The SEC and its continued focus and enforcement of “Greenwashing” by Alek Smolij

 

The U.S. Securities and Exchange Commission (SEC) has positioned itself as one of the United States’ leading government regulators on environmental, social, and governance (ESG) issues and in 2023 has continued a pattern of active enforcement actions focusing on their perceived view of ESG misconduct.

The underpinning of these actions has its roots in various places, including those that occurred on March 4, 2021, when the SEC announced the creation of a “Climate and ESG Task Force” in its Division of Enforcement, to focus on ESG-related gaps and misstatements in disclosures by publicly-traded companies, mutual funds, and other investment vehicles.

One of the SEC’s main enforcement focuses is “greenwashing,” a term that describes when a publicly-traded company, mutual fund, or other public investment vehicle makes a misleading claim about its ESG policies or credentials. For instance, some mutual funds may market themselves as an “environmentally-friendly” energy fund but have a relatively small amount of investor funds invested in renewable energy sources. Critics of the current regulation regime have asserted that many investment vehicles mislead investors with terms like “green,” “carbon-neutral,” and “environmentally-friendly.” These broad terms, critics say, are not adequately defined and may convince investors to direct their money to funds that the investors believe align with ESG values when the funds themselves are not actually evaluating whether their investments are in line with such values.

In late March 2022, the SEC’s Division of Examinations used the term “greenwashing” in its 2022 Examination Priorities to describe certain activities that the SEC would be paying particular attention to in the coming months The SEC noted that it would focus on whether public investment vehicles are “overstating or misrepresenting the ESG factors considered or incorporated into portfolio selection (e.g., greenwashing), such as in their performance advertising and marketing.”

The SEC proposed new greenwashing-focused rules in 2022 that would strengthen the Division of Enforcement’s ability to fight against misleading ESG disclosures. In August 2022, after a public comment period, the SEC’s commissioners voted 3-to-1 to move forward with proposed climate disclosure ESG-focused rules. These rules focus on both publicly-traded companies and investment advisors and funds. Under these climate disclosure rules (expected to be made final in April, 2023), publicly-traded companies are required to include certain climate-related disclosures in their public filings. Further, these rules will require investment advisors and funds who associate their investments with ESG to provide specific disclosures about how they pursue ESG strategies in their investments.

While these rules are still pending and have not yet been finalized, the Division of Enforcement has continued its focus on greenwashing enforcement efforts without even having the benefit of these proposed rules.

The SEC has publicly announced various settlements in the banking space and in the manufacturing space involving tens of millions of dollars in agreed-upon penalties in multiple enforcement actions focused on greenwashing. These actions have focused on SEC investigations of internal policies governing mutual funds and investment strategies branded as ESG investments.

The ESG task force has also investigated and charged companies whom the SEC found were not adequately disclosing environmental-related risks. The SEC has, for instance, settled a charge with a mining company related to failure to disclose the financial risks of mercury contamination of a river located near a Brazilian mine.

Through these actions, the SEC has indicated that it will target companies whose policies do not adequately ensure that these investment products align with stated goals of investing in ESG-focused products. Further, the SEC is keeping a close eye on required disclosures by public companies as these disclosures relate to ESG risks and issues that companies may be required to communicate to investors. The SEC undertook these enforcement efforts under existing securities laws and regulations without final passage of the proposed ESG-focused climate disclosure rules mentioned above.

Clearly, the SEC is not waiting for final climate disclosure rules to hone in on greenwashing practices, and the proposed climate disclosure rules will only strengthen the SEC’s ability to engage in similar investigations and enforcement actions.

The Division of Examination’s 2023 Examination Priorities do not explicitly use the term “greenwashing,” but they indicate that the SEC will continue to focus on enforcement actions against companies that engage in this practice. The 2023 Priorities state that the SEC will examine “whether ESG products are appropriately labeled and whether recommendations of such products for retail investors are made in investors’ best interests.” This language indicates that greenwashing-focused enforcement is clearly still a priority for the SEC, especially when paired with the SEC’s proposed new rules requiring ESG climate disclosures.

The SEC’s focus on greenwashing means that organizations associating themselves or their investments with ESG objectives should assess whether their actions line up with their stated ESG efforts and whether their disclosure matches what their records show and whether they are measurable, verifiable and provable statistics and data. Regular auditing of ESG programs, company disclosure, ESG reporting and comprehensive ESG strategy planning could help avoid a costly SEC enforcement action.

Note, we have also published on the Federal Drug Administrations renewed focus on “Greenwashing” in an early post on our blog where we documented the renewed FDA focus in the area of cosmetics and other products and issued additional guidance on greenwashing in the context of utilization of words such as “natural”, “free (of)”, “eco-friendly”, “Cruelty Free”, “renewable” and “sustainable”.

Duane Morris has an active ESG and Sustainability Team to help organizations and individuals plan, respond to, and execute on your Sustainability and ESG planning and initiatives. For more information or if you have any questions about this post, please contact Alek Smolij (the author), Brad A. Molotsky, David Amerikaner, Sheila Rafferty-Wiggins, Alice Shanahan, Jeff Hamera, Nanette Heide, Joel Ephross, Jolie-Anne Ansley, Robert Montejo, Seth Cooley, or the attorney in the firm with whom you are regularly in contact.

ESG: Sustainability Linked Loans becoming more Commonplace in the Marketplace – Louise Melchor, Esq.

 

As environmental, social, and governance (“ESG”) initiatives are increasingly implemented by borrowers and lenders, sustainability linked loans provide opportunities for both.

What are Sustainability Linked Loans?

Sustainability linked loans (“SLLs”) are based on the Sustainability Linked Loan Principles developed by the LMA, APLMA and LSTA.[1]  In SLLs, a borrower, together with its lender group, determine and set certain sustainability performance targets (“SPTs”) for the borrower to achieve, to be measured by key performance indicators (“KPIs”).  Independent organizations, including the Sustainability Accounting Standards Board (“SASB”), provide guidance on the ESG metrics most relevant to certain industry sectors.  Once agreed between the borrower and lenders, the KPI/SPT benchmarks are then integrated into margin adjustments to the interest rate or commitment fee for the credit facility (i.e., by achieving the KPIs, the interest rate is reduced).  The credit facility documentation will also include reporting requirements for independent, external verification of the borrower’s performance level with respect to each SPT for each KPI, at least annually.

Borrower Benefits

Many companies have already undertaken ESG data collection and reporting, and more will likely do so as the SEC expands its focus on ESG disclosures and as more investors demand this information. While the above noted third party verification and reporting costs are inherent to SLLs, borrowers that are already engaging in these efforts may find they can efficiently obtain an additional economic incentive through SLL financing.  Additionally, SLLs can be part of a comprehensive alignment with the borrower’s ESG strategies and policies.

Lender Benefits

Lenders are undertaking ESG initiatives as well, in which SLLs may be a component.  And, regulatory agencies for certain lenders are communicating their plans to provide guidance on climate-related risks, and integrate these principles into their supervisory expectations.[2]  Further, studies have shown that companies (e.g., SLL borrowers) that identify and manage their ESG risks have improved financial performance.[3]  So, financing SLLs can benefit lenders across policy, regulatory and business aspects.

Current State of the Market and Next Steps

Although SLLs are a relatively new financing concept, particularly in the U.S., the volume of SLLs globally quadrupled in issuance between 2020 and 2021.[4]  As ESG momentum continues to build in the U.S., the volume of SLLs is likewise expected to continue to grow.  Currently, terms are negotiated on a transaction specific basis, and market provisions have not been added to the LSTA’s suite of documentation.  But, as SLLs become more common, the market is likely to coalesce on terms.  Stay tuned for more updates on SLLs and other trending sustainable finance products, including green bonds and commercial property assessed clean energy (C-PACE) financing.

Duane Morris has an active ESG and Sustainability Team to help organizations and individuals plan, respond to, and execute on Sustainability and ESG planning and initiatives within their own space. We would be happy to discussion your proposed project with you. For more information, or if you have any questions about this post, please contact Louise Melchor, the author or Brad A. Molotsky, Nanette Heide, Seth Cooley, David Amerikaner, Jolie-Anne Ansley or the attorney in the firm with whom you are regularly in contact.

 

[1] Available at https://www.lsta.org/content/sustainability-linked-loan-principles-sllp/

[2] See https://www.occ.gov/news-issuances/bulletins/2021/bulletin-2021-62.html and https://www.dfs.ny.gov/reports_and_publications/press_releases/pr202111032

[3] https://www.msci.com/esg-101-what-is-esg/esg-and-performance

[4] See https://about.bnef.com/blog/1h-2022-sustainable-finance-market-outlook/

 

 

 

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The opinions expressed on this blog are those of the author and are not to be construed as legal advice.

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