US: Increasing risk of greenwashing claims underscores need for improved ESG governance

Recent developments in the United States underscore the continued salience of “greenwashing” on the agendas of both public and private actors, and point toward the need for robust ESG governance, including in relation to ESG disclosures, to mitigate litigation and liability risk.

SEC: The U.S. Securities and Exchange Commission continues to drive forward its rulemaking and enforcement agendas focused on climate and ESG issues (for our previous posts on the SEC’s ESG focus, see here, here, and here). On the enforcement side, the SEC’s Climate and ESG Task Force has brought three enforcement actions in 2022 addressing ESG issues in a wide range of sectors and contexts:

• On February 10, 2022, the SEC charged a New York-based robo-adviser with making misleading statements, breaching its fiduciary duty, and failing to adopt appropriate compliance policies and procedures in connection with the robo-adviser’s Shari’ah advisory business, resulting in a penalty of USD 300,000 for the firm;
• On April 28, 2022, the SEC charged a publicly-traded Brazilian mining company with making false and misleading statements relating to the safety of its dams, including through deceptive safety audit practices; and
• On May 23, 2022, the SEC charged an investment adviser over misstatements and omissions relating to the incorporation of ESG considerations into certain mutual funds, resulting in a fine of USD 1.5 million imposed on the firm.

ESG issues have also dominated the SEC’s recent rulemaking agenda:

• On March 21, 2022, the SEC unveiled long awaited proposed rules on climate-related disclosures by registrants (see our summary of the proposal and webinar, and a comparison with the TCFD reporting framework), and has since extended the deadline for comment on the proposed rules to June 17, 2022;
• On May 25, 2022, the SEC proposed updates to the Investment Company Act “Names Rule” to require registered investment companies whose names suggest a focus in a particular type of investment (including, notably, ESG fund names) to adopt a policy to invest at least 80 percent of the value of their assets in those investments; and
• On the same day, the SEC issued new proposed rules for certain registered investment advisers, advisers exempt from registration, registered investment companies, and business development companies for disclosures regarding funds’ and advisers’ incorporation of ESG factors.

Civil litigation: Not to be outdone, private actors regularly bring greenwashing claims under a number of theories of liability in U.S. federal and state courts – with mixed success. For a discussion of the types of analysis courts have performed in evaluating such claims, including arguments regarding the use of third-party sustainability certifications and generic claims amounting to “puffery,” see our previous posts here and here.

Convergence with international trends: The US is by no means an outlier in terms of its strong focus on greenwashing. The International Organization of Securities Commissions (IOSCO) has announced that its 2022 work plan will include a focus on mitigating greenwashing, including by pushing for the implementation of its recommendations addressed to asset management and ESG ratings and data providers. IOSCO’s Secretary-General has alluded to the fact that “greenwashing isn’t always intentional…[but is] very widespread” in calling for companies and institutions to build new systems for managing risks. Similarly, the United Kingdom’s Financial Conduct Authority (FCA) has signaled that its key workstreams for 2022 will include enhancing ESG governance and challenging greenwashing.

Even unintentional greenwashing caused by failures in ESG governance systems can reduce the credibility of, and trust in, sustainability claims and ESG funds. Taken together, the developments above point to the importance of implementing robust ESG governance processes, including around ESG disclosures, to ensure that companies are able to substantiate any environmental or “green” claims, including regarding the use of ESG considerations in investments.