Companies that issue environmental, social and governance materials are under growing scrutiny from regulators and shareholders for false or misleading statements


By George Boychuk

ESG investing involves the analysis of environmental, social, and governance (ESG) factors when making investment decisions. Such investment has gained increasing attention from fund managers in recent years, leading to rapid growth in ESG-focused mutual funds and exchange traded funds. That, in turn, has led businesses across a range of industries to promote and try to capitalize on their ESG credentials. 

But ESG is more than just words, and such promotion has led to heightened scrutiny from a legal and regulatory standpoint. That includes governmental enforcement measures and civil litigation targeting false claims and other improper activities related to ESG, as well as the adoption of stronger public company disclosure requirements for ESG-related risks.

Enforcement actions

Governmental enforcement actions related to ESG are generally based on allegations of false or misleading claims, including claims by financial firms regarding their ESG investment principles, as well as representations by businesses about the environmental safety of their products.  An important development in this regard was the Securities and Exchange Commission’s (SEC) establishment of a Climate and ESG Task Force, formed to identify ESG-related misconduct. 

The task force’s first action was the filing of a lawsuit against mining giant Vale (VALE.US) alleging misrepresentations about the safety of a dam that collapsed in 2019. The lawsuit cites false statements made not only in SEC filings, but also in Vale’s presentations, sustainability reports and ESG webinars, demonstrating the broad scope of review undertaken by the SEC in building its case. Subsequently an enforcement action was brought against an investment advisory firm owned by BNY Mellon for misleading statements about the firm’s ESG quality review, resulting in a monetary fine.

The Federal Trade Commission (FTC) has also pursued ESG-related violations.  Lawsuits were recently filed against Walmart (WMT.US) and Kohl’s (KSS.US) alleging false claims about the composition of certain textile products. Both companies had marketed products as being made from bamboo fiber using environmentally friendly manufacturing processes. The FTC maintained that the products were in fact made from rayon, whose manufacture involves hazardous chemicals and creates harmful pollutants. Both lawsuits resulted in monetary settlements.

Class action lawsuits

Government action aside, a number of recent class action lawsuits have also asserted “greenwashing” claims, which are based on allegations that a company misrepresented its products or business practices as being environmentally friendly. This departs from prior actions which generally resulted from specific events or actions that caused environmental harm.

Greenwashing cases have been brought in a diverse range of industries.  Examples include claims against both Burger King and McDonald’s (MCD.US) for marketing their products as sustainable when their packaging contained harmful substances; Burt’s Bees Cosmetics for advertising that ingredients were natural and responsibly sourced when they actually contained harmful chemicals; and Coca Cola (KO.US) for claiming its bottled water products were 100% recyclable when the caps and labels were not.

Regulatory developments

A number of recent SEC regulatory actions also demonstrate a strong concern with ESG issues.  In May 2022 the SEC issued proposed rules to strengthen disclosure requirements for investment funds and investment advisers. A number of steps were also taken to enhance ESG disclosures by public companies generally.

In February 2021 the Division of Corporation Finance was instructed to focus on climate-related disclosure in SEC filings. Subsequently the Division of Corporation Finance published a sample letter, which illustrates the types of comments issuers may receive regarding their disclosure of climate-related risks. This was followed by the publication of proposed rules in March 2022 which, if enacted, would implement specific disclosure requirements pertaining to climate-related risk.

Mitigating risk

These regulatory developments, together with recent SEC and FTC enforcement actions, signal a clear emphasis on ESG issues which should prompt a corresponding response by affected companies. An effective way to mitigate the risk of enforcement actions, civil litigation and inaccurate disclosure is for companies to apply robust disclosure controls and procedures. 

Reporting companies are already required to maintain disclosure controls and procedures to ensure their SEC reports are accurate and compliant with applicable rules. In the current legal landscape it is important for this process to extend to ESG disclosures as well. This is highlighted in the above-noted SEC action against BNY Mellon, which specifically cites BNY’s failure to implement policies and procedures designed to prevent misstatements.

Additionally, ESG disclosure controls and procedures should not be limited to SEC filings, and should apply to statements made in other contexts including social responsibility reports and similar documents, as well as advertising and promotional materials. This is critical for protecting companies not only against regulatory scrutiny and enforcement actions, but also potential civil claims.

From a regulatory perspective, the need for comprehensive ESG controls and procedures is reflected in the SEC’s sample comment letter discussed above, which includes a comment about an issuer’s corporate social responsibility report. This shows the SEC’s broad approach in reviewing ESG-related disclosures. With regard to litigation risk, class action plaintiffs also look beyond a company’s SEC filings for ESG related misrepresentations and/or inaccuracies. To mitigate any legal risk, we believe all companies can benefit from having a comprehensive and coordinated process for reviewing and verifying their public statements and disclosures relating to ESG matters.

George Boychuk is counsel at Ziegler, Ziegler & Associates LLP, a corporate and securities law firm specializing in representation of foreign issuers, depositary banks and investors on corporate and litigation matters related to depositary receipts. Contact him at

(In the event of any conflict between the English and Chinese versions of this blog, the English version should be the reference.)

This commentary is the views of the writer and does not necessarily reflect the views of Bamboo Works

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