“Greenwashing” and disclosure liability under securities law: two views

Issuer concerns about liability for ESG-related disclosure are highlighted in the September 10, 2024 enforcement order of the U.S. Securities and Exchange Commission in respect of Keurig Dr. Pepper Inc. and the dissenting statement of SEC Commissioner Peirce. The order and Commissioner Peirce’s statement focus attention for public companies on the kinds of sustainability-related disclosure statements that might be scrutinized under securities law, and on the basis for alleging disclosure breaches. The order and the dissenting statement present two views on “greenwashing” and disclosure liability risk.

In the relevant disclosure, Keurig stated in its annual reports in 2019 and 2020 that its plastic pods for making coffee and other drinks “can be effectively recycled”. In support of the impugned statements, Keurig had successfully tested the recyclability of the coffee pods. However, Keurig had been advised by two recycling businesses that it was not economic to recycle the items and they would not accept them for recycling. That feedback was not included in the annual report disclosure¹.

In its order, the SEC found that Keurig’s “can be effectively recycled” statements were incomplete and misleading contrary to the Section 13(a) of the Exchange Act and Rule 13a-1, which require an issuer to file annual reports that are complete and accurate².  The SEC found that the statements breached that requirement by omitting the information that two recycling businesses did not intend to accept the pods for recycling: “[b]y not including this additional information, Keurig’s statements about the conclusion to be drawn from the testing concerning recyclability were incomplete and therefore inaccurate”. Keurig agreed to settle legal proceedings with the SEC by paying a $1.5 million fine and consenting to a cease and desist order.

The dissenting statement of Commissioner Peirce, colourfully titled “Not so Fast: Statement on In the Matter of Keurig Dr. Pepper Inc.”, criticizes the order and the reasoning supporting it on two bases: (i) the impugned statements are not factually incorrect; and (ii) even if the statements were incorrect, the alleged breach does not involve a material misstatement³.

• On the first point, Commissioner Peirce observes that the impugned statements are correct unless “can be effectively recycled” is read by the SEC to mean both that the pods are recyclable and that they are being recycled. The former aspect of the statement is correct—the pods are recyclable. The latter aspect, according to the dissenting statement, conflates what is possible with what will occur with respect to recycling, and of course what will occur depends not only on recycling businesses accepting the pods but also consumer behaviour and decisions to put used pods on the curbside for recycling. Given that uncertainty, how much could the issuer be assumed to be saying in its disclosure about recycling of the pods?
• On the second point, Commissioner Peirce observes that the SEC order nowhere finds that the impugned statements were material to investors. While the order refers to disclosure about the significance of coffee pod sales to the company’s coffee systems segment and the significance of that segment to overall net sales, the order does not say that the “recyclability” disclosure was material to investors.

The order and dissenting statement highlight concerns issuers have about “greenwashing” and allegations of disclosure breaches. A supercritical reading of ESG-related disclosure may increase liability risk just given the very nature of that disclosure. While Commissioner Peirce was focused on the way the order, in her view, misread Keurig’s “recyclability” statements as untrue, ESG-related disclosure may face undue scrutiny by its very nature until clear, objective criteria for such disclosure are available.

The statement of Commissioner Peirce also highlights concerns about the securities law basis for evaluating sustainability disclosure. In respect of the SEC, as with other securities regulators, an issuer may expect that the focus of disclosure evaluation will be on materiality as that standard is developed under applicable law: do the impugned statements affect investor decision-making? Do they involve price-relevant information? The materiality concern is particularly pronounced where issuers may be required to make ESG-related disclosure irrespective of it meeting a materiality standard and therefore could face enforcement action or civil litigation where there is no basis for linking the disclosure to investor decision-making and the price of an issuer’s securities.