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US Securities and Exchange Commission

Republicans Grill SEC Enforcement Director Grewal over Upcoming ESG Rules

Bill Flook  Editor, Accounting and Compliance Alert

· 5 minute read

Bill Flook  Editor, Accounting and Compliance Alert

· 5 minute read

Republicans on a House Financial Services subcommittee on July 19, 2022, pressed SEC Enforcement Director Gurbir Grewal on how the commission will enforce environmental, social, and governance (ESG) disclosures that are part of proposed rules.

The hearing before the Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets offered the lawmakers a rare opportunity for a face-to-face grilling of an SEC division head, even though Grewal frequently deflected questions on ongoing rulemakings as outside of his purview. Much of the hearing was dominated by ESG matters, coming amid a broader opposition by Republicans and industry groups to SEC Chair Gary Gensler’s aggressive rulemaking agenda on corporate climate disclosure.

The SEC in March proposed Release No. 33-11042The Enhancement and Standardization of Climate-Related Disclosures for Investors, which would require public companies to provide investors with more detailed disclosures on climate risk and greenhouse gas (GHG) emissions, including, in some cases, so-called “Scope 3” indirect emissions. (See SEC Votes to Propose Climate Risk Disclosures in the March 22, 2022, edition of Accounting & Compliance Alert.)

The SEC in May also proposed Release No. 33-11068Environmental, Social, and Governance Disclosures for Investment Advisers and Investment Companies, which would address so-called “greenwashing” practices by funds and advisers by mandating new disclosures on ESG strategies and requiring certain funds to disclose their portfolio investments’ GHG emissions, among other provisions. SEC Commissioner Hester Peirce, in a dissenting statement on the proposal, concluded that “E, S, and G cannot be adequately defined, nor will they be, should the proposal eventually find its way into the Code of Federal Regulations.” (See Commissioner Peirce Says SEC Proposal Aimed at Tackling Greenwashing in Investment Industry Will Not Work in the May 27, 2022, edition of ACA.)

Republicans, in their questioning of Grewal, focused on that lack of an ESG definition in the proposal, as well as the challenges associated with enforcing Scope 3 emissions disclosures under Release No. 33-11042.

Under the latter proposal, registrants would need to disclose separately Scope 1 direct emissions and Scope 2 emissions, those that stem from energy consumed by the company. A registrant would need to disclose its Scope 3 emissions – all those indirect emissions that fall outside of Scope 2 – if that information is material, or if it has set emissions goals that include Scope 3 emissions.

Rep. Ann Wagner, a Missouri Republican, pressed Grewal on how the commission operationally planned on handling the enforcement of Scope 3 disclosures.

“We’ll take the same approach we’ve taken to date, we know that ESG and climate issues are important to investors, we know that issuers are making statements about their climate risk already, and we know that investment advisers are marketing ESG funds, so we brought greenwashing cases when they breach their fiduciary duty on the adviser side,” he said. “We brought cases against issuers, most recently a litigated case against Brazilian issuer Vale, for lying about its ESG policies. It’s the same thing, if we find that sort of deceit in their statements, we’ll bring cases.”

In late April, the SEC charged Vale S.A., a publicly traded Brazilian mining company, with misleading investors over the fragile condition of its Brumadinho dam, whose 2019 failure killed 270 people. (See SEC Charges Brazilian Mining Company Vale over Dam Safety Claims in the May 2, 2022, edition of ACA.)

In a somewhat testy exchange that followed, Wagner went on to question how the SEC plans to verify whether an issuer has misstated its Scope 3 emissions, to which Grewal responded that “we’re relying on experts in our litigated matters.”

“Experts, really?” Wagner said. “Is the SEC an expert in climate policy?”

Grewal added that those experts are retained for particular cases.

Another case mentioned during the discussion was the SEC’s settled charges announced in late May against BNY Mellon Investment Adviser, Inc., related to ESG quality reviews for investments by certain mutual funds advised by the firm. BNY Mellon neither admitted nor denied the commission’s findings as part of the settlement, in which it agreed to a $1.5 million penalty, a censure, and cease-and-desist order. (See BNY Mellon to Pay $1.5 Million to Settle SEC Charges on ESG Misstatements in the May 25, 2022, edition of ACA.)

Rep. French Hill, an Arkansas Republican, questioned Grewal on the BNY Mellon charges.

“The allegation there was is they said they had a process by which they determined if companies were eligible to be in an ESG fund, and in your view they just didn’t follow it, so they were misleading, is that a fair assessment?” Hill asked.

“That’s what they admitted to as well,” Grewal replied.

“And so that would tell me that you’ve got all the authority you need as it relates to protecting investors in the mutual fund ESG arena, using simply the power you have now, is that fair?” Hill continued. “You can go in and make a judgment if someone is misleading in advertising, either the financial adviser level or at the fund sponsor level, is that fair?”

Grewal said he would agree “that the antifraud provisions that we have that allow us to bring these cases are adequate…but what the rulemaking will help with is putting all those disclosures in a consistent comparable format that will allow us to more easily further our investigations.”


This article originally appeared in the July 20, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.

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