SEC Enforcement of ESG and Greenwashing Claims.

SEC Enforcement of ESG and Greenwashing Claims SEC scrutiny of issuers’ ESG claims is just the tip of the iceberg. Greenwashing

inquiries targeting issuers are underway and will be scrutinized by the SEC, which will be vigilant about any perceived deception or misleading ESG disclosures. But scrutiny of ESG disclosures extends beyond issuers. The SEC has a similar interest in investment advisers’ ESG-related marketing strategies, including claims of green investing, ESG compliance, carbon credits, and others. In fact, the SEC has been active in the greenwashing space in recent years, as evidenced by the following press releases: - SEC Issues Guidance on ESG Investing (April 2021)

• SEC Charges Investment Advisor with False ESG Investing Claims (October 2022)
• SEC Charges FinTech Company in Alleged ESG Fraud (August 2023)

  SEC Inquiries, Civil and Criminal Exposure, and Collateral Consequences - SEC Inquiries

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• Civil and Criminal Exposure
• Collateral Consequences These SEC inquiries may precede, occur alongside, or follow parallel DOJ criminal investigations, SEC enforcement actions, or private litigation. While the SEC will focus on potential violations of federal securities law, DOJ prosecutors can target issuer executives (as well as issuer-level criminal culpability for material ESG misstatements), and shareholders and other plaintiffs can seek monetary relief based on their investment losses. These forms of government charges can present serious collateral consequences as well. A greenwashing enforcement action or criminal prosecution can trigger loss of coverage under D&O insurance policies, loss of licensure, government contract debarment, and other commercial implications.

  Defending Allegations of Greenwashing At Spodek Law Group,

  we handle matters defending companies and executives in federal securities enforcement proceedings, government investigations, and securities litigation involving allegations of financial fraud and other forms of corporate wrongdoing. This includes defending issuers, officers, directors, and investment advisers facing allegations of greenwashing. Importantly, greenwashing allegations can generate SEC investigations and securities class action litigation simultaneously, making it critical for companies and executives to have strong representation for all legal risks involved.

  When Does an ESG Claim Violate Federal Securities Law?

  Public companies, private equity firms, and investment advisers are not exempt from their financial reporting and investor disclosure obligations when making claims in the ESG space. As long as material gaps between their public assertions and their actual policies, practices, and operations remain present, SEC enforcement is on the table. This includes issuers’ and advisers’ liability for: - Issuers’ and Advisers’ ESG-Related Financial Reporting and Investor Disclosures

• Fraudulent Misrepresentations in Securities Offerings and Investment Advisers’ Marketing
• Fraudulent Registration Statements and Prospectuses

  Examples of Federal Securities Law Violations

  The statutes and rules that cover these types of violations include: - Exchange Act Section 10(b) and Rule 10b-5

• Securities Act Sections 17(a)(2) and 17(a)(3)
• Investment Advisers Act Sections 206(1) and 206(2)
• Investment Advisers Act Rule 206(4)-8
• Investment Company Act Section 34(b)

  Defending Allegations of ESG-Related Securities Law Violations If the SEC or DOJ

  is investigating your company or business for greenwashing, there are several key defenses to consider. These include: - Materiality

• Lack of Scienter
• Inadequate Securities Disclosure Rules

  Q. What Does it Mean for an ESG Claim or Disclosure to be “Material”?

In each case described above, an ESG-related claim or disclosure must be material in order to be actionable. This means that the misrepresented information is the type of information that a reasonable investor would consider important in deciding whether to buy, sell, or hold securities (or, in the context of an Investment Advisers Act claim, whether to engage a particular investment adviser). Materiality is one of the most heavily litigated aspects of securities fraud cases, and it is a key component of a successful defense for most corporate defendants in SEC enforcement actions.

Q. What Does it Mean to Lack “Scienter”?

Scienter is a key element of fraud, meaning the government or plaintiff is required to prove that the defendant had fraudulent intent. While a lack of scienter will be a complete defense to an SEC enforcement action brought under Rule 10b-5, it will be insufficient to defeat an SEC enforcement action brought under a provision that allows for negligence-based liability.

Q. What Are the Defenses to ESG-Related Securities Law Violations Under the Advisers Act and Investment Company Act?

In addition to materiality and lack of scienter, the SEC’s authority under these two statutes may be limited by the SEC’s own ESG-related rules and regulations. Along with these and other defenses, the SEC and DOJ also need evidence to prove that an ESG-related disclosure, claim, or marketing statement actually constitutes a violation.

Which SEC greenwashing cases reveal the greatest compliance risks?

Recently, the SEC has targeting firms whose ESG claims have misled investors about the sustainability or ethics of their assets, offerings, or services. While not unique to ESG-related issues, in many cases, the fines imposed in these matters are relatively small. Notably: - In September 2023, the SEC announced that DWS, a multi-billion-dollar asset management firm, had agreed to pay a $19 million penalty. The SEC’s action was based on allegedly “ material misstatements” concerning DWS’s ESG-related investment procedures.

• In June 2022, BNY Mellon paid the SEC $1.5 million for misstating the degree to which BNY Mellon integrated ESG considerations into its investment process for a selection of its ESG-related investment funds.
• In July 2022, Goldman Sachs paid a $4 million penalty following SEC allegations that it failed to implement its ESG investment policy in five of its investment funds in 2020 and 2021.
• In September 2024, WisdomTree paid the SEC $4 million in connection with failures involving advertised and offered exclusions for an investment product WisdomTree managed. Specifically, according to the SEC’s release, several of WisdomTree’s funds held companies involved in fossil fuels, tobacco, weapons, and other “exclusions” they claimed to have avoided in their offerings.
• In November 2024, Invesco paid $17.5 million to the SEC over allegedly misleading marketing claims concerning a series of Invesco ESG Funds. Specifically, Invesco claimed that “ESG integration” was applied across its ESG Funds, but included passive funds where that claim did not apply.

  When Did the SEC Start Bringing ESG Enforcement Actions?

The SEC first brought forward ESG enforcement actions in 2022. At the time, it brought the first action under the then-new Climate and ESG Task Force created by then-Acting SEC Chair Allison Herren Lee in March 2021. However, in June 2024, the Supreme Court held in SEC v. Jarkesy that the Seventh Amendment entitles defendants to a jury trial when the SEC seeks civil penalties for securities fraud. This means that while it will continue to pursue civil monetary penalties (CMP) to the fullest extent allowed, it must now bring those claims in federal court rather than in administrative proceedings. With the Trump administration in place, these efforts have slowed considerably.

Are the SEC Climate Rules and ESG Priorities Still Active?

The SEC continues to scrutinize issuers’ and advisers’ ESG-related claims, but there are several key changes in the SEC’s approach to ESG. In the coming months, there will be considerable uncertainty in several key areas:

Climate-Disclosure Rules - Proposed Climate-Disclosure Rules (March 21, 2022)

• Final Climate-Disclosure Rules (March 6, 2024)
• SEC Voluntary Stay (April 4, 2024)
• SEC Withdraws Defense (March 2025) The SEC proposed its climate-disclosure rule on March 21, 2022. At the time, SEC Chair Gary Gensler said that the rule would “level the playing field” between companies that voluntarily disclosed their climate data and companies that did not. Again, as with many other proposed SEC rules, the proposal itself did not create affirmative requirements. However, it did put the market on notice that disclosure would be a priority. The SEC adopted final climate-disclosure rules on March 6, 2024, but immediately announced it would voluntarily stay the adoption of the rules and defer enforcement until pending litigation was resolved.
• “While we would rather get from the outset that these rules are final,” Chair Gensler said during a press conference, “given the pending litigation, we are going to stay our rules... to give the federal courts time to weigh in and to preserve our ability to defend our rules to the fullest extent possible if needed.” As recently as July 17, 2024, in a call for public input, the SEC seemed to maintain confidence that it would eventually be able to enforce the climate-disclosure rules. But on March 27, 2025, the SEC voted to end its defense of the rules before the Eighth Circuit Court of Appeals. Instead of appealing the decision, the SEC made the unusual decision not to defend its rules, instead announcing that “the Commission will no longer be defending the adoption of these rules in the pending litigation in the Eighth Circuit Court of Appeals.” This effectively terminates the enforcement efforts that had been underway since Chair Gensler’s proposed rules in March 2022.

  Climate and ESG Task Force - Establishment of Climate and ESG Task Force (March 2021)

• Disbandment of Climate and ESG Task Force (September 2024) The SEC created the Climate and ESG Task Force in March 2021 to enhance the agency’s ability to pursue enforcement actions based on issuers’ and advisers’ greenwashing claims and other sustainability-related issues. While the task force was the same unit responsible for the first greenwashing claims in 2022, the SEC announced it had disbanded the task force in September 2024. With the task force gone, it remains to be seen how the SEC will dedicate resources to enforcement actions in this space going forward.

ESG as a Standalone Priority - In October 2024, the SEC

released its Division of Examinations priorities for fiscal year 2025. This list did not include ESG as a priority, meaning the SEC will likely integrate ESG into other priorities and examinations.

What Happens During an SEC Greenwashing Investigation?

Many investigations start during routine SEC examinations. The agency’s Division of Examinations plays a critical role in ensuring issuers and advisers comply with their obligations, both financial and nonfinancial, by conducting routine examinations of its registrants’ compliance. When these examinations uncover compliance deficiencies related to greenwashing claims or other offenses, the Division of Examinations refers these matters to the SEC’s Division of Enforcement.

• While SEC examinations can be a fruitful source of enforcement actions, many of the examinations that end in enforcement will not start with one. In addition, if the SEC staff conducts an investigation but does not find sufficient evidence to warrant a recommendation of enforcement action, the staff may close the investigation without action.

Formal Investigation and Wells Notice

When investigations go beyond the voluntary stage, the SEC will issue a formal investigation order. This authorizes designated SEC staff to issue subpoenas to compelled testimony and production of documents and records. If, after a full investigation, the SEC staff makes a preliminary determination that enforcement charges are warranted, it will issue a Wells notice. This is essentially the SEC’s preliminary decision to recommend that the SEC commissioners pursue charges of fraudulent misstatements. Before the commissioners make a final decision, however, the SEC will allow for a Wells submission, which is when corporate defense attorneys can argue why the case should not proceed forward.

Securities Fraud Allegations: Financial vs.

Non-Financial

The SEC has historically focused on financial misstatements in registration statements, prospectuses, and other investor-facing disclosures. But, while the SEC continues to target these types of disclosures, in recent years, it has also begun targeting non-financial ESG disclosures. In addition to being the same type of liability, the SEC’s recent ESG-related enforcement actions have focused almost exclusively on issuers’ and advisers’ liability.

Civil Litigation and SEC Penalties

The SEC’s enforcement strategy also is differe

nt in that it will seek civil monetary penalties as well. The Supreme Court’s decision in SEC v. Jarkesy recently restricted the SEC’s ability to seek monetary penalties in administrative proceedings for securities fraud, and the SEC must now prove securities fraud in a federal jury trial whenever it seeks to prove securities fraud as the basis for a civil penalty. However, the Supreme Court has not currently required the SEC to meet the same standard when defending SEC enforcement actions brought in administrative proceedings without civil monetary penalties.

Public Company Officers and Directors

Public company officers and directors are the same individuals responsible for filing truthful registration statements and prospectuses. This means they, too, can be investigated as a result of an SEC greenwashing investigation.

Should We Self-Report and What Penalties Could Follow?

If companies or investment advisers uncover evidence of potential ESG misconduct during internal audits, they will need to determine next steps, including whether to self-report. Once a company or adviser knows that its greenwashing exposures could pose liability risks, conducting a self-investigation and taking remediation steps may support requests for cooperation credit, mitigation, or other beneficial outcomes. With that said, while self-reporting can be one factor in a favorable resolution, issuers and investment advisers must also consider the possibility of self-reporting before they have received government contact. Along with determining the best path forward for self-reporting, companies and investment advisers must also understand their obligations and liabilities if the SEC, DOJ, or plaintiffs’ counsel gets involved.

Civil Monetary Penalties, Disgorgement, and Injunctive Relief

The SEC may seek the

following as a result of successful enforcement action. These penalties and remedies depend on the statute or rule being enforced: - Civil Monetary Penalties

• Disgorgement
• Injunctive Relief

  Non-Monetary Penalties and Remedies

Beyond seeking the above penalties, the SEC can also pursue non-monetary penalties and remedies. In its recent settlements with BNY Mellon, Goldman Sachs, and other companies, the SEC has required company-wide audits and the appointment of compliance monitors. For more examples of SEC settlements and non-monetary penalties, see: - SEC Settles Securities Fraud Charges with WisdomTree (September 13, 2024)

• SEC Charges Invesco Investment Management LLC (August 28, 2024)

  How Does the SEC Evaluate Issuer and Investment Adviser Compliance?

In the SEC’s 2001 Seaboard Report, it outlines various factors that it will use to assess whether a company or adviser self-policed, self-reported, remediation, or cooperated with an investigation. While the SEC has not issued an update for the Seaboard Report, it still plays a key role in the agency’s approach to evaluating corporate compliance. The Seaboard Report outlines the following as considerations:

A. How Successfully Did the Issuer or Investment Adviser Self-Police?

If a company or adviser can prove a compliance culture that does not tolerate misconduct, that self-reports once misconduct is discovered, and it is willing to take corrective measures, the SEC may be more likely to take the approach of working with the company or adviser rather than seeking a hostile outcome.

B. Did the Issuer or Investment Adviser Self-Report?

If the issuer or investment adviser self-reported its misconduct before it became public or the government became involved, then the SEC should potentially view this as a positive step. If it only self-reports after a government investigation begins, that may not matter as much.

C. Did the Issuer or Investment Adviser Remedially Respond?

Once an issuer or investment adviser finds greenwashing evidence, taking immediate action to avoid future violations may be a key factor in evaluating the company’s commitment to compliance.

D. How Satisfactorily Did the Issuer or Investment Adviser Cooperate?

Ultimately, how well a company or adviser cooperated with the government’s investigation can also make a significant difference. Cooperating with the government may lead the SEC or DOJ to accept corporate defense attorneys’ efforts and allow the company’s leadership to remain in place during the process.

How Do SEC Greenwashing Claims Differ From FTC Cases?

If companies and executives seek to avoid greenwashing scrutiny by relying on the FTC Green Guides, they should be careful. While companies may encounter enforcement by the FTC, state attorneys general, and other agencies, the SEC is unique in that it has a direct role in enforcing issuers’ and advisers’ securities disclosure obligations. This means that while the FTC Green Guides may be useful for evaluating environmental advertising in a consumer context, they do not set out the requirements for securities disclosure.

FTC Green Guides

The FTC is the main federal authority with regard to environmental advertising.

Along with state attorneys general, the FTC enforces the federal FTC Act. As well as taking a rule-making approach to a number of its issues, the FTC uses a guidance-based approach in others. The FTC Green Guides fall into the latter category. This includes issues such as: - Vague and General Environmental Claims

• Qualifications Carbon Credits

Carbon credits can attract attention from both advertising and commodities regulators. While the FTC investigates allegations that misleading carbon-credit claims affect consumer purchasing decisions, the Commodity Futures Trading Commission has also focused regulatory attention on carbon-offset market activity. This is an example of why companies may be targeted in civil or criminal investigations based on the same ESG-related issue under different statutes and regulations.

Moreover, the FTC’s enforcement standard (deception) and the SEC’s (materiality) differ. The FTC’s deception standard looks at whether an environmental claim’s material representation is likely to mislead consumers acting reasonably under the circumstances. Conversely, when assessing materiality under federal securities law, the SEC focuses on whether information is important to investors making decisions to buy, sell, or hold investments. In general, the FTC’s standards are consumer-focused, while the SEC’s standards are investor-focused.

How Often Does the FTC Issue New Green Guides?

The FTC first issued its Green Guides in 1992. Since then, it has updating the Guides periodically in order to ensure the Guides remain current. The Guides are currently the agency’s guidance on avoiding deceptive environmental claims. The agency is currently awaiting public comments to revise its guides. This includes comments regarding “how to make effective and clear environmental claim qualifications,” “how to evaluate claims that address the carbon footprint,” and “how to evaluate claims of effectiveness of the carbon offsets.”

Contact a Federal Criminal Defense Attorney

Nothing here is legal advice, and the details of your case matter. Todd Spodek and Spodek Law Group take federal criminal and white collar cases nationwide, from offices in New York, Brooklyn, Queens and Los Angeles. You can reach the firm at 212-300-5196.