by Christo­pher Menen­dez*

As the gen­er­al public’s aware­ness of and con­cern about envi­ron­men­tal issues and cli­mate change has increased, so have the num­ber of com­pa­nies attempt­ing to sit­u­ate their prod­ucts and oper­a­tions with­in this dri­ve for more sus­tain­able prac­tices. This has led to an increase in “green­wash­ing,” the act or prac­tice of mak­ing a company’s prod­ucts or oper­a­tions appear more envi­ron­men­tal­ly friend­ly than they real­ly are.1 As this prac­tice has become increas­ing­ly com­mon in recent years, cli­mate activists and some investors have attempt­ed to uti­lize tools cur­rent­ly avail­able in the law to com­bat it, includ­ing suits under Sec­tion 11 of the Secu­ri­ties Act of 1933 (“Sec­tion 11”). Sec­tion 11 impos­es strict lia­bil­i­ty on the issuer of a secu­ri­ty for mak­ing mate­r­i­al mis­state­ments or omis­sions in con­nec­tion with the issuance of that secu­ri­ty.2 As Sec­tion 11 demon­strates, mate­ri­al­i­ty lies at the heart of most pri­vate suits brought under our secu­ri­ties laws. Courts test mate­ri­al­i­ty by deter­min­ing whether it is sub­stan­tial­ly like­ly that a rea­son­able investor would have viewed the dis­clo­sure of the fact in ques­tion to sig­nif­i­cant­ly alter the “total mix” of infor­ma­tion avail­able when mak­ing an invest­ment deci­sion.3 Since cli­mate con­cerns are gen­er­al­ly not the sort of infor­ma­tion that courts find mate­r­i­al, the tra­di­tion­al mate­ri­al­i­ty analy­sis, along with excep­tions for lia­bil­i­ty such as puffery and a safe har­bor for for­ward-look­ing state­ments, makes Sec­tion 11 ill-suit­ed to com­bat green­wash­ing in the vast major­i­ty of cas­es.4 In recog­ni­tion of this real­i­ty, the Secu­ri­ties Exchange Com­mis­sion (“SEC”) recent­ly pro­posed new rules that cre­ate fur­ther dis­clo­sure duties in this con­text.5 By cre­at­ing new envi­ron­men­tal dis­clo­sure oblig­a­tions, the SEC will expand the scope of lia­bil­i­ty to cov­er cer­tain claims relat­ing to envi­ron­men­tal per­for­mance that have been left out­side court inter­pre­ta­tions of mate­ri­al­i­ty. Imple­men­ta­tion of these rules would be a pos­i­tive first step toward address­ing green­wash­ing and should there­fore be adopted.

The tra­di­tion­al mate­ri­al­i­ty analy­sis for Sec­tion 11 claims has cen­tered around the core aspects of an issuer’s busi­ness, or the aspects that a rea­son­able share­hold­er would be sub­stan­tial­ly like­ly to con­sid­er impor­tant in mak­ing an invest­ment deci­sion.6 Courts have typ­i­cal­ly found facts to be mate­r­i­al when they direct­ly relate to the prof­itabil­i­ty of a cor­po­ra­tion or a key aspect of its oper­a­tions, such as safe­ty stan­dards in the con­text of an issuer engaged in deep water drilling.7 In most cas­es, the sus­tain­abil­i­ty of a company’s prod­ucts are periph­er­al to its busi­ness mod­el. For exam­ple, a gener­ic shoe company’s abil­i­ty to main­tain a cer­tain prof­it mar­gin will only cen­ter around the biodegrad­abil­i­ty of its shoes in rare and spe­cif­ic instances. Courts have only found mate­ri­al­i­ty in these arguably tan­gen­tial aspects of the issuer’s busi­ness when an issuer close­ly aligns them with the company’s suc­cess.8 For exam­ple, if a shoe com­pa­ny cen­ters its busi­ness mod­el on the biodegrad­abil­i­ty of its shoes, under Sec­tion 11 the SEC and courts would like­ly view biodegrad­abil­i­ty as mate­r­i­al and impose lia­bil­i­ty for omis­sions or mis­state­ments regard­ing this fact. How­ev­er, this fails to address the typ­i­cal cir­cum­stances of greenwashing.

Sec­tion 11 mate­ri­al­i­ty analy­sis also sug­gests the SEC would choose whether to impose lia­bil­i­ty based on an objec­tive stan­dard of the rea­son­able investor.9 This objec­tive stan­dard fur­ther lim­its the reach of Sec­tion 11 lia­bil­i­ty, because even if one investor may have con­sid­ered an omit­ted fact mate­r­i­al to their invest­ment deci­sion, courts will still look to a vague con­cep­tion of what the gen­er­al pool of investors in the mar­ket would have found impor­tant.10 While the stan­dards of a rea­son­able investor may vary depend­ing on the par­tic­u­lar secu­ri­ty mar­ket,11 it is unlike­ly envi­ron­men­tal indi­ca­tors would be mate­r­i­al unless an issuer put them front and cen­ter in com­mu­ni­ca­tions about the offer­ing. The vague nature of the rea­son­able investor stan­dard has proven to be a source of frus­tra­tion for prac­ti­tion­ers and legal schol­ars alike.12 The stan­dard offers lit­tle con­crete guid­ance to issuers of what investors find to be mate­r­i­al and, at the same time, func­tion­al­ly fore­clos­es bring­ing suits based on green­wash­ing because envi­ron­men­tal con­cerns tra­di­tion­al­ly have not been at the fore­front of invest­ment deci­sions until recent­ly, if at all.

In addi­tion to the inher­ent prob­lems with mate­ri­al­i­ty, the doc­trine of puffery and the safe har­bor for for­ward-look­ing state­ments under the Pri­vate Secu­ri­ties Lit­i­ga­tion Reform Act of 1995 (“PSLRA”) fur­ther pre­vent Sec­tion 11 claims from effec­tive­ly address­ing green­wash­ing. Courts have rec­og­nized puffery as a defense for issuers in Sec­tion 11 actions13 where the state­ments at issue are opti­mistic and vague or indef­i­nite in nature.14 Puffery offers a defense to issuers because investors, both pro­fes­sion­al and ama­teur, are con­sid­ered able to suf­fi­cient­ly deval­ue cor­po­rate exec­u­tives’ opti­mism.15 In short, Sec­tion 11 impos­es no lia­bil­i­ty on puffery state­ments because no investor would rea­son­ably rely on them when mak­ing an invest­ment deci­sion and they there­fore can­not be mate­r­i­al.16 A more con­crete stan­dard for eval­u­at­ing whether a state­ment could con­sti­tute puffery is whether it could be “proven or dis­proven using stan­dard tools of evi­dence.”17 Puffery adds anoth­er bar­ri­er to con­sid­er­ing an envi­ron­men­tal­ly-con­scious investor because many issuers speak about envi­ron­men­tal, social, and gov­er­nance (ESG) stan­dards with vague lan­guage. Such state­ments are in many cas­es anal­o­gous to claims that an issuer will “do busi­ness with integri­ty and respect for the envi­ron­ment.”18 While such a state­ment might give a gen­er­al impres­sion of envi­ron­men­tal con­scious­ness, it is dif­fi­cult to mea­sure what the state­ment means. Does respect for the envi­ron­ment mean min­i­mal emis­sions, or sim­ply that an issuer will choose a sus­tain­able pro­duc­tion method when eco­nom­i­cal­ly fea­si­ble? This vague­ness makes it dif­fi­cult for a court to impose lia­bil­i­ty with­out more con­crete state­ments from the issuer and present reg­u­la­tions pro­vide no incen­tive for an issuer to do so.

Sim­i­lar­ly, the safe har­bor pro­vi­sion for for­ward-look­ing state­ments shields an issuer from lia­bil­i­ty if the for­ward-look­ing state­ment is “accom­pa­nied by mean­ing­ful cau­tion­ary state­ments” iden­ti­fy­ing fac­tors that could have an impact on the statement’s sub­ject mat­ter and cause it to dif­fer from what the issuer has com­mu­ni­cat­ed.19 An issuer will not be liable for mak­ing aspi­ra­tional state­ments about an envi­ron­men­tal goal as long as they are “ade­quate­ly tinged with cau­tion.”20 The ratio­nale for the pro­vi­sion is that a rea­son­able investor is assumed to know that such state­ments are aspi­ra­tional and not a con­crete state­ment about the cur­rent state of the issuers’ oper­a­tions.21 This is prob­lem­at­ic in the con­text of green­wash­ing because state­ments about the future are usu­al­ly also an implic­it asser­tion that the state­ments are fea­si­ble giv­en the cur­rent state of a company’s oper­a­tions. For exam­ple, an issuer’s state­ment that it seeks to have 80% of its prod­uct line com­plete­ly biodegrad­able by a cer­tain date implies that a non-insignif­i­cant per­cent­age of its prod­uct line has already reached that thresh­old or is close to reach­ing it. How­ev­er, the PSLRA stan­dard sug­gests that as long as the for­ward-look­ing state­ment includes cau­tion­ary descrip­tors that could impact the fea­si­bil­i­ty of this goal, an investor is not able to suc­cess­ful­ly bring suit if only a small por­tion of the issuer’s prod­uct line is cur­rent­ly biodegrad­able.22 This safe har­bor con­se­quent­ly cre­ates a gap in our secu­ri­ties regime where green­wash­ing may thrive, and where issuers are able to make state­ments that give an impres­sion of their com­mit­ment to sus­tain­able prac­tices that are not actu­al­ly con­sis­tent with their cur­rent busi­ness and practices.

Sec­tion 11’s short­com­ings in address­ing issues relat­ed to envi­ron­men­tal dis­clo­sures have not gone unno­ticed by the SEC, and the com­mis­sion recent­ly pro­posed new rules in March 2022, to address the issue.23 These new rules would specif­i­cal­ly impose dis­clo­sure duties on issuers for cli­mate-relat­ed risks rea­son­ably like­ly to have a mate­r­i­al impact on a pub­lic company’s busi­ness and the issuer’s green­house gas emis­sions, as well as require the inclu­sion of cli­mate-relat­ed finan­cial met­rics in the issuer’s finan­cial state­ments.24 These pro­posed rules and the impo­si­tion of a duty to dis­close green­house gas emis­sions are a sig­nif­i­cant step toward com­bat­ting green­wash­ing for two rea­sons. First, rules of this type have been referred to as “name and shame” rules because the oblig­a­tion to dis­close is like­ly to influ­ence cor­po­rate behav­ior.25 Issuers are like­ly to want to avoid being seen as major con­trib­u­tors to cli­mate change. Sec­ond, these dis­clo­sure duties will reduce the num­ber of mis­lead­ing envi­ron­men­tal claims from issuers. Issuers will be pre­sent­ed with a choice of either reduc­ing the opti­mism of such claims to bring them in line with their actu­al dis­closed prac­tices, or face suits from investors argu­ing that their own dis­clo­sures show that the chal­lenged claims are mate­ri­al­ly misleading.

How­ev­er, the pro­posed rules alone do not solve many of the present prob­lems with cli­mate-relat­ed state­ments. First, the rules do not cre­ate a gen­er­al impo­si­tion of lia­bil­i­ty for green­wash­ing. Issuers would still be like­ly to make vague com­mit­ments and state­ments about areas uncov­ered by these rules, such as biodegrad­abil­i­ty, and evade lia­bil­i­ty for fail­ing to meet their aspi­ra­tional stan­dards. Sec­ond, these pro­posed rules may not be adopt­ed because mem­bers of the SEC and issuers have pushed back on them.26 These crit­ics argue that com­bat­ting cli­mate change is not with­in the SEC’s mis­sion.27 And, last­ly, these rules are like­ly to be chal­lenged on First Amend­ment grounds just as pri­or name and shame pro­vi­sions have been.28

The SEC’s pro­posed rules reflect the increas­ing pub­lic inter­est in ESG ini­tia­tives, sug­gest­ing investors may start pay­ing clos­er atten­tion to cli­mate issues and the role cor­po­ra­tions play in them.29 While these rules would impose new dis­clo­sure bur­dens on issuers, they would also facil­i­tate the effi­cient allo­ca­tion of cap­i­tal by allow­ing investors to accu­rate­ly invest in com­pa­nies that are mak­ing seri­ous efforts to reduce their car­bon foot­print. Such mea­sures are like­ly nec­es­sary to ensure that the Unit­ed States remains com­pet­i­tive in the emerg­ing green econ­o­my. Even if the pro­posed rules do not com­plete­ly stamp out the issue of green­wash­ing, they rep­re­sent a sig­nif­i­cant and encour­ag­ing step toward clos­ing a major gap with­in our secu­ri­ties regime.


* Christo­pher Menen­dez is a J.D. Can­di­date (2023) at New York Uni­ver­si­ty School of Law. This Con­tri­bu­tion arose from the prob­lem pre­sent­ed at the 2022 Irv­ing R. Kauf­man Memo­r­i­al Secu­ri­ties Law Moot Court Com­pe­ti­tion host­ed by Ford­ham Uni­ver­si­ty School of Law. The ques­tion pre­sent­ed asked whether an issuer’s state­ments about sus­tain­abil­i­ty and the biodegrad­abil­i­ty of its prod­ucts were mate­ri­al­ly mis­lead­ing under a Sec­tion 11 claim. This Con­tri­bu­tion presents a dis­til­la­tion of argu­ments from the com­pe­ti­tion and does not nec­es­sar­i­ly rep­re­sent the views of the author.

1. Mer­ri­am-Web­ster, “Green­wash­ing” Def­i­n­i­tion, https://www.merriam-webster.com/dictionary/greenwashing (Oct. 20,2022).

2. 15 U.S.C. § 77k.

3. Matrixx Ini­tia­tives, Inc. v. Sir­a­cu­sano, 563 U.S. 27, 38 (2011) (quot­ing Basic Inc. v. Lev­i­son, 485 U.S. 224, 232 (1988)).

4. See In re Cutera Sec. Lit­ig., 610 F.3d 1103, 1111 (9th Cir. 2010) (hold­ing that investors can suf­fi­cient­ly “deval­ue the opti­mism of cor­po­rate exec­u­tives” and puffery there­fore is not mate­ri­al­ly mis­lead­ing); see also 15 U.S.C. § 77z‑2(c) (pro­vid­ing safe har­bor for for­ward-look­ing statements).

5. SEC Pro­pos­es Rules to Enhance and Stan­dard­ize Cli­mate-Relat­ed Dis­clo­sures for Investors, SEC (Mar. 21, 2022), https://www.sec.gov/news/press-release/2022–46.

6. See TSC Indus., Inc. v. North­way, Inc., 426 U.S. 438, 449 (1976).

7. See Brick­lay­ers & Masons Local Union No. 5 Ohio Pen­sion Fund v. Transocean Ltd., 866 F. Supp. 2d 223, 243 (S.D.N.Y. 2012).

8. In re Massey Ener­gy Co. Sec. Lit­ig., 883 F. Supp. 2d 597, 615 (S.D.W.V. 2012) (find­ing state­ments about safe­ty to be mate­r­i­al when the ener­gy com­pa­ny issuer placed empha­sis on them in press releas­es, quar­ter­ly and annu­al SEC fil­ings, and in con­fer­ences with analysts).

9. Unit­ed States v. Lit­vak, 889 F.3d 56, 64 (2d Cir. 2018).

10. See id. at 65 (hold­ing there must be evi­dence of a nexus between the views of one spe­cif­ic trad­er and the main­stream belief of investors in a par­tic­u­lar market).

11. See id. (assert­ing as part of its mate­ri­al­i­ty analy­sis that courts can assume the rea­son­able investor in a mar­ket that only insti­tu­tion­al investors trade in is more sophis­ti­cat­ed than the rea­son­able investor in a mar­ket that includes many indi­vid­ual investors).

12. See Aman­da Rose, The “Rea­son­able Investor” of Fed­er­al Secu­ri­ties Law: Insights from Tort Law’s “Rea­son­able Per­son” & Sug­gest­ed Reforms, 43 J. Corp. L. 77 (2016) (com­par­ing the costs of the rea­son­able investor stan­dard to tort law’s rea­son­able per­son stan­dard, and sug­gest­ing changes to the doctrine).

13. See In re Cutera Sec. Lit­ig., 610 F.3d 1103, 1111 (9th Cir. 2010).

14. See Boca Raton Fire­fight­ers & Police Pen­sion Fund v. Bahash, 506 Fed. App’x. 32, 37 (2d Cir. 2012).

15. In re Cutera Sec. Lit­ig., 610 F.3d at 1111.

16. In re Fusion-io, Inc. Sec. Lit­ig., No. 13-CV-05368-LHK, 2015 WL 661869, at *14 (N.D. Cal. Feb. 12, 2015).

17. See City of Mon­roe Emps. Ret. Sys. v. Bridge­stone Corp., 399 F.3d 651, 674 (6th Cir. 2005).

18. See Com­mit­ments, Poli­cies and Stan­dards, Shell, https://www.shell.com/investors/environmental-social-and-governance/commitments-policies-and-standards.html (last vis­it­ed Nov. 8, 2022).

19. 15 U.S.C. § 78u‑5(c)(1)(A).

20. In re Syn­chrony Fin. Sec. Lit­ig., 988 F.3d 157, 172 (2d Cir. 2021).

21. Id.

22. See Rein­er v. Teladoc Health, Inc., No. 18-CV-11603, 2020 U.S. Dist. LEXIS 163686, at *27 (S.D.N.Y. Sep. 4, 2020) (hold­ing an undis­closed breach of com­pa­ny stan­dard of con­duct inac­tion­able when state­ments at issue are explic­it­ly aspirational).

23. SEC Pro­pos­es Rules to Enhance and Stan­dard­ize Cli­mate-Relat­ed Dis­clo­sures for Investors, SEC (Mar. 21, 2022), https://www.sec.gov/news/press-release/2022–46.

24. Id.

25. See gen­er­al­ly Kei­th Paul Bish­op, SEC (Secu­ri­ties and Exchange Com­mis­sion) Con­flict Min­er­al Rules: Name and Shame No More?, Nat’l L. Rev. (Apr. 15, 2014), https://www.natlawreview.com/article/sec-securities-and-exchange-commission-conflict-minerals-rules-name-and-shame-no-mor.

26. See Col­in J. Dia­mond et al., SEC Pro­pos­es Long-Await­ed Cli­mate Change Dis­clo­sure Rules, White & Case (Mar. 24, 2022), https://www.whitecase.com/insight-alert/sec-proposes-long-awaited-climate-change-disclosure-rules; Hes­ter M. Pierce, We Are Not the Secu­ri­ties and Envi­ron­ment Com­mis­sion – at Least Not Yet, SEC (Mar. 21, 2022), https://www.sec.gov/news/statement/peirce-climate-disclosure-20220321.

27. See Pierce, supra note 26.

28. See Nat’l Ass’n of Mfrs. v. SEC, 800 F.3d 518, 530 (D.C. Cir. 2015) (“By com­pelling an issuer to con­fess blood on its hands, the statute inter­feres with that exer­cise of the free­dom of speech under the First Amendment.”).

29. See gen­er­al­ly Georg Kell, The Remark­able Rise of ESG, Forbes (Jul. 11, 2018), https://www.forbes.com/sites/georgkell/2018/07/11/the-remarkable-rise-of-esg/?sh=74f775941695.