Last week, the SEC’s Climate and ESG Task Force in the Division of Enforcement – that has a mandate to identify material gaps or misstatements in issuers’ ESG disclosures – issued its first enforcement action against Brazilian mining company Vale for
making false and misleading claims about the safety of its dams prior to the January 2019 collapse of its Brumadinho dam. The collapse killed 270 people, caused immeasurable environmental and social harm, and led to a loss of more than $4 billion in Vale’s market capitalization.
According to the SEC’s complaint, beginning in 2016, Vale manipulated multiple 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 environmental, social, and governance (ESG) disclosures…
‘Many investors rely on ESG disclosures like those contained in Vale’s annual Sustainability Reports and other public filings to make informed investment decisions,’ said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement. ‘By allegedly manipulating those disclosures, Vale compounded the social and environmental harm caused by the Brumadinho dam’s tragic collapse and undermined investors’ ability to evaluate the risks posed by Vale’s securities.
Although Vale is a Brazilian company, they have American Depositary Receipts (ADRs) and file reports with the US SEC, which gives the SEC jurisdiction to enforce US securities regulations/laws against the company. The 76 page complaint contains a number of allegations about third party auditor conflict of interest, bias and fraud in dam safety audit work conducted in conjunction with engineering assessments. There is also a significant element of corporate governance failures related to the audits. This blog from Cooley has more details on the complaint.
The action is the first I know of that directly connects safety audits to “violating antifraud and reporting provisions of the federal securities laws,” potentially setting a precedent significantly increasing liability of ESG auditors.
What This Means
The Climate and ESG Task Force was established specifically to enforce against material gaps or misstatements in issuers’ ESG disclosures. ESG data and the audits producing such data are now a securities law risk. Companies that use auditors to collect or validate environmental, safety, sustainability and similar data should ensure professional standards for audit practices and impairment identification/management are fully implemented.
Non-financial EHS auditors may see this as unfortunate timing given that the SEC climate proposal includes an attestation report for emissions inventory disclosures and certain related disclosures about the service provider. The proposal language states that the attestation service provider would not have to be a registered public accounting firm and the attestation report would not need to cover the effectiveness of internal control over GHG emissions disclosure (i.e., ICFR). However, questions 144 – 153 of the proposal request input on matters related to whether the use of non-financial auditors is appropriate. The Vale action may create doubt that doing so is a good idea.