ESG Disclosures and SEC Enforcement: Investigation Risks

ESG Disclosures and SEC Enforcement: Investigation Risks

The SEC has been ramping up enforcement actions related to environmental, social, and governance (ESG) disclosures. Companies need to ensure their ESG statements are accurate and supported, or they could face investigations and penalties. This article looks at recent SEC actions, risks, and steps companies can take to mitigate them.

SEC’s ESG Enforcement Task Force

In March 2021, the SEC launched the Climate and ESG Task Force to proactively identify potential misconduct related to ESG disclosures [1]. This includes:

• Material gaps or misstatements in climate risk disclosures
• Issues with investment advisers’ and funds’ ESG strategies

The task force uses data analysis to spot disclosure issues across companies. It coordinates enforcement resources to address them. Recent examples include:

• An adviser charged for not following ESG investment policies [1]
• A mining company charged for misleading claims about environmental practices [1]

The SEC warns it will continue pursuing ESG disclosure violations [2].

Risks of ESG Misstatements

The SEC sees ESG misstatements as violating securities laws on fraud, reporting, and internal controls [4]. Recent cases have involved:

• Overstating sustainability practices
• Lacking controls around ESG investing
• Greenwashing marketing claims

Such lapses expose companies to SEC investigations, penalties, and reputational damage. The SEC will likely ramp up scrutiny as investors increasingly weigh ESG factors [5].

Steps to Mitigate ESG Disclosure Risks

Companies can take several steps to avoid issues:

1. Review ESG policies and controls: Ensure robust processes for developing, reviewing, and approving ESG disclosures across the organization.
2. Substantiate claims: Have evidence to back up any sustainability or ESG-related statements made in SEC filings, marketing, etc.
3. Coordinate disclosures: Maintain consistency between voluntary and mandatory ESG reporting.
4. Monitor regulations: Stay updated on the SEC’s evolving stance on climate and ESG disclosures.
5. Get independent assurance: Consider having internal audit or third parties assess ESG disclosure controls.

“Do what you say and say what you do” should guide ESG reporting, per SEC officials [6]. Firms that accurately reflect their ESG practices will be better positioned as regulatory scrutiny increases.

The Road Ahead

The SEC aims to adapt disclosure rules to the growing materiality of ESG risks [5]. But companies shouldn’t wait for new regulations. Acting now to ensure rigorous, substantiated ESG reporting is key to mitigating enforcement and reputational risks.

As investors increasingly weigh sustainability, the SEC will likely continue ramping up ESG disclosure enforcement. Companies that accurately reflect their ESG policies and practices will be better positioned for this heightened regulatory focus.

References

1. Enforcement Task Force Focused on Climate and ESG Issues. SEC.gov.
2. Climate-Related Disclosures/ESG Investing. SEC.gov.
3. ESG Risk Alert. SEC.gov.
4. Guest Post: SEC Steps up Enforcement on ESG Reporting with Climate Disclosure Rules Looming. UCI Paul Merage School of Business.
5. ESG Disclosure – Keeping Pace with Developments Affecting Investors, Public Companies and the Capital Markets. SEC.gov.
6. ESG enforcement is on the rise: Are you ready? Reuters.