When the SEC Steps Back: Rule 10b-5 and the Challenge of Greenwashing Litigation

Introduction

The growing prominence of green investment has brought ESG considerations to the forefront of investor decision-making and corporate governance. Within U.S. securities law, this trend has materialized through increasing disclosure pressures driven by investor demand and, until recently, a regulatory climate favorable to sustainability reporting. Yet as ESG considerations have expanded in scope, so has “greenwashing” (the practice of overstating or misrepresenting a company’s or product’s environmental credentials). These misrepresentations may fall within the antifraud provisions of Rule 10b-5 of the Securities Exchange Act of 1934 and have given rise to a growing body of greenwashing litigation.

This recent expansion in litigation has, to some extent, been encouraged by the SEC itself. However, with the emergence of the ESG backlash and the arrival of a new administration, the Commission has taken a deliberate step back from treating ESG as a distinct pillar of its policy. This retreat has played out across several actions taken by the Commission. Among others, the SEC has expressed its intention to withdraw the Climate Disclosure Rules. These rules are currently the subject of litigation in the Eighth Circuit, which remains in abeyance while the SEC decides whether to proceed with their rescission. Also, the SEC has disbanded the ESG Task Force, originally established in 2021 within the Division of Enforcement. But what are the consequences of these moves for greenwashing litigation?

ESG Information and the Post-Rollback Disclosure Landscape

The starting point is that the rollback of the SEC’s ESG initiatives reshapes, but does not eliminate, the landscape for greenwashing claims. From a disclosure and liability standpoint, the SEC’s retreat does not mean that ESG-related reporting will disappear altogether (to begin with, the SEC’s 2010 Climate Disclosure Guidance remains in effect). Rather, it implies a reversion to the traditional standard of financial materiality for disclosure purposes. However, this shift is unlikely to substantially alter the dynamics of greenwashing litigation, at least in formal terms. To bring a greenwashing claim, plaintiffs must satisfy the same requirements as in any other securities-fraud case: Rule 10b-5 requires proof of fraud or deceit, plus materiality as defined in TSC Industries v. Northway (i.e., significance to a reasonable investor in the total mix of information), as well as reliance, causation, and damages.

The basic prerequisite for a successful greenwashing claimis the availability of information, from which a false or misleading statement (a half-truth) can arise. Absent such a statement, mere silence—so-called “pure omissions”—is generally not actionable under Rule 10b-5, as clarified in Macquarie Infrastructure Corp. v. Moab Partners, L.P. From this perspective, the SEC’s proposed Climate Disclosure Rules are particularly relevant, as they require companies to disclose information regarding their Scope 1 and Scope 2 emissions. In this process, registrants are required to apply a materiality assessment. And it seems that by “material,” the SEC meant “traditional notions of materiality under the federal securities” (see here). In principle, although this conclusion is not without controversy, it would tend to align disclosures made under the Climate Rules with the materiality standard governing Rule 10b-5 litigation.

As the SEC proceeds with the withdrawal of this regulation, however, issuers will continue to be required to disclose sustainability information to the extent it is generally “material” at the federal level. In parallel, developments at the international and state levels are expanding the volume of ESG information entering the public domain, which indirectly shapes Rule 10b-5 litigation risk exposure. In the European Union, the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD) require EU companies—and non-EU companies with significant turnover in the EU—to report on environmental and human-rights impacts across their operations and value chains. That expansion has nonetheless proven fragile, with these initiatives facing increasing headwinds, as reflected in the Omnibus I reform. For instance, as revised, the CSDDD applies to third-country undertakings only where they exceed €1.5 billion (as opposed to €150 million) in EU turnover, a change that hinders the Directive’s extraterritorial effects.

At the state level, California’s climate-disclosure regime applies to certain companies with more than $1 billion (under SB 253) or $500 million (under SB 261) of revenues “doing business in California” to report on their emissions and climate-related financial risks. These norms are particularly salient in that they may function as a de facto national standard. At the same time, however, the regime’s legal status remains unsettled, as the regulations are currently subject to constitutional challenge before the Ninth Circuit and enforcement of SB 261 has been temporarily enjoined. Even so, as they currently stand, two features are especially relevant for the purposes of greenwashing litigation. First, California requires reporting of Scope 3 emissions (as opposed to solely Scope 1 and Scope 2), and does not predicate that reporting obligation on materiality (the materiality question remains relevant only if those statements are later used in federal securities communications, or for purposes of bringing a 10b-5 claim). 

Second, the California statutes do not provide a forward-looking safe harbor, as is the case under the SEC’s Climate Rules. In principle, companies may still invoke the PSLRA’s safe harbor with respect to forward-looking statements. Otherwise, attention will likely turn to the “puffery” doctrine: ESG claims are actionable only when they are “sufficiently factual and measurable” rather than generalized or aspirational (see In re Alphabet, Inc. Securities Litigation), and they are material if they would meaningfully alter the “total mix” of information available to a reasonable investor (see Basic Inc. v. Levinson, 485 U.S. 224).

It follows that the expected withdrawal of the Climate Disclosure Rules does not necessarily imply that companies will face fewer reporting obligations. In practice, alternative frameworks are emerging to fill the space left by the Commission. Whether this evolution continues will depend on how current geopolitical and judicial developments shape the global reception of ESG regulation and its overall legitimacy crisis. Since these regimes fall outside the federal framework, however, the question remains as to whether violating these rules is “material” for securities law purposes.

The enforcement perspective

From an enforcement perspective, the SEC’s retreat may have more implications. In practice, securities-fraud actions under Rule 10b-5 can arise in two ways: either through an SEC enforcement action (civil or administrative), or through a private lawsuit (see here). The difference between the two is that in an SEC action, the agency is not required to prove reliance (see SEC v. Rana Research, Inc., 8 F.3d 1358, 1363 (9th Cir. 1993)) or particular damages (see SEC v. Rind, 991 F.2d 1486 (9th Cir. 1993)). This is particularly relevant in the ESG context, where causation is often diffuse, and the alleged harm can be subjective. Arguably, ESG-related investigations are now integrated into the agency’s broader financial-regulation efforts. Yet, the reality is that the Commission’s activity in this area seems to have slowed, and this trend signals a reduced emphasis on these issues (at least under the present administration). 

Conclusion

The SEC’s intended withdrawal of its recent ESG initiatives does create a challenging atmosphere, but it does not spell the end of ESG litigation in the United States. Rather, it marks a transition to a model that will be increasingly led by private enforcement and alternative disclosure regimes. As these alternative disclosure regimes continue to develop in a contested judicial and political environment, the amount of publicly available ESG information may continue to grow, which sustains both the opportunity and the risk of securities-fraud litigation. Ultimately, the future of ESG litigation will hinge on how courts reconcile the evolving narratives with the traditional principles of materiality and the extent to which damage can be measurable, which continues to be complex. In the long term, this evolution could also lead to a rise in claims beyond the securities-law context.

Juan José Conforto Sarrias is an LL.M. candidate in Corporation Law at New York University School of Law, where he serves as a Graduate Editor of the NYU Journal of Law & Business. He gained experience in capital markets, mergers and acquisitions, and corporate governance while interning for a leading international law firm in Madrid, and has conducted research on ESG regulation, sustainable finance, and green project financing. Prior to attending NYU, he graduated from Universidad Carlos III de Madrid with a dual Bachelor’s degree in Law and International Studies. He is a recipient of the “la Caixa” Foundation Fellowship.