Articles

Environmental, Social, and Governance Issues in the Securities Litigation Space

The past two years have witnessed the first of several enforcement actions expressly targeting ESG issues, and today’s securities class actions are focused on greenwashing.

By Jacob Hupart and Ellen Shapiro

The Securities and Exchange Commission (SEC) has made abundantly clear that it is focused on environmental, social, and governance (ESG) issues. It has proposed extensive climate-focused disclosure rules for public companies, proposed enhanced requirements surrounding fund and advisor names that suggest an environmental agenda, and created a task force focused solely on ESG-issues. The past two years have witnessed the first of several enforcement actions expressly targeting ESG issues, which are likely to continue in the coming years. While SEC investigations and securities class action plaintiffs frequently operate in tandem, in this area the plaintiffs’ bar has already been focused on ESG-related disclosures for more than 30 years (albeit at a relatively low, but stable, pace). But there have been significant changes of late, in particular with respect to the nature of the cases being brought and the types of defendants grappling with ESG-related federal securities claims. Until recently, ESG-related securities class actions had been most common in cases surrounding environmental disasters and involving energy companies. Today’s securities class actions, by contrast, are focused on greenwashing—a topic that could affect any public company.

The SEC Has Made Clear Its Focus on ESG

In March 2021, the SEC announced the creation of a new task force within the Division of Enforcement to focus on ESG issues. According to then acting chair Allison Herren Lee, “[t]he task force . . . w[ould] play an important role in enhancing and coordinating the efforts of the Division of Enforcement, the Office of the Whistleblower, and other parts of the agency to bolster the efforts of the Commission as a whole on these vital matters.” SEC Press Release No. 2021-42, SEC Announces Enforcement Task Force on Climate and ESG Issues (Mar. 4, 2021); see also SEC Press Release No. 2021-119, SEC Issues Agenda for July 7 Meeting of Asset Management Advisory Committee (July 2, 2021).

That same month, Commissioner Lee asked for public input to assist the SEC with shaping forthcoming ESG disclosures. Statement of Commissioner Allison Herren Lee, Public Input Welcomed on Climate Change Disclosures (Mar. 15, 2021). While some SEC commissioners questioned the appropriateness of new climate-related disclosures (speech by Commissioner Elad L. Roisman, An Honest Conversation about ESG Regulation (Mar. 19, 2021)), Commissioner Lee emphasized in her March 15, 2021, statement that the SEC was evaluating disclosure rules “with an eye toward facilitating the disclosure of consistent, comparable, and reliable information on climate change.” In that statement, as is typical with the adoption of any new rules or regulations, the SEC sought comment from the public on a variety of issues. During the 90-day comment period, the SEC held over 40 meetings with market participants and received hundreds of submitted comments, most of which seemed supportive of enhanced climate-related disclosures. While seemingly significant, this paled by comparison with the more than 15,000 comments that the proposed rule issued in March 2022 received. Jacob H. Hupart et al., “What Public Comments on the SEC’s Proposed Climate-Related Rules Reveal—and the Impact They May Have on the Proposed Rules,” Mintz, Feb. 1, 2023 (updated). Similar disclosure rules have been proposed or enacted in a number of foreign jurisdictions, including the European Union and the United Kingdom.

Notably, in April 2021, the SEC’s Division of Examinations issued a risk alert on its review of ESG investing, in which it summarized staff observations:

During examinations of investment advisers, registered investment companies, and private funds engaged in ESG investing, the staff observed some instances of potentially misleading statements regarding ESG investing processes and representations regarding the adherence to global ESG frameworks. The staff noted, despite claims to have formal processes in place for ESG investing, a lack of policies and procedures related to ESG investing; policies and procedures that did not appear to be reasonably designed to prevent violations of law, or that were not implemented; documentation of ESG-related investment decisions that was weak or unclear; and compliance programs that did not appear to be reasonably designed to guard against inaccurate ESG-related disclosures and marketing materials.

SEC, Div. of Examinations, Risk Alert, The Division of Examinations’ Review of ESG Investing (Apr. 9, 2021).

The SEC also noted that it would “continue to examine firms to evaluate whether they are accurately disclosing their ESG investing approaches and have adopted and implemented policies, procedures, and practices that accord with their ESG-related disclosures.” Id.

In September 2021, the SEC published a sample comment letter concerning climate disclosures, highlighting the types of comments the SEC may issue to public companies. While the comment letter was not intended to be exhaustive, it signaled that public companies should, inter alia, be focused on ESG-related disclosures pertaining to risk factors, including disclosure of material litigation risks related to climate change, and management’s discussion and analysis of financial condition and results of operations, including disclosure of material capital expenditures for climate-related projects, as well as material consequences of climate-related regulation and business trends. In early 2022, the SEC again emphasized its focus on ESG-related disclosures, stating that it would examine “whether RIAs [registered investment advisers] and registered funds were accurately disclosing their ESG investing approaches[.]” SEC Press Release No. 2202-57, SEC Division of Examinations Announces 2022 Examination Priorities (Mar. 30, 2022).

More recently, the SEC has proposed additional rules to fight greenwashing. Proposed amendments to the Investment Company Act’s “names rule” would require that any fund with a name that suggests ESG-focused investing, in fact, reflect such ESG-investing principles. SEC Press Release No. 2022-91, SEC Proposed Rule Changes to Prevent Misleading or Deceptive Fund Names (May 25, 2022). In addition, the SEC proposed enhancing disclosure requirements to demonstrate that funds and advisors that tout ESG-goals follow their stated ESG-strategy. SEC Press Release No. 2022-92, SEC Proposes to Enhance Disclosures by Certain Investment Advisers and Investment Companies About ESG Investment Practices (May 25, 2022).

The SEC Has Begun to Take Aggressive ESG Enforcement Action

Consistent with SEC commissioners having made ESG a stated priority for years, the SEC has begun taking aggressive enforcement actions in furtherance of its ESG agenda, even before its new proposed policies have gone into effect. By early 2022, the SEC’s Dallas office was actively investigating ESG disclosures by companies doing business with state government entities in Texas, “scrutinizing potential conflicts between what the underwriters have told investors versus Texas regulators about their policies on doing business with . . . [inter alia] fossil fuel companies.” Chris Prentice, “SEC’s Texas office probes banks over disclosures on guns, fossil fuels—sources,” Reuters, Jan. 5, 2022. While these investigations were publicly reported, other nonpublic investigations into ESG-related disclosures were almost certainly taking place throughout the country.

Indeed, last year saw several SEC enforcement actions in the ESG space. In April 2022, the SEC’s Climate and ESG Task Force issued its first enforcement action against Vale S.A., a Brazilian mining company, following the 2019 collapse of a dam in Brazil that killed 270 people. The SEC’s complaint, filed in the U.S. District Court for the Eastern District of New York, alleged the company violated sections 10(b) and 13(a) of the Securities Exchange Act of 1934 and section 17(a) of the Securities Act of 1933 by making allegedly false and misleading statements pertaining to the dam’s safety and stability. Complaint, SEC v. Vale S.A., No. 22-cv-2405 (E.D.N.Y. filed Apr. 28, 2022). The matter ultimately settled for $25 million in civil penalties and $30.9 million in disgorgement and prejudgment interest. SEC Press Release No. 2023-63, Brazilian Mining Company to Pay $55.9 Million to Settle Charges Related to Misleading Disclosures Prior to Deadly Dam Collapse (Mar. 28, 2023).

The following month, the SEC charged BNY Mellon Investment Adviser, Inc. (BNYMIA) with violating sections 206(2) and 206(4) of the Investment Advisers Act of 1940, as well as section 34(b) of the Investment Company Act of 1940, for allegedly falsely representing to investors that its affiliated sub-advisor had implemented ESG principles by conducting ESG quality reviews as part of its research process for all investments. BNY Mellon Investment Adviser, Inc., No. 3-20867 (SEC May 23, 2022) (order instituting administrative and cease-and-desist proceedings); SEC Press Release No. 2022-86, SEC Charges BNY Mellon Investment Adviser for Misstatements and Omissions Concerning ESG Considerations (May 23, 2022). To settle the charges, BNYMIA paid a $1.5 million penalty. This was followed by charges to, and a settlement with, Tampa-based Health Insurance Innovations and its former chief executive officer for violations of sections 17(a)(2) and (3) of the Securities Act and 13(a) of the Securities Exchange Act arising from the company’s alleged false statements concerning scope of coverage and consumer satisfaction. Health Insurance Innovations, Inc., now named Benefytt Technologies, Inc., and Gavin D. Southwell, No. 3-20932 (SEC July 20, 2022) (order instituting administrative and cease-and-desist proceedings). While this action does not appear to be ESG-related, the press release announcing the charges and settlement expressly noted that “[t]he Division of Enforcement’s Climate and ESG Task Force provided assistance in this matter.” SEC Press Release No. 2022-126, SEC Charges Tampa-Based Health Insurance Distributor and its Former CEO with Making False Statements to Investors (July 20, 2022).

By the fall of 2022, the SEC had filed two more ESG-related enforcement actions. The SEC charged Goldman Sachs Asset Management, L.P. (GSAM) with failing to adopt and implement policies and procedures involving ESG investing in violation of section 206(4) of the Investment Advisers Act. Goldman Sachs Asset Management, L.P., No. 3-21245 (SEC Nov. 22, 2022) (order instituting administrative and cease-and-desist proceedings). To settle the charges, GSAM agreed to pay a $4 million penalty. SEC Press Release No. 2022-209, SEC Charges Goldman Sachs Asset Management for Failing to Follow its Policies and Procedures Involving ESG Investments (Nov. 22, 2022). Second, the SEC charged Compass Minerals International Inc. with, among other things, failing to properly assess the financial risks of mercury contamination by one of its former facilities in Brazil. SEC Press Release No. 2022-171, SEC Charges Compass Minerals for Misleading Investors about Its Operations at World’s Largest Underground Salt Mine (Sept. 23, 2022). The company agreed to settle the charges for a $12 million penalty. Id.

It seems likely that such enforcement actions in the ESG space will continue, given the forthcoming disclosure rules (which are expected to be robust) and the increase in enforcement actions that we have already seen, along with the public announcement that ESG will remain an enforcement priority of the SEC in 2023. See SEC Press Release No. 2023-24, SEC Division of Examinations Announces 2023 Priorities (Feb. 7, 2023) (“The Division will continue its focus on ESG-related advisory services and fund offerings, including whether funds are operating in the manner set forth in their disclosures. In addition, the Division will assess whether ESG products are appropriately labeled and whether recommendations of such products for retail investors are made in the investors’ best interests.”).

While the SEC Has Now Asserted Itself Concerning ESG Issues, ESG-Related Securities Actions Have Been Continuing at a Steady Pace

Although the SEC’s attention on ESG-related disclosures has increased dramatically over the past few years, and litigation surrounding ESG-issues is on the rise generally (see, e.g., Pete Michaels & Alyssa Scruggs, “The Rise of Shareholder Activism and Litigation Related to Environmental, Social, and Governance Investing,” Sec. Litig., Apr. 1, 2021), federal securities class actions related to ESG disclosures have been occurring for at least the past 30 years, and the plaintiffs’ bar is continuing to bring such actions.

The end of the twentieth century saw federal securities class actions against companies that allegedly falsely touted compliance with environmental regulations, as well as those that allegedly failed to adequately disclose liabilities related to environmental infractions. For example, one federal securities class action filed in 1992 against AES Corporation, asserted that this global energy company violated sections 11 and 12(2) of the Securities Act and section 10(b) of the Securities Exchange Act by allegedly falsely touting it was a leader in environmental compliance with emissions levels lower than required. Another action brought a few years earlier against NL Industries asserted section 10(b) violations against the company for allegedly failing to disclose liabilities in connection with noncompliance with various environmental laws by its wholly owned subsidiary in the uranium processing space. Somewhat similarly, in 1988, the plaintiffs’ bar filed a federal securities class action against Fruit of the Loom, along with its bankers and accountants, asserting violations of section 10(b) of the Securities Exchange Act and sections 11, 12(2), and 17(a) of the Securities Act, as well as various state and common-law claims, for allegedly failing to disclose its environmental liabilities. In addition, the plaintiffs’ bar litigated a securities class action filed in 1999 arising out of an allegedly false prospectus issued by U.S. Liquids, alleging that the waste management company failed to ensure compliance with environmental laws both pre- and post-acquisitions. In addition to traditional disclosure cases, event-driven ESG-related securities class actions were also popping up, including those surrounding environmental catastrophes.

The 2000s continued to see more securities class actions pertaining to perceived failures to disclose environmental violations by subsidiaries. For example, plaintiffs brought a securities class action in 2010 against the oil and gas company Transocean Ltd. in connection with an explosion on its Gulf of Mexico oil rig, alleging, inter alia, misleading disclosures relating to its safety, training, inspection, and maintenance protocols. Relatedly, in 2013, investors filed a securities class action under the Securities Act against ATP Oil & Gas Corporation’s directors, executives, and underwriters in connection with an allegedly false and misleading registration statement concerning the company’s alleged failure to disclose the impact of the U.S. Department of Interior’s moratorium on deepwater drilling issued in response to the 2010 oil rig explosion. In 2015, plaintiffs filed a federal securities class action against the mining company Barrick Gold Corporation, alleging violations of section 10(b) of the Securities Exchange Act in connection with, among other things, its alleged failure to disclose its alleged disregard for Chilean and Argentinean environmental laws. This decade saw additional securities class actions alleging false and misleading statements concerning compliance with environmental laws, as well as more event-driven securities litigation following environmental tragedies, including collapsed dams.

While there has yet to be an exponential spike in federal securities class actions pertaining to ESG-related disclosures, we can expect to see an increase in securities class actions alleging greenwashing—namely, companies falsely touting ESG goals and capabilities. By way of example, in 2021, investors filed a federal securities class action against the bioplastics company Danimer Scientific, Inc., alleging violations of section 10(b) of the Securities Exchange Act in connection with alleged greenwashing statements about its biodegradable products. Moreover, with increased SEC enforcement action, we can expect additional securities class actions. Similarly, last year, plaintiffs filed a federal securities class action alleging violations of section 10(b) of the Securities Exchange Act against wood pellet producer Enviva, Inc., for allegedly greenwashing its wood procurement activities. And more recently, in February 2023, Global Witness submitted a lengthy letter to the SEC, accusing energy company Shell, Inc., of misstating its commitment to renewable energy sources.


As discussed above, the SEC’s recent emphasis on ESG-related disclosures is evidenced by its stated priority, new proposed rules, and recent enforcement actions. Over the next few years, we can expect this focus to continue, especially as the SEC continues to issue comment letters on companies’ ESG-related disclosures, as the new rules become effective, and as additional enforcement actions are filed. With new (and extensive) disclosure requirements, it seems likely that additional private securities class actions will be filed as the salience and scope of alleged disclosure violations will have increased significantly. The plaintiffs’ bar will also likely continue to file environment-focused securities class actions in the form of event-driven litigation (e.g., following an environmental catastrophe) but also against companies for alleged greenwashing. These class actions, along with the defendants in the SEC’s recent ESG-related enforcement actions, demonstrate the changing face of the type of defendant in ESG-disclosure-related cases and serve as a reminder that while oil and gas companies remain at risk of litigation and enforcement action, so do other companies, including those that tout their ESG-friendly agendas.

Jacob Hupart is a member and Ellen Shapiro is an associate with Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., in New York City, New York.

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