all41author By Andrew Ramonas
An SEC enforcement initiative targeting misleading ESG disclosures has become a business risk for dozens of public companies, including bankrupt Bitcoin miner Core Scientific, shale oil producer Pioneer Natural Resources and banking giant Ally.
The Climate and ESG Task Force the Securities and Exchange Commission, which was launched two years ago, was mentioned among the risk factors in 30 companies’ 10-K annual reports so far this year with about six months to go, according to a Bloomberg Law review of company filings. That’s double the 15 companies that referenced it in their 10-K risk factors in all of 2022.
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The ramp-up in risk disclosures comes amid a seven-month lull in new cases from the task force. The unit last helped bring a case in November, when the SEC announced an enforcement action and settlement with Goldman Sachs. The matter was one of at least four cases tied to the group.
The task force is unlikely to stay quiet indefinitely, securities lawyers said. The SEC continues to emphasize environmental, social and governance reporting and is moving to require climate risk disclosures, giving companies reason to alert their shareholders to the special enforcement unit, they said.
“The sense is that it’s often better to have said something, pointing out a known issue, than to have said nothing at all,” said Amy Greer, a former SEC lawyer and co-chair of Baker & McKenzie LLP’s North American financial regulation and enforcement practice. Greer defended health insurance distributor Benefytt against a task force-assisted case last year.
An SEC spokesman declined to comment.
The task force is an example of more scrutiny and changing expectations from regulators, investors and others on ESG issues, Greenidge and Core Scientific said in their 2022 and 2023 10-Ks. The Bitcoin miners may face additional costs if they don’t adapt to expectations and rules about their electricity usage and other ESG concerns, according to their reports.
Both Greenidge and Core Scientific rely on at least some carbon-emitting sources for their mining, which requires powerful computers to crack complex equations that garner the companies rewards in cryptocurrency once solved.
Greenidge’s website says that the Bitcoin miner is a “protector of the environments in which we operate.” The company has battled environmental activists over the natural gas-fired power plant it runs in upstate New York. The state’s Department of Environmental Conservation denied Greenidge’s renewal permit for the facility last year due to greenhouse gas emissions limits, but it remains operational as the company appeals the decision.
Ally in its 2022 and 2023 10-K risk factors listed the task force as an example of how governments are increasingly focusing on climate change, while adding that a majority of its business is connected to auto loans.
Government officials and others are looking more closely at companies’ emissions reduction targets and other climate goals for instances of greenwashing, Pioneer and Devon said in their 10-Ks. Both companies report emissions data and reduction goals in their sustainability reports. The rise of lawsuits over misleading ESG claims bring “increased litigation risks which could, in turn, lead to further negative sentiment against us and our industry,” Devon said in its 10-K.
The inclusion of the task force in a company’s 10-K risk factors doesn’t necessarily mean the SEC is probing its ESG disclosures, said Emily Strauss, a University of California College of the Law, San Francisco, associate professor, who studies securities litigation and enforcement. But companies like oil producers and Bitcoin miners face a higher risk of ESG-related enforcement due to the carbon-intensive nature of their businesses, she said.
“Firms are being more forthcoming and more conscious about some of the risks that they face and connections to misstatements about those issues,” Strauss said.
And if one company reports a new risk, its peers likely will take notice, Greer said.
“You don’t want to be the last one to have incorporated that general risk disclosure,” she said.
Representatives of Ally, Pioneer, Devon and Core Scientific didn’t respond to requests for comment. A Greenidge representative declined to comment.
The task force would enter new territory if it pursues a case against a Bitcoin miner or an oil company. The unit so far only has helped with enforcement actions concerning
The Goldman Sachs and BNY Mellon cases both centered on descriptions of the firms’ ESG funds. BNY Mellon agreed to pay $1.5 million to resolve SEC claims the bank misled investors about its ESG fund labels, the agency announced in May 2022. Goldman Sachs reached a $4 million settlement with the SEC over allegations the firm didn’t follow its policies and procedures for its ESG funds, the agency said in November.
Benefytt and its former CEO, Gavin Southwell, agreed to pay more than $12 million to settle claims they hid tens of thousands of consumer complaints from investors when it was a public company known as Health Insurance Innovations Inc., the SEC announced in July 2022. Vale reached a $55.9 million deal with the SEC earlier this year to settle the agency’s claims that the company misled investors about its dams’ safety before a 2019 collapse killed 270 people after it helped bring the case in April 2022.
SEC Enforcement Division Director Gurbir Grewal has said repeatedly that ESG cases are a priority. But an SEC press release hasn’t mentioned any ESG-related enforcement work since the Vale settlement was announced in March.
The SEC may be trying to show its powers are inadequate to combat ESG wrongdoing and it needs regulations like its proposed climate disclosure rules in order for the task force to bring more cases, said Nicolas Morgan, a former agency lawyer and president of Investor Choice Advocates Network, a nonprofit law firm that fights what it considers to be government overreach.
The agency is looking to issue rules in October that would require companies to report on their greenhouse gas emissions and other risks they face from climate change. But the SEC has faced significant pushback and threats of a legal challenge from business interests and Republicans.
“There’s a distinct possibility that it is a strategic silence so that you’re not feeding the critics of the proposed rule who say you already have the tools you need,” said Morgan, who’s also a partner at Paul Hastings LLP.
Another possibility: Some cases just take more time file, Strauss said.
“The fact that an enforcement action hasn’t appeared recently doesn’t mean that there’s not a lot of investigative activity going on,” she said. “The SEC likes to bring enforcement actions that kind of give it the most signaling bang for its buck.”
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