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SEC Brings Landmark Suit Over Alleged Misrepresentations in ESG-Related Documents

This Alert discusses the recent enforcement action brought by the SEC against Vale S.A. arising out of alleged misrepresentations in its sustainability reports and other ESG-related disclosures.

The U.S. Securities and Exchange Commission's ("SEC") Climate and ESG Task Force has filed one of its most significant enforcement matters to date. On April 28, 2022, the SEC brought an action in the U.S. District Court for the Eastern District of New York against Vale S.A. ("Vale"), a global mining company. The SEC alleges violations of the federal securities laws arising out of false and misleading statements in connection with the safety and stability of dams built to hold toxic waste produced in mining operations. Vale is litigating the matter.

In January 2019, Vale's Brumadinho dam in Brazil collapsed and released nearly 12 million cubic tons of toxic waste, causing one of the most catastrophic mining disasters in history. The collapse killed 270 people and poisoned a nearby river. In the days following the collapse, Vale suffered significant financial distress—its market capitalization declined by more than $4 billion and its American Depositary Shares lost more than 25% of their value.

The SEC alleges that Vale manipulated dam safety audits, obtained numerous fraudulent stability certificates, and regularly misled local governments, communities, and investors about the safety of the Brumadinho dam through its ESG disclosures. Specifically, the SEC asserts that Vale engaged in a pattern of deceptive acts and practices between 2016 and 2019 when it caused its sustainability reports, periodic filings, and other ESG disclosures to be materially false and misleading by downplaying the risk of catastrophic financial consequences should any of its high-risk dams collapse.

Important Takeaways

The complaint demonstrates that the SEC is willing to target statements included in sustainability reports, in addition to traditional periodic filings, as a basis for enforcement actions alleging fraudulent misstatements and omissions. We expect the SEC to use this approach more regularly in the future, and companies should consider taking additional measures to perform an audit of their ESG-related statements and disclosures to ensure the accuracy and verifiability of such statements made in these reports, on their websites, and in connection with their representations regarding products in marketing materials and to regulators.

The SEC's allegations characterize environmental standards, in particular dam safety audits, as "internal controls." Though the SEC did not bring an independent internal controls claim on this basis, it has clearly signaled its view that violation of environmental standards referenced in internal certifications may constitute internal controls violations.

Given the Division of Enforcement's ongoing focus on ESG, we expect engagement on environmental issues is likely to result in an uptick in companies engaging third-party "environmental auditors" to prepare to defend against these types of allegations. The focus of the SEC's complaint on environmental standards effectively ensures that litigation of the SEC's fraud claims will turn on a significant battle of environmental experts.

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