A Brazilian mining company has agreed to pay US$55.9 million to settle charges that it deliberately misled investors about its safety record before a dam collapsed.

On March 29, the U.S. Securities and Exchange Commission (SEC) announced that a publicly traded mining company and one of the largest iron ore producers in the world had agreed to settle charges alleging the company's sustainability reports misled investors about the safety of its dams.

Dam collapse killed 270

In January 2019, one of the mining company's dams collapsed, killing 270 people and causing significant environmental and social harm. The company's sustainability reports indicated all of its dams were certified as stable, but the SEC alleged the company engaged in numerous efforts to mislead investors about dam safety.

According to the SEC's complaint, the company began manipulating dam safety audits in 2016, obtained fraudulent safety certificates and routinely misled investors, governments and local communities about the safety of the dam through ESG disclosures.

"By allegedly manipulating those disclosures, [the company] compounded the social and environmental harm caused by the [...] dam's tragic collapse and undermined investors' ability to evaluate the risks posed by [the company's] securities," Gurbir Grewal, the SEC's director of enforcement, said in a statement.

The SEC alleged that the company knew its dam could contain potentially toxic byproducts from mining operations and that it did not meet safety standards, but the company nevertheless claimed it adhered to the "strictest international practices" in evaluating the safety of its dams.

Holding companies accountable for "material misrepresentations"

To settle the SEC's charges, the company agreed to pay a civil penalty of US$25 million and US$30.9 million in pre-judgment interest. The settlement is subject to approval by the U.S. District Court for the Eastern District of New York.

"The terms of today's settlement, if approved by the court, will [...] demonstrate that public companies can and should be held accountable for material misrepresentations in their ESG-related disclosures, just as they would for any other material misrepresentations," said Mark Cave, associate director of enforcement with the SEC.

Settlement comes amid increasing scrutiny of ESG disclosure

The settlement with the SEC comes amid increasing scrutiny of companies' ESG disclosure.

As we discussed in recent blogs, corporate directors and officers are now facing the prospect of personal liability for allegedly deficient ESG disclosures and Canada's largest bank is being investigated over claims of greenwashing.

Meanwhile, the Canadian Securities Administrators have warned companies against making "overly promotional" ESG disclosures - and securities regulators in this country are starting to take note.

The Ontario Securities Commission recently asked an investment fund manager to amend its ESG disclosure - and we're likely to see more revisions to ESG disclosures as regulators continue to crack down on misrepresentations, MLT Aikins ESG practice leader Conor Chell recently told Advisor's Edge.

With mandatory ESG disclosure fast approaching for banks and insurers, now is the time to ensure your disclosures are accurate - otherwise you run the risk of litigation, regulatory enforcement and significant reputational harm. Contact a member of our ESG team to learn how we can help.

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