The wave of ESG litigation and enforcement (or is it a tsunami?) is here – Securities

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If the first wave of ESG was for marketing and promotion, the second wave is coming for litigation and enforcement.

Despite recent declines in ESG ratings and climate disclosures from high-profile figures such as Tesla chief Elon Musk and HSBC’s head of sustainable investing, government agencies around the world are taking this very seriously. ESG disclosure compliance and enforcement to ensure transparent and honest reporting for investors and others. company stakeholders.

SEC sets the tone

While the U.S. Securities and Exchange Commission’s (SEC) proposed rule on climate disclosures for publicly traded companies remains for comment until June 17, 2022, the SEC is already taking strong action to combat climate change. greenwashing and misleading claims related to ESG disclosure.

In April, the SEC announced that it was accusing Vale, a Brazilian mining company, of allegedly making false and misleading statements in its sustainability reports and other public documents to investors regarding the risks associated with its structures. tailings at the Brumadinho dam before the dam collapsed. in 2019. The SEC says Vale’s disclosure was based on manipulated security audits, fraudulent geotechnical stability certificates, and misrepresentations about environmental and social risks to local communities, governments, and investors.

“By allegedly manipulating these disclosures, Vale has compounded the social and environmental damage caused by the tragic collapse of the Brumadinho dam and has undermined the ability of investors to assess the risks posed by Vale securities,” said Gurbir S. Grewal. , director of the SEC’s Enforcement Division, in a statement.

In May 2022, the SEC proposed changes to its “Names Rule” fund to guard against “materially misleading and misleading use of ESG terminology”. The SEC proposes that the only investment funds that can use the term “ESG” are those that consider ESG factors central to the investment selection process.

Europe seeks to eradicate greenwashing

In a significant escalation in law enforcement around greenwashing – and a potential sign of things to come in North America – German police raided the offices of Deutsche Bank on May 31 as part of of an investigation into misleading claims about the investment bank’s “green” investment portfolio. The allegations have already led Deutsche Bank CEO Asoka Woehrmann to resign, with further fallout expected.

Is Canada next?

With mandatory climate disclosures coming to Canada for banks and insurers (as discussed in our previous blog), Canadian banks have also come under greenwashing scrutiny from environmental groups and investors due to their increasing use of sustainability-linked finance (SLF).

The SLF allows banks to extend financing to companies that perform well from an ESG perspective, even if they are carbon-intensive. Canadian banks distinguish between strong action on decarbonization and support for their Canadian corporate clients, many of whom work in the extractive and carbon-intensive sectors. Banks and insurers will need to be judicious and transparent in their ESG disclosures and engagements, particularly on climate, by 2024 to ensure they are not the next targets of enforcement action.

An ESG tsunami?

Between 2017 and 2020, more than 1,800 ESG-related litigation cases were filed in 40 different countries. Recently, we have seen examples of ESG-related litigation brought against companies and individuals. With mandatory ESG reporting coming soon in Canada and the United States, many companies could become the target of ESG litigation if their reporting is incomplete or potentially misleading, as discussed in our previous blog post. It seems likely that the wave of ESG litigation and enforcement will soon turn into a tsunami, if it hasn’t already.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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