End To Greenwashing

    An Appraisal Of The Effect Of SEC-Proposed Climate Risk Disclosure Rules

    This article was written by Uyi Samuel Oni.


    The concept of ESG has become a key component of corporate law. Words like “impact investing,” “benefit corporation,” and the infamous “greenwashing” are now commonly used in realm of business law to portray the significance of ESG and the notion that investors are now keen on the impact of their investment. Even though ESG issues have traditionally been of secondary concern to investors and corporations, in recent years, institutional investors and pension funds are now considering the environmental and social impact of a business before making investment decisions, forcing corporations to adjust their business model to consider ESG issues, particularly climate-related risk.

    In a bid to stem what could be a greenwashing disaster, many countries and supervisory authorities have begun to require mandatory ESG and climate risk disclosures. They are expecting to drive transparency in addressing climate risk and invariably protect investors who may rely on this information in making investment decisions. It is on the strength of this new wave that the Securities and Exchange Commission (SEC) issued a proposal to require mandatory climate-risk disclosures from public corporations in the United States.

    This article is an attempt to underscore the importance of the recent trend of mandatory ESG and climate-risk disclosures, the implication of false or fraudulent disclosures under the SEC proposed climate-risk disclosure rules, and likely legal remedies available to shareholders or investors of public corporations who rely on these disclosures to make investment decisions under the Securities Laws of the United States.


    The growing trend of ESG disclosures shows a shift from the traditional business concept of financial value to a more impact-driven investment model. According to SEC Chair Gary Gensler, “investors increasingly want to understand the climate risks of the companies whose stock they own or might buy. Large and small investors, representing literally tens of trillions of dollars, are looking for this information to determine whether to invest, sell, or make a voting decision one way or another.”1 Similarly, BlackRock’s Larry Fink in a letter urged companies to disclose how they are preparing for a “net-zero world” where net greenhouse gas emissions are eliminated by 2050.2 In 2021, Blackrock published guidance concerning its expectations with respect to climate-related disclosures, stating that “climate risk — physical and transition risk — presents one of the most significant systemic risk[s] to the long-term value of our clients’ investments,”3 and true to its position, Blackrock voted for two shareholder proposals requiring Berkshire Hathaway Inc. to issue disclosures addressing how the company is managing climate risk, noting that the company “is not adapting to a world where environmental, social, governance considerations are becoming much more material to performance.”4 With Bank of America Merrill Lynch predicting that up to US$20 trillion could be invested in these types of funds over the next three decades,5 it is not surprising to see that many corporations have started taking the path of voluntary ESG disclosures as a business and marketing strategy,6 which has prompted many countries to require mandatory ESG and climate risk disclosures in order to drive transparency in addressing climate risk and to protect investors from false disclosures.

    Several international and regional policy and regulatory initiatives are driving in the same direction. The International Financial Reporting Standards (IFRS) Foundation’s proposals around sustainability reporting, and the Network for Greening the Financial System represent an important international attempt to make progress on disclosure by coordinating best practices in the world of financial supervision of climate-related risks. On the other hand, the SEC proposal on mandatory climate-risk disclosure, the new sustainability disclosure requirements for market participants in the European Union (EU) under the Sustainability Disclosures Regulation, and the taxonomy are aimed at providing legal framework for ESG reporting in the countries or regions where the rules apply, with a far-reaching effect for public corporations.

    The Rise Of Voluntary Climate-Risk/ESG Disclosure And The Faux Pas Of Greenwashing

    Globally, in the early 1990s, fewer than 20 publicly traded firms issued reports that included ESG data. By 2014, the number around the world providing some information on ESG issues had increased to nearly 6000.7 In the United States, 83% of companies registered with the SEC in 2017 disclosed some sustainability information in their regulatory filings.8 Early firm-initiated disclosures of sustainability information tended to be reactive, with firms often disclosing in press releases or on company websites after high-profile scandals. These practices became recognized as industry best practices and served as guidelines. In response to the recent growth in demand for ESG information from investors, stakeholders, and regulators, firm ESG disclosures began being centralized in a single document: the ESG report. Yet the content in these reports varied widely by firm and by industry because ESG reports are not audited, mandated, or regulated in many jurisdictions, including the United States. ESG reports encourage greenwashing and false and misleading statements to sway investors.

    Greenwashing9 refers to the practice of falsely promoting an organization as environmentally friendly when in practice the organization may be causing more harm to the environment through its activities and business operations.10 It could also be used to describe the practice of firms claiming to have strong ESG compliance when they do not.11

    With the recent rise in ESG investments,12 there has been a significant increase in the number of corporations involved in greenwashing. One example is a 2015 Volkswagen marketing campaign that described its diesel engines as being as clean as, or cleaner than, US and Californian requirements. It also claimed to provide good fuel economy and performance, claiming low emissions and eco-friendly features. In reality, these cars were installed with “defeat devices” software designed to cheat emissions. The engines installed with this software emitted NOx pollutants up to 40 times above what is allowed in the United States. The scandal resulted in Volkswagen recalling millions of cars worldwide and running into losses worth billions of dollars.

    SEC Mandatory Climate And ESG Disclosures Rules:

    In a bid to stem the menace of false voluntary ESG disclosures, the SEC, like its counterparts in other countries, has proposed rules to require mandatory climate-risk disclosures in periodic filings by public companies with reporting obligations pursuant to the Securities Exchange Act Section 13(a) or Section 15(d), and companies filing a Securities Act or Exchange Act registration statement (Proposed Rules). The Proposed Rules would amend and create new sections within Regulations S-K and S-X that the SEC believes would provide more consistent, comparable, and reliable information for investors to evaluate climate-related risks to registrants. The SEC states that registrants should “continue to evaluate the climate-related risks they face and assess whether disclosure related to those climate-related risks must be disclosed in the Description of Business, Risk Factors, Legal Proceedings, and management discussion and analysis as described in the SEC 2010 Guideline.13 The Proposed Rules would require registrants to disclose certain climate-related information, covering numerous topics including but not limited to:

    1. Strategy, Business Model, & Outlook: The proposed rule 1502(b) would cover the material impacts, or potential impacts of climate-related risks on business strategy, outlook, or consolidated financial statements over short, medium, and long terms, including use of carbon offsets or renewable energy credits or certificates (RECs) as part of business strategy to reduce climate-related risks. It also requires disclosure on the maintenance of internal carbon price, or the estimated cost of carbon emissions, including the price in units of the registrant’s reporting currency per metric ton of carbon dioxide (CO2), the total price, including change over time, if applicable. It will also cover the impacts of climate events (severe weather, natural conditions, or other identified physical risks), and transition activities (including identified transition risks) on consolidated financial statements and related expenditures, including estimates and assumptions.14
    2. Governance: Proposed Rule 1501(a)(1) covers oversight and governance of climate- related risks by the board, and would assess whether the entire board, specific board members, or a board committee is responsible for the oversight of climate-related risks. It also covers the processes by which the board is informed about climate-related risks, the frequency of its discussions on them, and how the board or board committee considers climate-related risks as part of its business strategy, risk management, and financial oversight. In addition, proposed rule 1501(b)(1) would cover management oversight of climate-related risks, including: Whether certain management positions or committees are responsible for assessing and managing climate-related risks and, if so, to identify such positions or committees and disclose the relevant expertise, and the processes by which responsible managers or management committees are informed about and monitor climate-related risks.15
    3. Risk Management: A key component of proposed rule 1503(a) covers the processes for identifying, assessing, and managing climate-related risks, and whether the processes are integrated into overall risk management system or processes, including: Determining the relative significance of climate-related risks to other risks, consideration of existing or expected regulatory requirements or policies on climate-related risks, consideration of shifts in customer or counterparty preferences, technological changes, or change in market prices in assessing transition risks, determining materiality of climate-related risks and transition plans, or strategies and implementation plans to reduce climate-related risks, if the registrant has adopted a plan.16
    4. Financial Statement Metrics: Proposed Rule 14-02 would require registrants to provide certain climate-related financial statement metrics and related disclosures in a note to their audited financial statements, including: Financial impact metrics, based on disclosures covered by proposed Item 1502(b) applied on a line-item basis, expenditure metrics, both positive and negative impacts associated with the events, activities, and risks in the proposed financial impact metrics. These metrics are separately aggregated for expenditures expensed and capitalized costs incurred during the fiscal year. Financial estimates and assumptions discussed in a qualitative narrative, covering whether financial statements were impacted by exposures to risks and uncertainties associated with climate-related risks, and as part of the financial statements, these metrics and disclosures would be subject to external audits.
    5. Greenhouse Gas (GHG) Emissions Metrics Disclosures: The rule would require a disclosure of Scope 1 (direct) and Scope 2 (electricity indirect) GHG emissions metrics, separately disclosed and presented by disaggregated constituent GHGs and in aggregate, as well as in absolute and intensity terms. If the registrant is an accelerated or large accelerated filer, an attestation report from an independent attestation service provider covering, at a minimum, Scopes 1 and 2 emissions disclosures, would be required. Within one year of the compliance date for the disclosures, registrants would need to provide limited assurance, and within three years provide reasonable assurance. Scope 3 (other indirect) GHG emissions and intensity if material or the registrant has set a GHG emissions reductions target or goal including Scope 3 emissions.

    Effect Of Disclosures Or Failure To Disclose

    Once the Proposed Rules become effective, a public corporation would be liable for securities fraud violation if it fails to disclose or makes a fraudulent disclosure pursuant to the Proposed Rules.

    The SEC Rule 10b-517 enables the SEC, or private plaintiffs to investigate and bring civil actions to enforce three types of securities fraud violations:

    1. Those committed by employing any device, scheme, or artifice to defraud.
    2. Those committed by making a false statement or omitting information that would be misleading to an investor.
    3. By engaging in fraudulent or deceitful conduct.18

    A corporation who decides to toil the path of greenwashing in making its disclosure pursuant to the Proposed Rules would have the SEC or individual investors to contend with. I believe that an investor who relies on a corporation climate-risk disclosure made pursuant to the Proposed Rule would not have to contend with the roadblock of “materiality.”19 ESG information, should be considered “material” for the purposes of the securities laws so disclosure of inaccurate or misleading ESG information could be a basis for liability and would be settled in favor of an investor who relied on a corporation’s climate risk statement to make an investment decision.20

    Although an attempt to hold a corporation accountable for making false, albeit voluntary climate risk disclosures in the case of People v Exxon Mobil Corp21 was not successful, the attitude of the court when it decided the matter points to the direction of “immateriality because there was no duty to disclose.” The fact of the case is intriguing. On October 24, 2018, the Attorney General filed a lawsuit alleging that Exxon engaged in a long-standing fraudulent scheme to defraud investors concerning the company’s management of the risks posed to its business by increasingly stringent climate change regulation, alleging that Exxon artificially inflated its share price by failing to disclose the proper costs of carbon emissions in its project calculations. While dismissing the case, the court noted the Office of the Attorney General failed to prove by a preponderance of the evidence that ExxonMobil made any material misrepresentations that would have been viewed by a reasonable investor as having significantly altered the ‘total mix’ of information made available.”22

    Considering the history of the Proposed Rules, and the heavy reliance investors now place on ESG disclosures before making investment decisions, I believe a plaintiff would not have to bear the burden of materiality to succeed in a security fraud case, as it is certain that a statement disclosed pursuant to a disclosure obligation of the SEC would be considered material. In a seminal Supreme Court case on materiality, Basic v. Levinson,23 the court found that preliminary merger negotiations may be material, affirming that materiality is to be gauged through the eyes of the reasonable investor. In Matrixx Initiatives Inc. v. Siracusano,24 the court was of the view that an omission is actionable under the securities laws when the corporation is subject to a duty to disclose the omitted facts.


    As the concept of ESG and climate-risk disclosure evolves from what used to be voluntary to mandatory as indicated by the Proposed Rules, board and management of public corporations should brace up for the challenges ahead by setting up various internal processes to help evaluate their disclosures to ensure it is free from greenwashing. Disclosures should be accurate and not an act of subterfuge. Once the Proposed Rules become effective, it would form part of the US Federal Securities Laws, giving room to investors who place high premium on ESG to sue and hold public corporations accountable for failure to disclose or false disclosures.


    About The Author

    Uyi Samuel Oni is a legal professional. He holds a Master-of-Laws (LLM) degree from the University of Pennsylvania Carey Law School. Uyi’s legal practice spans corporate and commercial law with a focus in mergers and acquisitions, private equity, venture capital, emerging business, and regulatory and ESG compliance. He has served as a member of the University of Pennsylvania Division of Public Safety Advisory Board; Osun State of Nigeria committee on Law, Justice, Security and Peace sector reform; and the Compliance Committee of CarePoint LLC. For enquiries or to get in touch, he can be reached at samueloni2014@gmail.com or uyioni@penncareylaw.upenn.edu.


    Notes & Sources

    1 Chair Gary Gensler, Climate and Global Financial Markets https://www.sec.gov/news/speech/gensler-pri-2021- 07-28 (last visited Dec. 16, 2022).

    2 SP Global, Seven ESG Trends to Watch in 2021 https://www.spglobal.com/en/research-insights/featured/special- editorial/seven-esg-trends-to-watch-in-2021 (last visited Dec. 16, 2022).

    3 BlackRock, Our 2021 Stewardship Expectations https://www.blackrock.com/corporate/literature/publication/our- 2021-stewardship-expectations.pdf. (Last visited Dec 17, 2022).

    4 Cadwalladers, Investors and Regulators Turning up the Heat on Climate-Change Disclosures: Attempting to Make Sense of the State of Play in the US, EU, and UK www.cadwalader.com

    5Business Insider “10 reasons to care about ESG investinghttps://markets.businessinsider.com/news/stocks/10- reasons-to-care-about-esg-investing-bank-of-america (last visited January 19, 2023).

    6 Exxon Mobil was the first US oil super major to disclose greenhouse gas emissions data related to customer use of its petroleum products. The company said it will provide Scope 3 emissions data reports annually.

    7 Cadwalader, Investors and Regulators Turning up the Heat on Climate-Change Disclosures: Attempting to Make Sense of the State of Play in the US, EU, and UK www.cadwalader.com

    8 id

    9The word greenwashing was first coined in 1986 by prominent environmentalist Jay Westerveld when he observed vast amounts of waste that hotels produced and failed to undertake any sustainable measures to tackle. However, the same hotels promoted the reuse of towels as part of their environmental strategy, which implied that reuse of towels was nothing but a cost-saving measure.

    10 ActusESG, ESG Greenwashing: A not-so green business practice: ActusESG.com (visited Dec 19, 2022).

    11Jason Holt -INSIGHT: ‘Green-Washing’ Lessons for Financial Crime Compliance Programs, Bloomberg Law.

    12 According to Financial Times, global ESG-linked funds took in nearly US $350 billion last year, compared with US $165 billion in 2019, according to data from Morningstar. Net assets held in UK-domiciled ESG funds went from US$39 billion at the beginning of 2017 to US$96 billion by the end of 2020, including active and passive funds. https://www.ft.com/greenpensions

    13 Amy S Matsuo, Climate Risk: SEC’s Mandatory Climate Disclosures Proposal https://advisory.kpmg.us/articles/2022/sec-mandatory-climate-disclosures-proposal-reg-alert-mar-2022 (visited Dec. 16, 2022).

    14Amy S Matsuo, Climate Risk: SEC’s Mandatory Climate Disclosures Proposal. supra

    15 id

    16 Amy S Matsuo, Climate Risk: SEC’s Mandatory Climate Disclosures Proposal. supra

    17 Rule 10b-5 is the Securities and Exchange Commission’s (SEC) main basis for investigating possible security fraud claims. Violations of the rule include executives making false statements to drive up share prices, a company hiding huge losses or low revenues with creative accounting practices, or actions taken to grant current shareholders a better return on their investments — as long as the deception remains undiscovered. These schemes typically require ongoing, misleading statements to perpetuate the fraud.

    18 David Lopez, et al. The Materiality Debate and ESG Disclosure: Investors May Have the Last Word Harvard Law School Forum on Corporate Governance

    https://corpgov.law.harvard.edu/2022/01/31/the-materiality-debate-and-esg-disclosure-investors-may-have-the-last- word/

    19 Materiality is a litigated issue in securities cases. SEC regulations 405 defines material information as information “to which there is a substantial likelihood that a reasonable investor would attach importance in determining whether to buy or sell the securities registered.”

    20 In TSC Industries Inc. v. Northway Inc., 426 US 438 (1976), the US Supreme Court articulated the requirement of materiality in securities fraud cases.

    21 2019 N.Y. Misc. LEXIS 6544.

    22 People v. Exxon Mobil Corp., 2019 N.Y. Misc. LEXIS 6544.

    23 485 US 224.

    24 563 US 27, 44 (2011).