SEC Whistleblowers Should Be on the Lookout for ESG Issues: A Case Study of the Vale Settlement
Importance of ESG-related disclosures for companies
In recent years, the U.S. Securities and Exchange Commission (SEC) has increased its focus on environmental, social, and governance (ESG) issues. On March 28, 2023, the SEC announced that it had settled a case with Vale S.A., a Brazilian mining company that had allegedly made false ESG-related disclosures regarding the safety of its Brumadinho dam, which collapsed in 2019 and killed 270 people. The SEC’s action against Vale highlights the importance of ESG-related disclosures and the risks of making false or misleading statements.
The Vale settlement resulted in a $55.9 million payment by the company, which included a $25 million civil penalty and $30.9 million in disgorgement and prejudgment interest. This was the first case brought by the SEC’s Climate and ESG Task Force, which was established to focus on ESG issues. The case illustrates the types of ESG-related disclosure cases the SEC may bring under the existing disclosure framework.
Details of Vale’s securities fraud
According to the SEC’s complaint, Vale committed securities fraud by intentionally concealing risks that its Brumadinho dam might collapse. Vale manipulated multiple dam safety audits and fraudulently disclosed that the dam was safe in multiple public disclosures. Vale used sustainability reports, presentations, ESG webinars, and its SEC filings to fraudulently convince investors otherwise. The SEC’s complaint also alleged that Vale’s disclosures caused “significant harm” to investors, causing Vale’s annual sustainability reports and other public disclosures to be materially false and misleading.
Pat Almonrode, an SEC whistleblower lawyer stated, “The Vale case demonstrates that insiders from public companies should continually and carefully review their ESG-related disclosures for accuracy and completeness and when the company strays from its directives consider consulting with a lawyer about your options to blow the whistle. It’s not just important from a securities perspective, it’s important for the health of the planet and as shown here lives are at stake.” Consistent with that, companies must maintain disclosure controls and procedures that are designed to ensure the accuracy of their ESG-related disclosures. Companies should also maintain documentation to support ESG and climate-related representations.
The SEC’s current focus on ESG-related disclosures is likely to lead to more ESG-related enforcement actions. Companies should be aware of the risks of making false or misleading ESG-related disclosures and should take steps to ensure the accuracy and completeness of their ESG-related disclosures. SEC whistleblowers should also be on the lookout for ESG issues and should consider reporting any concerns to the SEC through the use of a whistleblower lawyer who can potentially keep your identity anonymous. By doing so, they can help to protect investors and promote the integrity of the securities markets.
It is important to note that the SEC’s scrutiny of ESG-related disclosures is not limited to periodic filings. The Vale action demonstrates that the SEC’s scrutiny can extend to other ESG-related disclosures, such as those in sustainability reports or other climate-related analyses. This is true for both domestic and foreign issuers that access U.S. capital markets for equity or debt investments.
The SEC’s focus on ESG-related disclosures reflects a growing trend among investors who are increasingly interested in ESG issues. Investors are looking for companies that are committed to sustainability and responsible corporate behavior. As a result, companies that fail to meet ESG standards may face reputational risks, loss of investor confidence, and potential legal liabilities.
In light of the SEC’s increasing focus on ESG-related disclosures, companies should take steps to enhance their ESG reporting and disclosure practices. This may include conducting ESG audits, implementing ESG policies and procedures, and providing more robust ESG-related disclosures in their periodic filings and other public disclosures. By doing so, companies can enhance their credibility with investors, promote transparency, and reduce the risk of enforcement actions by the SEC.
The SEC’s settlement with Vale demonstrates the risks of making false or misleading ESG-related disclosures. Companies should take steps to ensure the accuracy and completeness of their ESG-related disclosures and maintain documentation to support ESG and climate-related representations.