Vale and the Rise of Securities-Based Climate Litigation
The devastating effects of the Brumadinho dam failure on the surrounding community and waterways.
By: Lydia Wang. Staff Member
In April 2022, the U.S. Securities and Exchange Commission (SEC) brought suit against Vale SA, which is based in Brazil and is one of the largest mining companies in the world. The suit, which alleges Vale had made false and misleading statements regarding the safety of its dams, followed the disastrous Brumadinho dam failure in 2019. The failure killed nearly 300 people and released massive amounts of toxic waste into a nearby Brazilian river. This lawsuit is one of the first brought by the SEC against a publicly traded company for making false or misleading statements around climate disclosures. In light of the SEC’s upcoming climate disclosure rule, which would require publicly traded companies to disclose certain climate-related information in their SEC filings and is expected to be finalized around spring of 2023, legal experts anticipate a sharp increase in similar lawsuits and are considering the potential impact of these lawsuits on global corporations.
Vale’s 2015 and 2019 Dam Failures
In 2019, Brazil experienced the worst industrial environmental disaster in its history when Vale’s Brumadinho tailings dam in Minas Gerais, Brazil collapsed. As a result of the dam failure, 270 people were killed and millions of cubic meters of mining waste were spilled throughout Brazil’s waterways, causing long-term environmental damage and contamination. This disaster occurred just four years after Vale’s Mariana dam failure in 2015, which killed 19 people and impacted more than 200,000 people from the surrounding community.
Both dams were part of large-scale mining ventures solely or jointly owned and operated by Vale, one of the largest publicly traded mining companies in the world. Given the sheer scale of the Brumadinho disaster, the dam failure sparked a major outcry within Brazil and internationally, particularly since Vale and the Brazilian government claimed to have implemented stronger monitoring and compliance measures after the Mariana dam disaster in 2015.
Following the Mariana disaster, multiple attempts were made to hold Vale legally accountable for failure to adequately monitor the safety of its dams while falsely representing that it was meeting safety standards. A private foundation (the Renova Foundation) was created to expedite the distribution of monetary damages to impacted communities, since the Brazilian judicial system is known to be slow and heavily under-resourced. The Brazilian government also fined Vale $5 billion, but so far, only a nominal amount has been paid and the government is not strictly enforcing payment.
Recognizing the weaknesses of the Brazilian judicial and regulatory system, victims of the Mariana disaster filed a class action lawsuit against BHP Billiton in the UK courts, seeking to impose a nearly $7 billion penalty on the company. While the UK Court of Appeals recently agreed to hear the case, demonstrating that there is some potential for impacted communities to eventually hold Vale and BHP accountable for irresponsible business practices, most legal mechanisms have so far been ineffective against these companies.
SEC Response
In April 2022, the SEC’s recently-formed Climate and ESG Task Force brought suit against Vale for making false and misleading statements regarding the safety of its dams. The complaint alleged that Vale had “manipulated multiple dam safety audits; obtained numerous fraudulent stability certificates; and regularly misled local governments, communities, and investors about the safety of the Brumadinho dam through its environmental, social, and governance (ESG) disclosures.” According to the SEC, Vale had fraudulently misrepresented in its annual public filings and sustainability reports that it was strictly following international safety standards while simultaneously being aware of the multiple safety risks associated with the Brumadinho tailings dam. As a result, Vale’s investors were misled into believing that Vale was operating according to internationally accepted mining safety and sustainability standards.
The SEC’s lawsuit was brought under multiple commonly-applied anti-fraud provisions within the federal securities framework, including Rule 10b-5, Sections 10(b) and 13(a) of the Exchange Act, and Section 17(a) of the Securities Act. Thus far, neither the SEC nor private shareholders have successfully brought an anti-fraud suit under federal securities laws for a registrant’s failure to accurately disclose climate-related risks. This is partly because the current federal securities regime does not include specific statutory provisions related to climate-related disclosures. As a result, litigants have had difficulty demonstrating that a company’s misstatements or omissions around climate-related risks are sufficiently material to the reasonable investor, which is a key component of successfully bringing a securities fraud suit. However, this may soon change in light of the SEC’s recently-proposed climate disclosure rule.
The SEC’s Proposed Climate Disclosure Rule
In March 2022, the SEC proposed a new rule that would mandate registrants to disclose certain climate-related information in their annual SEC filings, including “information about climate-related risks that are reasonably likely to have a material impact on their business, results of operations, or financial condition, and certain climate-related financial statement metrics in a note to their audited financial statements.”
The proposed rule substantially expands the SEC’s role in regulating corporations’ responsibility for disclosing and addressing climate-related risks. As written, the proposed rule would amend Regulation S-K to include a separate “Climate-Related Disclosure” section, which could also refer to information disclosed in other SEC filings, such as in the Risk Factors or Management Discussion & Analysis sections. Companies would also be required to describe “the actual and potential impacts of any [identified] climate-related risks ... on the registrant’s strategy, business model, and outlook.” This would include disclosure of the company’s business strategy resilience, taking into account identified material climate-related physical and transition risks. If a registrant has developed an internal proxy cost of carbon, then it must disclose the quantitative basis for its calculation of each of its proxy costs. Additionally, registrants would be mandated to disclose any climate risks in their financial statements if the risks constitute 1% or more of a total line item in that year.
Finally, registrants would be required to disclose their GHG emissions metrics, including Scope 1 and Scope 2 emissions. If a company’s Scope 3 emissions are material or if the company has set a reduction target that includes Scope 3 emissions, those must also be disclosed.
The Future of Securities-Based Climate Litigation
Given that the proposed rule would substantially expand the SEC’s authority to regulate climate-related disclosures of publicly traded companies, it has elicited strong reactions from companies and investors alike. While the rule was initially meant to be finalized by October 2022, significant debates around certain provisions in the rule have led to a postponed finalization this spring. While the finalized rule has not yet been published, the proposed rule has led to substantial speculation of the future of climate-related securities litigation with the existence of a climate-specific rule.
With the introduction of a targeted climate disclosure rule, the SEC (and private shareholders) would have a significantly stronger foothold to bring a securities fraud claim for making a materially false or misleading statement, or for failure to make a material statement. One such legal pathway would be through Rule 10b-5, which is one of the most commonly-cited anti-fraud provisions in securities fraud claims. To bring a Rule 10b-5 claim, plaintiff(s) must adequately demonstrate: (1) They purchased or sold shares, the price of which had been overinflated as a result of alleged false statements, materially misleading statements, or omissions of material fact; (2) The statements or omissions at issue are material (materiality requirement); (3) Defendant acted with “a mental state embracing intent to deceive, manipulate, or defraud” (scienter requirement); (4) They relied on the alleged statements or omissions to make an investment decision (reliance requirement); (5) They experienced economic loss as a result of this reliance (damages requirement); and (6) The alleged statements or omissions were the cause of the economic loss (causation requirement).
In the context of climate-related disclosures, more consistent and comprehensive disclosures would make it easier to identify false or misleading statements. Insofar as a mandatory disclosure rule provides more specific guidance on the materiality standard, the materiality requirement would also be easier to meet. This would eliminate a key barrier to securities cases that had been previously brought.
The likely effects of mandated disclosure around climate-related risks in registrants’ annual filings are two-fold: Such mandated disclosure may increase securities litigation related to climate disclosure, but it may also incentivize registrants to limit greenwashing by disclosing sustainability strategies that are reasonably achievable, rather than ambitious sustainability goals that the company knows have no hope of being met. While a mandated disclosure rule would certainly affect compliance costs for registrants, as many will need to bring on external auditors and accountants to review their climate-related risks, it is also likely to push companies to be more transparent around their sustainability goals.
Since the federal securities regime is primarily focused on disclosure, lawsuits based on securities law will not, by themselves, bring justice to the thousands of people who are directly impacted by industry-related environmental disasters each year. With that said, the introduction of a mandatory climate disclosure rule would be an opportunity for federal securities law to fill a critical gap in holding corporations accountable for failure to accurately disclose, and perhaps mitigate, climate-related risks. A disclosure rule would also bring the U.S. more in line with current global disclosure mandates, thus reducing the loopholes that multinational corporations may seek to exploit. So long as there is no global regulatory disclosure regime, there will always be limitations in compliance and enforcement. But encouraging and enforcing a mandatory disclosure rule through domestic securities law is clearly a step in the right direction.
Lydia Wang is a second-year student at Columbia Law School and a Staff member of the Columbia Journal of Transnational Law. She graduated from UC Berkeley in 2019.