SEC, ESG and Climate Enforcement: Gearing Up, Winding Down or Business As Usual?

The Securities Exchange Commission (SEC) launched its Climate and ESG Task Force focused on enforcement with great fanfare in March 2021. In response to “increasing investor focus and reliance on climate and ESG-related disclosure and investment,” the task force had a staff of 22 from across the agency to proactively identify misconduct related to environmental, social and governance (ESG). 

The SEC’s initial focus was to identify any material gaps or misstatements in issuers’ disclosure of climate risks under existing rules and to address whistleblower complaints.

Barely three years later, when the SEC quietly disbanded that Climate and ESG Task Force, there was no public announcement. But for the eagle eye of a Bloomberg reporter who reported on Sept. 12 that the task force webpage had been dropped in June 2024 just before the SEC revamped its website in July 2024, its dissolution may not have been revealed to this day.

According to Bloomberg, when asked about it, a SEC spokesperson stated, “The strategy has been effective, and the expertise developed by the task force now resides across the Division.” Some commenters jumped on this shift in the shadows as indicative of a strategic downturn in SEC ESG related enforcement.

Notwithstanding this belated acknowledgement that the task force was no more, on Sept. 10, the SEC announced a $1.5 million settlement with Keurig Dr Pepper Inc. for making incomplete and inaccurate statements in annual reports about the recyclability of Keurig’s K cups. Some commenters viewed this settlement as a harbinger of more ESG enforcement to come.

This confluence of recent events raises the question: Is the SEC’s ESG- and climate-related enforcement gearing up, winding down, or is it just business as usual?  Like many nuanced legal policy questions, the answer to this one initially appears to be – it depends. However, upon closer review, indications are that the SEC’s approach to ESG and climate enforcement is very much business as usual, and that continued vigilance and diligence will be required of the regulated community to assure that statements they make about ESG and climate related matters are accurate and complete. 

How hard the SEC presses compliance and enforcement in the future will likely depend on the ESG- and climate-related rules and tools it will have to work with – which is very much an open question in these uncertain political times.

In light of the Oct. 2 announcement of the departure of SEC Enforcement Director Gurbir S. Grewal, the direction of future ESG and climate enforcement will also be subject to the priorities of the new acting director, Sanjay Wadhwa, and those who succeed him.

Initial Rise in SEC ESG Enforcement

In conjunction with the operation of the task force, the SEC included ESG matters in its annual Examination Priorities Reports for 2021, 2022, and 2023.

During that time, the SEC established and maintained a web page that explained its mission as follows:

“The Climate and ESG Task Force is coordinating the effective use of Division resources, including through the use of sophisticated data analysis to mine and assess information across registrants, to identify potential violations including material gaps or misstatements in issuers’ disclosure of climate risks under existing rules, and disclosure and compliance issues relating to investment advisers’ and funds’ ESG strategies.”

Through the end of 2022, that webpage heralded eight significant ESG enforcement actions that had been initiated after the task force was formed, some of which settled during that time netting tens of millions of dollars in penalties. The enforcement actions covered a broad gamut of alleged environmental, social, and governance misconduct.

The SEC also proposed more far-reaching rules to impose affirmative disclosure requirements on issuers to protect investors on ESG matters, including:

• Climate-Related Disclosures Rule, proposed in March 2022
• Amendments to rules under both the Investment Advisers Act of 1940) and the Investment Company Act of 1940 to require certain investment advisers and companies to enhance disclosures about their ESG investment practices, proposed in May 2022
• Amendments to the Names Rule to prevent misleading or deceptive fund names (Rule 35d 1) proposed in November 2022 (e.g., that a fund’s investment decisions incorporate one or more ESG factors) 

Promulgation of all of these rules would establish a broader basis for ESG enforcement.

SEC ESG Enforcement Ebbs in 2023

While the Climate and ESG Task Force was lower profile in 2023, it did participate in settlement of a number of ESG-related enforcement actions that recovered penalties of more than $110 million, including actions for alleged failure to:

• Adopt and implement policies and procedures reasonably designed to ensure that its public statements about ESG integrated products were accurate
• Implement policies and procedures required for two mutual funds and a separately managed account strategy marketed as ESG investments
• Maintain disclosure controls and procedures to collect and analyze employee complaints of workplace misconduct
• Disclose, and for making, false and misleading statements about the circumstances leading to a CEO’s termination
• Disclose, and for making, false and misleading claims about the safety of a dam before it collapsed

Although the SEC tied all of these 2023 settlements to ESG, they were not referenced on the task force webpage.

Without mentioning the task force in Feb. 23, 2024, remarks reflecting on ESG and enforcement of the federal securities laws in 2022 and 2023, Grewal highlighted the importance of ESG is to building trust in the securities industry: “… ESG speaks to what investors care about in terms of how they make money; in short, it speaks to their values.”

Grewal went on to summarize the SEC’s focus on ESG enforcement in 2022 and 2023 in the same terms as the mission assigned to the task force in 2021:

“Here’s the simple takeaway from the examples I’ve shared and from our work in this space: ESG issues are increasingly material to investors. It is therefore crucial that when companies speak about the host of issues that may fall under the rubric of ESG – whether climate, social, corporate governance or others – they do so in a way that’s not materially false or misleading.”

In the meantime, the SEC’s key ESG and climate regulatory initiative made little headway in 2023. Although the public comment period ended in June 2022, from then until the end of 2023 the SEC was mired in a flood of contentious comments on the Climate Related Disclosure Rule that pitted environmental groups against business and industry, with a continuous stream of post-comment period advocacy from Democrats in favor and Republicans against the proposed rule.

Similarly, there was no action on the Enhanced ESG Disclosure rule amendments and, in its regulatory agenda issued in the fall of 2023, the SEC pushed the anticipated time frame for issuance of its final rule to spring 2024. 

However, the agency did adopt final amendments to the Names Rule on Sept. 20, 2023, to improve and broaden the scope of funds that must comply with the requirement to adopt a policy to invest at least 80 percent of their assets in accordance with the investment focus the fund’s name suggest.

According to the SEC’s fact-sheet, “[t]he primary types of names that the amended rule is anticipated to cover include fund names with terms such as “growth” or “value” or certain terms that reference a thematic investment focus, including terms indicating that the fund’s investment decisions incorporate one or more ESG factors. These amendments were adopted largely as proposed, have not been subjected to judicial review, and became effective on December 11, 2023.

ESG Enforcement Dipped Further the First Eight Months of 2024

As a preview of things to come, after three years of focusing on ESG enforcement, in October 2023, the SEC dropped ESG from its list of Division of Examinations Priorities for 2024. 

A few months later at a conference in January 2024, when asked about the Climate and ESG Task Force, Grewal played down its active role in ESG enforcement, saying that it was a “clearinghouse of information” and “[t]he confusion here sometimes is that people view a task force or strike force as something along the lines of a collection of individuals exclusively looking at a certain set of cases.”

Following this public lowering of expectations, during the first eight months of 2024 no new ESG enforcement actions were announced by the SEC. At the same time, the SEC has ramped up enforcement activity in other areas, with a notable increase as the agency’s fiscal year came to a close.

In the meantime, a substantially revised final Climate-Related Disclosure Rule was finally approved by the SEC on March 6, 2024, but the changes were not sufficient to satisfy the U.S. Chamber of Commerce and a number of business stakeholders and government officials. Multiple petitions for review challenging the regulation were filed quickly that were consolidated for disposition by the U.S. Court of Appeals for the Eighth Circuit.

On April 4, the SEC issued an order staying the final rule pending the completion of judicial review by the Eighth Circuit. During briefing, the issues were further complicated by the U.S. Supreme Court’s Loper Bright and Corner Post decisions.

Briefing in the Eighth Circuit was recently completed and oral argument may take place yet this year. There is no set time for the Court of Appeals to issue its decision. Accordingly, the fate of this rule may be subject to the outcome of the upcoming elections.

Also, in its spring 2024 regulatory timeline, the SEC further postponed action on its ESG-related rules, including issuance of final Enhanced ESG Disclosure rule amendments that were proposed in May 2022, as well as issuance of proposed amendments to its “Human Capital Management Disclosure” and a proposed “Corporate Board Diversity” rule. The final Enhanced ESG Disclosure Rule is currently targeted for release in October, but there has been no indication from the SEC that it is coming any time soon.

This rule is almost certain to be challenged if issued in its current form before the end of the year, and also may be subject to revocation by the next Congress under the Congressional Review Act. The other proposals are not expected until mid-2025. Consequently, like the Climate-Related Disclosure Rule, the prospects for these other SEC ESG-related proposed and planned rules may also depend on the 2024 general election.

Not Quiet on the State and Federal Front

In first nine months of 2024, the highly politicized state and federal battles between ESG and anti-ESG forces also rose to a fever pitch. Institutional Investor reported in June that while the pace of state anti-ESG legislation slowed in 2024, more than 161 bills and resolutions were proposed in 28 states. At the same time, ESG proponents have continued to underscore the high costs and impacts of anti-ESG policies. They have recently had success challenging ESG legislation in Oklahoma and Missouri, and a First Amendment challenge to a Texas anti-ESG investing law was recently filed.

At the federal level, House Republicans have most recently stepped up their challenges to the administration’s ESG policies as part of their pre-election skirmishing by proposing legislation to limit the ESG disclosure requirements proposed by the SEC, restrict ESG retirement investing, and prevent higher education institutions from promoting diversity. On Sept. 17, the White House issued a series of Statements of Administration Policy opposing each of the proposed House bills. 

The House Speaker has also pledged to repeal large parts of the Biden administration’s climate laws included in the Inflation Reduction Act, and the House has advanced Congressional Review Act resolutions to overturn recent EPA rules on power plants, heavy-duty vehicle emissions and particulate matter standards.

For their part, on Sept. 12, Democrats in the House and Senate sponsored parallel proposed Polluters Pay Climate Fund bills to require the largest pollution emitters to contribute to a $1 trillion federal fund to pay the cost to mitigate and redress the effects of climate change. Shortly thereafter, on Sept. 23 at the start of Climate Week NYC, the White House commemorated the administrations historic climate legacy and derided Republicans’ continuing efforts to rollback climate protections.

SEC Disbands ESG Task Force, Continues to Enforce Against Material Misleading or False ESG Claims

Against this backdrop – reduced ESG enforcement, a stay of the Climate Related Disclosure Rule pending the outcome of hotly contested judicial review, continued postponement of most of the SEC’s other proposed and planned ESG and climate related rules, and the very fiery public disputes between those stakeholders favoring and opposing ESG and climate protections – it should not have been all that surprising that the SEC disbanded the ESG task force sometime in 2024. 

What was surprising to the regulated community, however, was that the SEC did it so quietly. In addition to the post hoc SEC statement related by Bloomberg, the following further comments from the SEC spokesperson reported by ESG Dive provide a bit more insight:

“The Commission brought a number of important enforcement actions in the area which have sent a strong message to market participants about the importance of complying with the law when it comes to ESG considerations,” the spokesperson said. “If we see another uptick in misleading or false claims around ESG by issuers and ESG investing by advisers, like we are now seeing around AI washing, we will use the same tools we’ve used in the past to hold those violators accountable.”

Coincidentally, the very same week that the public learned of the task force disbandment, the SEC also announced the first significant ESG enforcement action and settlement in nearly a year, when it settled claims that Keurig Dr. Pepper, Inc., made inaccurate statements regarding recyclability of K-cup pods in two of its annual reports. The SEC asserted that Keurig’s omissions from its disclosures violated Section 13(a) of the Securities Exchange Act of 1934 and Rule 13a-1. Keurig agreed to a cease-and-desist order and payment of a $1.5 million civil penalty. As reported by ESG Today ESG, John Dugan, Associate Regional Director, Enforcement Division, of the SEC Boston Regional Office, explained:

“Public companies must ensure that the reports they file with the SEC are complete and accurate. When a company speaks to an issue in its annual report, they are required to provide information necessary for investors to get the full picture on that issue so that investors can make educated investment decisions.”

Whether intended or inadvertent, the juxtaposition of these events – the revelation of the disbandment of the task force and the announcement of the first ESG enforcement action in a while – reflects that even though its efforts to promulgate ESG rules with more teeth have been stymied, the SEC will continue to bring ESG-related enforcement actions based on the rules already on the books.

SEC ESG and Climate Enforcement is Business as Usual

All in all, notwithstanding the kerfuffle over the SEC’s stealth disbandment of the ESG Task Force, the overall picture suggests that this this shift in priorities from one area to others where misconduct in on the rise (i.e. AI washing) is business as usual at the SEC, and not a permanent retreat from ESG and climate related disclosure enforcement.

In 2021, the when the ESG Task Force was established, the SEC’s announced focus was on material gaps or misstatements in issuers’ disclosure of climate risks and ESG strategies under existing rules, and the initial enforcement actions were based on those existing theories and rules, At the time, it appeared that the agency planned to issue several new rules that would substantially broaden the scope of climate and ESG disclosures, so it made sense to staff up a task force and build a repository of data and skill sets to marshal that information to prepare that expanded staff to pursue compliance and enforcement as soon as the new ESG and climate disclosure rules became effective.

However, most of those more specific and in-depth ESG and disclosure requirements have either not yet made it onto the books (e.g., the ESG Disclosure Rule) or been approved by the courts (e.g., the Climate Related Disclosure Rule). Unless and until they do – and at this unique political crossroads it is less than clear that they ever will - the SEC appears to be biding its time and sticking to its knitting by pursuing the same kind of bread and butter ESG and climate misrepresentations, material gaps, and false claims which, like the Keurig case, are based on alleged violations of the laws and regulations that are already on the books.

Regardless of whether the ESG and climate related rules are enhanced, the SEC has consistently recognized and publicly acknowledged that they are a priority for investors; and under existing laws and regulations, companies are still required to ensure the accuracy and completeness of their ESG and climate related public statements and disclosures. The SEC believes that it made its enforcement point sufficiently using the tools it has already. It can be anticipated that if the pending and planned ESG and climate rules become effective, the agency will use the expertise developed by the task force to step up enforcement to compel compliance with those more stringent requirements.

For more information, please contact the Barnes & Thornburg attorney with whom you work or Bruce White at 312-214-4584 or bwhite@btlaw.com.