In 2021, the SEC announced the formation of a task force in the Division of Enforcement “to proactively identify ESG-related misconduct.” See Climate Change is Rapidly Becoming an SEC Priority, March-April 2021 Update. While the Climate and ESG Task Force brought several cases against asset managers, enforcement actions against public companies alleging ESG-related disclosure violations have been rare. The only direct example of such a case is the Commission’s 2022 action against Brazilian mining company Vale S.A. See SEC is Serious About ESG Disclosure Enforcement, April-May 2022 Update.
On September 12, Bloomberg reported that the SEC had quietly disbanded the Climate and ESG Task Force several months earlier. But a recent action filed almost simultaneously with that report demonstrates that the SEC is still interested in bringing ESG-related cases, even when the facts arguably fall outside the usual enforcement parameters.
On September 10, the Commission issued an order charging Keurig Dr Pepper Inc. with making inaccurate statements regarding the recyclability of its K-cup beverage pods. According to the SEC’s order, Keurig’s annual reports for fiscal years 2019 and 2020 stated that K-cup pods “can be effectively recycled.” This statement was true in that Keurig had conducted testing which showed that pods could be sorted from other materials “to make it to a stage of the recycling process from which items have the potential * * * for purchase by parties who might further process the materials for their potential reuse.” However, Keurig did not disclose that two of the largest recycling companies had expressed significant concerns to Keurig regarding the commercial feasibility of curbside recycling of K-cup pods and that they did not intend to accept the pods for recycling.
Based on this omission, the SEC finds that Keurig violated the provisions of the Securities Exchange Act and the Commission’s rules that require companies to file complete and accurate annual reports. Without admitting or denying the findings in the order, Keurig agreed to a cease-and-desist from future violations and to pay a civil penalty of $1.5 million. In a press release announcing the settlement, John T. Dugan, Associate Director of the SEC’s Boston Regional Office said, “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.”
SEC Commissioner Hester Peirce issued a dissent. She points out that the order does not allege that Keurig’s statement concerning pod recycling was material. Keurig research in 2016 indicated that, for certain consumers, environmental concerns were a significant factor in deciding whether to purchase a Keurig brewing system. In Commissioner Peirce’s view, it does not follow that recyclability was material to investors. She also argues that Keurig’s statement that the pods could be recycled was accurate and was not “an implicit assertion that the pods would be recycled.” She ends with the statement that the Commission’s “pedantic parsing of Keurig’s recyclability statements and its $1.5 million penalty do little to disguise the weakness of this case.”
It is of course a basic principle that disclosures must be complete and that the omission of important information that qualifies a statement or significantly changes its meaning can violate the federal securities laws. From that perspective, the Keurig case breaks no new ground. However, the Commission’s willingness to bring this action on facts that are, as Commissioner Peirce’s dissent underscores, far from overwhelming in terms of any impact on investors suggests that the SEC staff remains interested in finding cases with an ESG nexus. Companies and their audit committees should be alert for ESG-related statements in SEC filings or other disclosures, such as sustainability reports, that the Commission could characterize as incomplete or misleading.
Comments