What we can learn from the SEC’s latest Complaint

Photo by Patrick Tomasso on Unsplash

The Securities and Exchange Commission

ESG done incorrectly, presents significant risks. And as regulators have stepped further into the ESG space, the risk of running afoul of regulations that relate to ESG reporting has increased. Earlier this year, the SEC issued proposed rules on The Enhancement and Standardization of Climate-Related Disclosures for Investors, which are currently open for public comment (until June 17, 2022).

Securities and Exchange Commission v. Vale S.A.

The Task Force’s work recently resulted in the SEC’s filing of a Complaint against Vale S.A., a publicly traded Brazilian mining company (and one of the world’s largest iron ore producers), in United States District Court for the Eastern District of New York.

https://www.sec.gov/litigation/complaints/2022/comp-pr2022-72.pdf

What lessons can we learn?

How can we use the information in the Complaint to be better ESG practitioners and manage the regulatory risks associated with ESG reporting?

https://www.sec.gov/litigation/complaints/2022/comp-pr2022-72.pdf

The importance of good data

There is also numerous reminders in the Complaint regarding something all ESG professionals should understand: the importance of good data. The SEC’s Complaint contains multiple references to how many issues stemmed from reliance on flawed data, “purposeful use of unreliable data, rendering the resulting stability certifications false.” Para. 229 (many other references).

The importance of materiality

Note the number of references to “material” in the summary, above. Poor data problems are made even worse when inaccurate or incomplete data is used to report on issues that are material to investors:

Sample letter, https://www.sec.gov/corpfin/sample-letter-climate-change-disclosures

The SEC will look at the totality of the circumstances

Additionally, the Vale Complaint really demonstrates that the SEC will look beyond the “four corners” of SEC filings, and consider all public-facing statements.

Corporate representatives will want to pay attention

The Vale Complaint also details what key Executives knew or should have known. If formalized into a final rule, the SEC’s proposed rules on The Enhancement and Standardization of Climate-Related Disclosures for Investors expand the scope of various disclosures. As such, Executives will want to pay even closer attention to all SEC disclosures, as well as the information in all public-facing documents (Sustainability and ESG reports, as explained above), which are incorporated into these disclosures by reference.

https://d18rn0p25nwr6d.cloudfront.net/CIK-0000829224/d2de114a-49d6-4994-8675-8454e5dd2289.pdf

Key Takeaways

So what can we learn from the SEC’s latest Complaint? Here’s my top takeaways:

  • The importance of good data — this should be the bare minimum, starting point.
  • Materiality matters— companies need to be able to back up their position that an issue is not “material” to investors.
  • The SEC will look at the totality of the circumstances — ensure all publicly-facing statements — including websites and webinars — are grounded in data and not misleading.
  • Corporate representatives will want to pay even closer attention to all publicly-facing representations regarding Environmental, Social and Governance aspects — liability increases when these documents are incorporated by reference into SEC filings.

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Nicole DeNamur

Nicole DeNamur

27 Followers

Attorney + sustainability consultant. I write about how we can drive deep green innovation at scale. https://www.sustainablestrategiespllc.com