May 08, 2023 • By Mark Segal
By Joe Donnelly, Partner, CPA – Baker Tilly and Patricia Wellmeyer, CPA, CGMA, Ph.D. Director – Baker Tilly and Assistant Professor in Accounting, University of California-Irvine Merage School of Business
With several recent high-profile enforcement actions and the creation of a new Climate and ESG Task Force, the Securities and Exchange Commission (SEC) has made it clear that it intends to proactively pursue companies for ESG-related reporting misconduct.
These actions send the message that the SEC’s focus on company ESG-related disclosures extend beyond those to be required in a soon anticipated final SEC climate disclosure rules. Given the increasingly wider SEC regulatory umbrella over ESG reporting, companies need to be taking steps to review their policies and controls around ESG-related disclosures to ensure they don’t fall prey to misleading statements, and consequently, public SEC scrutiny, regardless of the proposed rule.
The SEC launched its Climate and ESG Task Force within the Division of Enforcement in 2021 to identify potential violations under existing disclosure rules of material gaps or misstatements in issuers’ disclosure of climate risks and ESG strategies; the latter being of special focus in the case of investment advisers and funds.
In 2022, the Task Force was involved in pursuing several high-profile enforcement actions, all charging companies with fraudulently misleading investors on ESG-related matters. Violations noted in these enforcement actions were primarily in three areas: (1) Exaggerated disclosures around company commitments to ESG goals, (2) failure to disclose material information relevant for assessing the reasonableness of and/or progress towards meeting publicly disclosed ESG targets, and (3) failure to establish effective controls around ESG-related policies and reporting.
The SEC contends these actions violate the antifraud, reporting, and internal controls provisions of the Securities and Exchange Acts and has remarked that it will continue to pursue companies for misleading ESG disclosures under these mandates.
Given the SEC’s increasing scrutiny on ESG disclosures and impending new climate disclosure rule, it is important that companies and investment advisors/funds prioritize the readiness and effectiveness of controls designed to ensure consistency in application of ESG policies/procedures firm-wide and the faithful representation of ESG claims and disclosures. In doing so, company management and boards of directors should consider the following:
As the SEC continues to increase its focus on ESG reporting, it is likely that other regulatory bodies will follow suit. Impending regulation, however, is not the only reason companies need to worry about the consistency and supportability of their ESG disclosures. Investors, advocacy groups, and other stakeholders are all actively filing public complaints, lawsuits, and proxy battles alleging misleading reporting by companies on ESG-related matters. Pulled together, these forces can leave unprepared companies with a perfect storm of reputational and regulatory risks with which to contend.
Establishing an effective, cohesive, and sustainable organization wide ESG strategy and control framework will be key to successfully navigating through ESG reporting challenges.
About the authors:
Joe Donnelly, CPA is a Partner at Baker Tilly. Patricia Wellmeyer, CPA, CGMA, Ph.D. CPA is a Director at Baker Tilly and an Assistant Professor in Accounting – University of California-Irvine – Merage School of Business.
 (2023 Examination Priorities Report (sec.gov) and Commissioner Uyeda’s January 27, 2023 speech on ESG-related disclosures here (https://www.sec.gov/news/speech/uyeda-remarks-california-40-acts-group)
 Proposed rules – https://www.sec.gov/rules/proposed/2022/ia-6034.pdf