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VIRGINIA LAW & BUSINESS REVIEW
VOLUME 18 FALL 2023 NUMBER 1

THE SECURITIES AND EXCHANGE COMMISSION

AS HUMAN RIGHTS ENFORCER?
Jena Martint
Rachel Chamberst

ABSTRACT

On April 28, 2022, the Securities and Exchange Commission (SEC)

announced that it had charged Brazlian mining company Vale with
misleading investors about safety issues prior to a deadly dam collapse
that killed hundreds and led to signficant environmental harm in the
Braikan state of Minas Gerais. The action against Vale xas largely
seen as the agency's first signficant move after it had created an
Environmental, Social, and Governance (ESG) Task Force within the
Division of Enforcement, the purpose of which is to identfy and
investigate ESG-related violations.
This action against Vale also emerged at a time when scholars,
practitioners, and regulators, are engaged in a larger debate regarding
what role the SEC should have in regulating corporate actions and
statements that are connected to human rights harms. Here, we move the
debatefonvard by offering afirst-of-its kind analysis regarding whether
the SEC's Division of Enforcement-as the county's leadingfinancial
markets enforcer-should broaden itsfocus to include issues that mould
traditionallyfallwithin a business and human rights, i.e., non-financial,
framework.
Our analysis comes at aparticularyprescienttime in the agency's history:

t Robert Lemley Shuman Professor of Law, West Virginia University.

$ Assistant Professor of Business Law, University of Connecticut School of Business.
Research for this article was supported, in part, by a Hodges's Faculty Research Grant from
West Virginia University. An earlier version of this article was presented at the University
of Illinois College of Law Corporate and Securities Litigation Workshop, September 2022.
The authors would like to thank the Workshop participants and the following people for
their comments and insights: Valarie Blake, Cody Corliss, Amy Cyphert, Kirsha Trychta,
and Elaine Waterhouse Wilson. In addition, Trevor Crudele and Kevin Musco provided
valuable research and citation assistance.
Copyright ©2023 Virginia Law & Business Review Association

93
94 Virginia Lan' & Business Revien' 18:93 (2023)

on March 4, 2021, the SEC announcedthe creation ofan 'Enforcement

Task Force" that mouldfocus on ESG. In this article, wre argue that
there are three developments, in particular, that have led to the Division
of Enforcement'spnoritiZationof this issue. First, institutionalinvestors
have become increasingly engaged pith corporations (e.g., through
shareholderproposals and shareholder litigation) regarding issues that
impicate broader societal impacts. A second development relates to the
impact that external rule setters have had on ESG reporting by
corporations,particulary in the global context. Finally, the Division of
Enforcement's actions comes at a time wvhen the agency, more generally,
has embarked on a rulemaking process surrounding ESG disclosure
requirementsforboth corporationsand institutionalinvestors.
We believe that these three developments, in turn, have created mutually
reinforcing notions regarding what the "reasonable"investor considers
material (a key element in securitiesfraud ztigation). As a result, the
landscape regarding what types ofcases are broughtunder securitiesfraud
may broaden signficanty soon. Is this, hoxever, a welcome development?
We conclude that, xhile not ideal, the SEC'spotential to expand case
lax in this area may prove to be a key tool that business and human
rights advocates use to hold corporationsaccountablefor its abuses.

INT R O D U CT IO N .................................................................................................... 95

I. ESG AND BHR: AN EXPLAINER.....................................................................102

A. A Brief History of the Conceptual Landscape......................................103
1. The Birth of BHR...................................................................................103
2. The E volution ofESG ............................................................................ 106
3. The Intersection of Fraud, the SEC andESG.........................................106

II. CURRENT SEC INITIATIVES: RULEMAKING ON ESG ............................... 109

A. The SEC's Rule on Climate Change: Addressing the "E"
in ESG.......................................................................................................111
B. Tackling the "S"-The SEC's Hope for Human Capital....................112
C. The SEC's Expansion of ESG for Investment Advisers
and Investment Companies ................................................................... 114
D. The SEC's Other Attempt to Expand its Regulatory
Reach for ESG.........................................................................................115

III. THE EFFECT OF OTHER ACTORS ................................................................ 117

A. Shareholders' Voice ................................................................................... 117
18:93 (2023) The SEC as Human Rights Enforcer? 95

1. Lary Fink and the Letter Heard 'Round the World...............................118

2. The IncreasingImportance ofShareholderProposals ................................. 119
B. Shareholders' Action(s) ............................................................................. 121
1. The BP OilSpill.....................................................................................122
2. Walgreens'Role in the Opioid Cisis........................................................124
3. Eli.Zabeth Holmes and Theranos..............................................................126
C. Standard Setters: The New Influencers .................................................. 127

IV. THE GLOBAL CONTEXT ................................................................................ 129

A. Double Materiality ..................................................................................... 129
B. Mandatory Human Rights Due Diligence..............................................132
C. Regulatory Oversight.................................................................................135

V. THE SEC'S ROLE IN THE BHR FIELD -WHAT'S AT STAKE ................... 137
A. The Perils of Disclosure ........................................................................... 138
B. Shifting Agency Priorities ......................................................................... 140
C. Bringing in the Reasonable Investor.......................................................141
1. Adding Long-Term Materialty StandardsDiscussion............................. 142
D. Current SEC Enforcement Actions: The Evolving
Nature of Fraud?......................................................................................142
1. Vale........................................................................................................144
2. Bookend Actions......................................................................................145

CONCLUSION .......................................................................................................... 146

INTRODUCTION

T home disaster
HE at [six AM
destroyed eveything, communiy
... itam
lfe. We left
to go to work one morning and some of us
just didn't make it back home alive. We had [ten[ minutes to run away
from death. Imagine fyou had lostyour mum, a son of [seven[ and
daughterof five[ allof this because of irresponsibilktyandgreedforprofit?
The relationship with Samarco before the dam ruptured was good, they
used to help us a lot with the kids at school andforparties, mosty social
things. They ony had one employee from our Bento communiy [an[
employee ho worked directy at Samarco. They held directmeetings with
the community to discuss their social investmentprojects and where re
also questioned the possible rupture of the dam. They told us they xere
super sure, that we could sleep carefree-that such a disastermould never
happen. The company always told us we could sleep safely.
96 Virginia Law & Business Review 18:93
1 (2023i

They explained that the dam was monitored [twenty-four] hours a day,
it had the best standards, bestprofessionals working there. Of course we
be/ieved them! What choice did we have? They were the experts, well at
least that's what they said, that they knew what they were doing.'
On April 28, 2022, the Securities and Exchange Commission (SEC)
announced that it had filed suit against Vale SA, a Brazilian company, in
connection with its operations of a tailings dam2 for the Brumadinho iron mine,
in the Brazilian state of Minas Gerais. Three years earlier, on January 25, 2019,
the dam-which is owned and operated by Vale-catastrophically failed,
releasing a wave of mining waste in the form of toxic sludge. 3 The
consequences for people and planet were horrific. The death toll stands at 270
people, with 11 people still missing.4 Of the lives lost, around 150 people were
buried alive in the sludge that engulfed the town of Brumadinho.5
The dam collapse inflicted grave damage to the environment, with
immeasurable consequences for people's lives and livelihoods. The mud
destroyed "almost 300 acres of native forest and polluted 200 miles of the local
Paraopeba River" and its tributaries. 6 The river can no longer serve as a source
of drinking water for the state.7

1 Rajiv Maher & Adriana Bravin, The Rupturing of the Dam and the Communito's Sodal Fabric:A
Testimony from an "Adngido"from Bento Rodgues, Brasjl, WHEN BUSINESS HARMS HUMAN
RIGHTS: AFFECTED COMMUNITIES THAT ARE DYING TO BE HEARD 57, 60 (Jena Martin et
al. eds., 2020) [hereinafter DYING TO BE HEARD]. This chapter provides a first-hand account
regarding the tragedy from one of the individuals affected by a previous dam bursting on
November 5, 2015 in the same Brazilian state of Minas Gerias. Vale had an ownership
interest in both the Samarco and the Brumadinho mine. While the SEC's lawsuit, discussed
infra, relates to a subsequent dam bursting, the parallels between the operations and actions
of Vale in both 2015 and 2019 are striking. In fact, one could say that Vale's actions in
connection with this second dam failing are even more problematic because the company
was specifically on notice regarding the risk of dam's bursting within its operations. Indeed,
as the SEC notes in its 2022 complaint against the company, "Vale was well aware of the
risks of liquefaction when the Brumadinho dam collapsed in 2019. Just over three years
earlier, in November 2015, another dam, known as the Fundio dam, near the city of
Mariana, Brazil and co-owned by Vale, failed as a result of liquefaction." Complaint at ¶ 6,
Complaint at 3, SEC v. Vale, No. 22-cv-2405 (E.D.N.Y. Apr. 28, 2022) [hereinafter SEC
Vale Complaint]. See also discussion infra note 2.
2 A tailings dam is a mining waste dam. See Taiings Dams: An Explainer, LONDON MINING
NETWORK, http s://londonminingnetwork.org/get-informed/tailings-dams-explainer/.
3 Manuela Andreoni & Leticia Casado, Vale Mining Company to Pay $7 Billion in Compensation
for Bragl Dam Collapse, N.Y. TIMES (Feb. 4, 2021),
https://www.nytimes.com/2021/02/04/world/americas/vale-brazil-dam-collapse-7-
billion-compensation.html.
4 Id.
s SEC Vale Complaint, supra note 1, at ¶ 2.
6 Andreoni & Casado, supra note 3.
7 Id.
18:93 (2023) The SEC as Human Rghts Enforcer? 97

What makes this disaster particularly tragic is that it was preventable. The
company was on high alert after another of its dams, Fundio, in the state of
Minas Gerais, collapsed only a few years earlier, causing loss of human life and
massive environmental destruction. 8 According to a report by an independent
commission, hired by Vale, the company knew about the safety risks at the
Brumadinho dam as early as 2003.9
As tragic as the human and environmental costs may be, the collapse of
the dam also had financial fallout, removing more than $4 billion in Vale's
market capitalization.1 0 "Its American Depository Shares," which trade on the
New York Stock Exchange, lost more than 25% of their value."1 2 This loss,
along with fact that Vale is alleged to have misled investors with assurances in
its sustainability reports and other company documents about the safety of the
dam, brought it to the attention of the SEC. Although catastrophic harm to
people and planet lies at the heart of the Brumadinho matter, the SEC's interest
is not in the incident per se; rather the agency's interest is in whether the
company misled investors about the risk of the incident occurring and the steps
it was taking to prevent it.
For years, there has been a growing debate regarding what role (if any) the
U.S. securities laws should have in the business and human rights (BHR)
ecosystem. BHR is a field of law and practice that pushes for increased
corporate accountability for human rights violations.1 3 Given the overlapping
nature of the types of corporate actions that can lead to both fraud and human

8 DYING TO BE HEARD, supra note 1, at 81; SEC Vale Complaint, supra note 1, at ¶ 6.
9 Andreoni & Casado, supra note 3.
10 SEC Vale Complaint, supra note 1, at ¶ 3.
i For an overview of ADRs and their impact on the extraterritorial reach of the SEC, see
Raphael G. Toman, The Extratemftorial Reach of the U.S. Securities Laws and Non-Conventional
Securities: Recent Developments After Momrson and Dodd-Frank, 14 N.Y.U. J.L. & Bus. 657 (2018)
(explaining that American Depository Shares (ADR) are a type of security that allows
American investors to trade in foreign corporations. In addition, because these shares
(which are actually negotiable bank certificates) trade on U.S. securities markets, they are
subject to the enforcement purview of the SEC).
12 SEC Vale Complaint, supra note 1, at ¶ 3.
13 See discussion infra Section I.A. and related footnotes.
98 Virginia Law & Business Review 1
18:93 (2023)

rights violations, scholars, 4 commentators,1 5 and advocates," have called for

an expanded focus of securities regulation to also encompass non-financial
harms.1 7 The starting point for this debate is that securities regulation, generally,
and the SEC, specifically, have typically (but not always) focused on financial-
based misconduct rather than a broader, non-financial mandate. Beginning
with Cynthia Williams' seminal article in 1999, scholars1 8 and practitioners 9
have challenged this viewpoint and argued that the SEC should use its powers
to address some social and environmental as well as financial issues. 20 Others,
meanwhile, have noted that Securities Exchange Act Rule 10b-5-the principal
tool used to fight fraud in the securities markets-can also be used to address
corporate actions that lead to social harms.21 However, we do not believe that

14 For an example of early pioneers, see Cynthia A. Williams, The Securities and Exchange
Commission and CorporateSodal Transpareng, 112 HARV. L. REv. 1197, 1998-99 (defending "the
view that the . . . SEC can and should require expanded social [and environmental]
disclosure by public reporting companies to promote corporate social transparency
comparable to the financial transparency that now exists"). Williams' work marked an early
intervention into the larger BHR field. Other pioneers include: Steven Ratner, Corporations
and Human Rzghts: A Theo 0 of Legal Responsibilig, 111 YALE L.J. 443 (2001) (discussing how
to hold corporations liable for social impacts); David Weissbrodt & Muria Kruger, Business
and Human Rghts, in HUMAN RIGHTS AND CRIMINALJUSTICE FOR THE DOWNTRODDEN 421-
49 (Morten Bergsma ed., 2003) (coining the term "business and human rights" as the
conceptual framework for understanding corporate accountability for human rights
abuses); Larry Cat6 Backer, MulinationalCoporations, TransnationalLaw: The UnitedNations'
Norms on the Responsibilides of TransnationalCorporations as a Harbinger of Corporate Sodal
Responsibilio in InternationalLaw, 37 COLUM. HUM. RTS. L. REV. 287 (2006) (discussing the
international law landscape prior to the development of the United Nations Guiding
Principles on Business and Human Rights).
1s See Rachel Cherington, Securities Laws and Corporate Sodal Responsibilio: Toward an Expanded
Use of Rule 10B-5, 25 U. PA. J. INT'L ECON. L. 1439 (2004) (surveying investor litigation
against transnational corporations); see also Galit A. Sarfaty, Human Rights Meets Securities
Regulation, 54 VA. J. INT'L L. 97 (2013) (analyzing the normative implications of the broader
strategy of using securities regulation to hold companies accountable for human rights
abuses). With regard to Dodd-Frank § 1502, the Conflict Minerals Rule, the ability of the
SEC to be a "humanitarian watchdog" has been questioned due to the organization's lack
of specialist knowledge. See Karen E. Woody, ConflctMinerals Legisladon:The SE C's New Role
as Diplomatic and HumanitarianWatchdog 81 FORDHAM L. REv. 1315 (2012) (arguing that this
is an over-extension of the SEC's powers).
16 INTERNATIONAL CORPORATE ACCOUNTABILITY ROUNDTABLE, KNOWING AND SHOWING:

USING U.S. SECURITIES LAWS TO COMPEL HUMAN RIGHTS DISCLOSURE (Cynthia A.

Williams ed., 2017), https://icar.squarespace.com/publications/2017/1/4/knowing-and-
showing-using-us-securities-laws-to-compel-human-rights-disclosure [hereinafter
KNOWING AND SHOWING].
17 Cherington, supranote 15, at 1439-41.
18 See Sarfaty, supra note 15.
19 See KNOWING AND SHOWING, supra note 16.
20 See Williams, supra note 14.
21 See Cherington, supranote 15.
18:93 (2023) The SEC as Human Rghts Enforcer? 99

any author-until now-has suggested that the SEC's Division of

Enforcement, specifically, should be using its powers to hold corporations
accountable for acts that lead to human rights abuses. To that end, our article
offers the first comprehensive analysis regarding the implications and
challenges that the SEC could face should it become a human rights enforcer.
And yet, the SEC, it seems, has already begun taking on that role. The
question, then, is why? Specifically, why is the Division of Enforcement
beginning to act on matters that have broad implications for a BHR
framework? This is not a simple question to answer. Certainly, in the last few
years, there have been a number of developments that have forced the issue of
corporate influence on workers and communities to the fore. This article
focuses on three.
First, over the last few years, 22 institutional investors have become
increasingly engaged with corporations regarding issues that implicate broader
societal impacts. This has been done both informally and in more formal
settings. For example, Larry Fink, the CEO of BlackRock Investments, has
recently been calling on corporations to consider the larger societal impacts of
their operations and in their relationships. 23 On the more formal side,
shareholder proposals, filed by investors before corporate annual meetings,
have increasingly requested additional information about a corporation's
impact on larger communitarian issues.24 In addition, investors-turned-litigants
have begun bringing claims based on statements and conduct relating to those
same communitarian issues. 25 Specifically, these shareholders are using Rule
10b-5 and similar statutory provisions to try and hold these corporations
accountable by alleging that they have suffered damage as a result of a
corporation's fraud. While these cases face significant challenges, plaintiffs
have also been successful in a handful of actions concerning a corporation's
environmental, health, and safety misrepresentations, 26 including cases brought
following the collapse of the Fundio and Brumadinho dams. 27

22 We should note, however, that even prior to this trend, shareholders have attempted to use
the various corporate governance tools offered to influence corporate behavior on non-
financial and social justice related issues. See discussion infra Section III.A. and related
footnotes.
23 See infra, note 129.
24 See discussion infra Section III.A. and related footnotes.
25 See discussion infra Section III.B. and related footnotes.
26 See, e.g., In re BP P.L.C. Sec. Litig., 843 F. Supp. 2d 712 (S.D. Tex. 2012); Ramirez v. Exxon
Mobil Corp., 334 F. Supp. 3d 832, 839 (N.D. Tex. 2018).
27 Consol. Amended Class Action Complaint, In re Vale S.A. Sec. Litig., No. 1:15-cv-9539-
GHW, 2017 U.S. Dist. LEXIS 42513 (S.D.N.Y. Mar. 23, 2017); In re Vale S.A. Sec. Litig.,
No. 19-cv-526, 2020 U.S. Dist. LEXIS 91150 (E.D.N.Y. May 20, 2020).
100 Virginia Law & Business Review 1
18:93 (2023)

A second development relates to the impact that external rule setters have
had on environmental, social, and governance (ESG) reporting by
corporations, particularly in the global context. For instance, as a result of rules
developing in Europe, commentators have begun to focus on the specific
measures and benchmarks needed to align corporate actions with larger societal
goals. Specifically, there are two legal developments that are gaining traction in
Europe-"double materiality" 28 and "human rights due diligence," 29 (HRDD)
both of which assess and evaluate corporate risks from the standpoint of
impacted individuals or communities, rather than simply examining how a
corporation's actions impact its own bottom line. As more of these external
standards become institutionalized, we believe that it will become increasingly
difficult for corporations (and their regulators) to disregard these greater social
harms when implementing an enforcement framework.
The final development concerns the SEC's own rulemaking. The decision
to bring an enforcement action against Vale comes at a time when the SEC has
embarked on a rulemaking process targeted at ESG disclosure requirements
for issuers, investment companies, and investment advisers.3 0
This article asks whether the culmination of these developments may signal

28 Double materiality refers to a framework regarding what is material in a corporation's

operations. Specifically, the concept advocates for a material assessment not just from an
investor's point of view but also from the viewpoint of an impacted community or
individual. See discussion infra Section IV.A. and related footnotes.
29 The concept of human rights due diligence (HRDD) was developed by then UN Special
Representative John Ruggie in connection with his creation of the UN Guiding Principles
on Business and Human Rights (and its foundational document, the Protect, Respect, and
Remedy Framework). Specifically, HRDD encourages companies to engage in a
comprehensive risk assessment regarding their operations and relationships. However,
rather than examining the risk to the corporation, HRDD examines the risk to impacted
individuals and communities. In that way, it shares many similar traits to the double
materiality framework. See discussion infra Section I.A. and related footnotes.
30 While the term ESG has been the subject of much debate and confusion, at its heart, the
concept relates to corporations and investors considering more than just their financial
impact within their operations and investments. Specifically, as the term implies, ESG
primarily engages with environmental, social, and governance concerns. See section I.A. infra
and surrounding footnotes for the evolution and use of the framework. However, we note
that the SEC's current activities are not the agency's first foray into these matters. For a
discussion of the SEC's history related to more social initiatives, see Jena Martin, Hiding in
the Light: The Misuse of Disclosure to Advance the Business and Human Rights Agenda, 56 COLUM.
J. TRANSNAT'L L. 530, 537 (2018) [hereinafter Hidingin the Light] (discussing the SEC's 1971
rule-making in this area). For an overview of the genesis and evolution of ESG, see
Elizabeth Pollman, The Making and Meaning of ESG (Univ. Pa. L., Working Paper No. 659,
2022), https://papers.ssrn.com/sol3/papers.cfm?abstractid=4219857.
18:93 (2023) The SEC as Human Rights Enforcer? 101

the SEC's increased willingness to enforce BHR matters.3 1 If so, we believe that
given the agency's orientation, this would be suboptimal. BHR's focus is on the
impact of business on people. In contrast, the SEC's focus is on the impact of
businesses' ESG statements on investors. As a result, we believe that the SEC's
actions are less than ideal for holding corporations accountable for human
rights abuses.
Unfortunately, the current legal landscape in the United States provides
little in the way of corporate accountability for human rights violations.32 For
instance, unlike in Europe, in the United States there is a diminishing legal
pathway for victims of harm at the hands of businesses to hold those actors
legally responsible.3 3 In addition, while there is no bespoke government
agency-anywhere in the world-that could bring claims against corporations
for human rights impacts per se, there are new corporate accountability
mechanisms for such impacts in European countries, including the emergence
of some regulatory oversight in this area.3 4 However, there is no corresponding
trend in the United States. Not only does this result in the United States failing
to meet its obligations under international human rights law, 35 but it leaves
victims of even the most egregious human rights violations without a way to
be made whole.
Consequently, while the SEC's focus makes it less than ideal for
establishing liability for BHR-related harms, it is nevertheless a crucial gap-filler
in the search for corporate accountability on these matters. Specifically, by
using tools like Rule 10b-5,36 the SEC can tie a corporation's actions and
statements to larger societal harms and, in doing so, begin to change the
discussion regarding what matters to a reasonable investor-a crucial element
in a corporate fraud charge-to include these larger BHR issues. In short, in

31 The BHR framework provides increased accountability for businesses (either through an
international or national law framework) regarding a corporation's social impact on
communities and individuals. See infra Section I.A., for more explanation regarding the
genesis of the framework.
32 See discussion infra Section I.A.
33 See discussion infra Section I.A.; see also Rachel Chambers, ParentCompany Direct Liabi/iDfor
Overseas Human Rights Violations: Lessonsfrom the U.K. Supreme Court, 42 U. PA. J. INT'L L. 519
(2021) (demonstrating that the U.K. courts, and the courts of other European states, are
becoming more receptive to business and human rights cases while the Alien Tort Statute
has been cut back by the U.S. Supreme Court).
34 See infra Section IV.
3s Specifically, the State's Pillar 1 obligations under the UN's Guiding Principles on Business
and Human Rights (the "UNGPs'). See infra Section I.A.
36 Rule 10b-5 of the Exchange Act is the primary fraud tool used by the agency to hold
corporations and other individuals liable for fraudulent misstatements and omissions. 17
CFR § 240.10b-5. See infra Section I.A. for more details.
102 Virginia Law & Business Review 18:93 (2023)

the absence of any currently viable alternatives, the SEC still has a vital role to
play.

The rest of the article will proceed in five parts. Part One lays the
foundation by explaining what is meant by BHR and relating it to the more
widely known concept of ESG. Part Two discusses the SEC's current ESG-
related initiatives and why the agency's rulemaking signals a shift in its
willingness to regulate on ESG-related issues. Part Three turns to the roles
other actors, including investors, may play in the SEC's increased vigilance on
ESG issues: (1) bringing shareholder resolutions; and (2) using private lawsuits
to hold companies accountable for fraudulent misstatements.
Part Four examines the international picture. Specifically, we discuss the
developments noted above: the adoption of double materiality and the
enactment of human rights due diligence laws. We survey the regulatory
oversight of BHR in European states and demonstrate how BHR is increasingly
legalized, thereby facilitating any leap the SEC may take in this area. Finally,
Part Five provides an analysis of how the SEC's enforcement actions may shift
jurisprudential norms regarding the "reasonable investor" standard that
permeates U.S. case law, using some of the SEC's recent actions as a
foundation. This section also discusses the role the agency's work can have in
determining necessary interventions to move the BHR agenda forward in the
United States while acknowledging that, because of the perspective the agency
takes when fashioning corporate accountability, its actions cannot (and should
not) be viewed as a panacea of corporate accountability for human rights
violations.

I. ESG AND BHR: AN EXPLAINER

Despite the overlapping nature of these conceptual frameworks, the

genesis of ESG and BHR comes from two very different theoretical
perspectives. The ESG framework evolved from an investor perspective and
arose specifically within the context of the investing community-in essence
serving as an outlet for investors who wanted to "do good" while "doing well"
in their investments.
In contrast, the BHR framework was an outgrowth of international human
rights law (IHRL) and, as such, starts from this conceptual vantage point. As a
result, BHR is firmly situated in the larger IHRL field of study. As we discuss
below, the impact of each of these conceptual birthplaces has long-lasting
consequences.
18:93 (2023) The SEC as Human Rghts Enforcer? 103

A. A Brief History of the Conceptual Landscape

1. The Birth of BHR

The BHR landscape is a relatively new development in the law-rising in

stature within legal practice and academia after the UN Human Rights Council
unanimously endorsed the UN Guiding Principles on Business and Human
Rights (UNGPs).37 As a field of study, BHR has been described as being "about
how business may negatively impact human rights and the various ways in
which such violations can be prevented and addressed, including how business
can be held accountable." 38
Because the BHR movement developed out of the larger field of IHRL,
the movement always struggled with reconciling the typical structure of IHRL
with the new reality of businesses and corporations. For instance, under the
prototypical IHRL structure, countries (or States) have duties to individuals to
protect, respect, and fulfill their human rights. In addition, because IHRL is a
bottom-up framework, States can largely only be bound to obligations to which
they have previously consented. As such, although the categories of rights that
may pertain to an individual as a rightsholder are substantial (including, for
instance, the right to life, 39 the right to health,40 freedom from both racial4' and
gender 42 discrimination and freedom from torture 43), they are generally only
enforceable to the extent a State consents to be bound.
Moreover-and particularly significant here-in the traditional IHRL field,
other non-State actors (such as corporations) were generally absent from the

37 John Ruggie, U.N. Special Representative for Bus. & Hum. Rts., Guiding Principleson Business
and Human Rights: Implemening the UnitedNations "Protect,Respect and Remedy"Framework, U.N.
Doc. A/HRC/17/31 (Mar. 11, 2011). For a comprehensive look at the UN's role in the
larger BHR landscape, see Jena Martin Amerson, "The End of the Beginning?": A Comprehensive
Look at the U.N.'s Business and Human RightsAgendafrom a BystanderPerspective, 17 FORDHAM J.
CORP. & FIN. L. 871 (2012) [hereinafter End of the Beginning]. That is not to say, however,
that there were not early scholars that paved the way for the BHR discussion to go
mainstream. See supranote 14 for a list of academics that began work in this field.
38 Chiara Macchi & Nadia Bermaz, Business, Human Rights and C//mate DueDiligence: Understanding
the Responsibiity of Banks, SUSTAINABILITY (2021), at *2 (citing NADIA BERNAZ, BUSINESS
AND HUMAN RIGHTS: HISTORY LAW AND POLICY - BRIDGING THE ACCOUNTABILITY GAP
(2017)).
39 See International Covenant on Civil and Political Rights, 999 U.N.T.S. 171 (Dec. 16, 1966),
art. 6 [hereinafter ICCPR].
40 See International Covenant on Economic, Social and Cultural Rights, 993 U.N.T.S. 3 (Dec.
16, 1966), art. 12 [hereinafter ICESCR].
41 ICCPR, supranote 39, art. 26.
42 Id.
43 Id. art. 7.
104 Virginia Law & Business Review 1
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conceptual landscape. Unfortunately, their absence belied a grim reality: in

many instances, the corporations (who had no duties under international law)
had significantly more leverage and power than the States in which they were
operating. It is out of this absence that the BHR framework developed.
BHR recognized that, while businesses could achieve some good in the
communities in which they operate, businesses could also cause substantial
negative human rights impacts, either through their operations or their
relationships. It identified both States and corporations as having either an
obligation (in the case of States) or a responsibility (in the case of businesses)
to prevent these negative impacts and remediate any harm that did occur as
much as possible.44
As such, the distinguishing feature of BHR is in the prioritization of
rightsholders. 45 Nowhere is this more apparent than in the creation of the
conceptual framework of Human Rights Due Diligence (HRDD)-a key
contribution of the UNGPs.46 Unlike traditional due diligence, which examines
corporate operations and relationships from the perspective of harm to the
company, 47 HRDD examines corporate operations and relationships from the
perspective of harm to people.48 In recent years, HRDD frameworks have been
institutionalized into national and regional laws, a trend still largely confined to
European States and the European Union. 49 In contrast, the United States has
50
not yet adopted the concept of HRDD within its legal framework.

44 See Macchi & Bernaz, supra note 38.

45 At least, theoretically. As one of us has noted in a recent edited volume, although the BHR
framework tries to center communities and individuals, it often does so with little input or
consultation from those individuals. See DYING TO BE HEARD, supranote 1, at 1.
46 U.N. Special Representative for Bus. & Hum. Rts, supranote 37, at Principle 8. This is the
key international framework for BHR, comprising both "hard" (i.e., mandatory legal
obligations) and "soft" (i.e., legal responsibilities that, while persuasive, have not
"hardened" into mandatory law. For a comparison of the two, see MARK JANIS,
INTERNATIONAL LAw 5 (7th ed. 2016).
47 For a general comparison of these two types of diligence, see generally Jena Martin, Business
and Human Rights: What's the BoardGot to Do ith It?, 2013 ILL. L. REV. 959 (2013) (comparing
traditional notions of corporate due diligence and risk assessment with human rights due
diligence).
48 Malcolm Rogge, Risk, Uncertaint and the Future of Coporate Human Rights Due Diligence 4
(Corp. Resp. Initiative Working Paper No. 81, 2022).
49 See, e.g., Loi 2017-399 du 27 Mars 2017 Relative au Devoir de Vigilance des Socites Meres et des
EntreprisesDonneuses D'Ordre [Law 2017-399 of March 27, 2017 Relating to the Duty of
Vigilance of Parent Companies and Ordering Companies], JOURNAL OFFICIEL DE LA
REPUBLIQUE FRANQAISE [OFFICIAL GAZETTE OF FRANCE], Mar. 28, 2017 [hereinafter Loi
de Vigilance].
5 There are, however, examples of laws that have an HRDD component, e.g., the recently
enacted Uyghur Forced Labor Prevention Act. Uyghur Forced Labor Prevention Act, H.R.
6210, 116th Cong. (2020). See infra Section IV.B. and related footnotes.
18:93 (2023) The SEC as Human Rghts Enforcer? 105

While there is no current mechanism to hold corporations liable for

negative human rights impact under internationallaw,51 businesses can be held
legally accountable under some country's national laws for human rights abuses
in different ways. For instance, in the United States, victims of such abuse can
seek accountability for harm they have suffered (e.g., by suing in tort law), 52 but
legal accountability also encompasses alternative approaches such as import
bans preventing goods made under particularly exploitative conditions from
entering the market. 53 In addition, U.S. consumers, investors, or the SEC can
bring lawsuits for false and misleading claims related to a corporation's
operations, relationships, or impacts, and their respective effects on an
individual's community's human rights. 5 4 In other countries (primarily in
Europe) courts or regulators can check that companies properly fulfill their
HRDD obligations 55 or comply with human rights 56 or modern slavery
reporting57 obligations. These entities could also verify that such reports are
not false or misleading. 58

51 This, despite the fact that some of the corporations that have been involved in egregious
human rights scandals are often significantly larger than countries in which they operate
(many of whom also have legal obligations under IHRL). See Martin, End of the Beginning,
supra note 37, at 883-87.
52 See the well-known Alien Tort Statute (ATS) cases, e.g., Doe v. Unocal, 248 F.3d 915 (9th
Cir. 2001). Unfortunately, over the last fifteen years, the Supreme Court has severely
curtailed the ability of plaintiffs to use this tried and tested means of bringing corporate
human rights litigation in the United State, culminating with the court's 2021 Nestle v. Doe,
decision. Nestle v. Doe, 141 S. Ct. 1931 (2021). For a discussion of the recent trend in ATS
litigation see Rachel Chambers & Jena Martin, United States: Potential Paths Forward after the
Demise of the Alen Tort Statute, in CIVIL REMEDIES AND HUMAN RIGHTS IN FLUX (Ekaterina
Aristova & Ugljesa Grusic eds., 2022).
s3 See, e.g., § 307 of the Tariff Act, 19 U.S.C. 1307; Uyghur Forced Labor Prevention Act, H.R.
6210, 116th Cong. (2020).
s4 See, e.g., Hodsdon v. Mars, Inc., 162 F.Supp. 3d. 1016 (N.D. Cal. 2016), affid Hodsdon v.
Mars, Inc., 891 F.3d 857 (9th Cir. 2018); Rachel Chambers, Ligatng CoporateHuman Rzihts
Information, 60 AM. Bus. L. J. 111, 138 (2023).
55 See, e.g., Loi de Vigilance, supra note 49.
56 In the United States, there is no legal requirement for companies to report on their human
rights impacts, but such a requirement exists in many other countries, e.g., Companies Act
of 2006, c. 46, § 414C, 414CB pt. 15 (Eng.) (reforming English company law to mandate
certain disclosures including on human rights). Oversight of this law is, in theory, provided
by the U.K. Financial Conduct Authority and the Financial Reporting Council.
57 See e.g., California Transparency in Supply Chains Act, CAL. CIV. CODE § 1714.43 (West
2012). The Attorney General of California, in theory, provides oversight of the law, but in
practice, has shown an extremely light touch. See Martin, supra note 30, at 551 (discussing
the lack of enforcement by California's Attorney General).
58 For example, under Loi de Vigilance, supra note 49, the courts have a role in verifying the
content of the "vigilance plans" that companies issue to comply with the law.
106 Virginia Law & Business Review 1
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2. The Evolution ofESG

Like the BHR field, the concept of reporting on "ESG" factors is a

relatively new phenomenon, albeit one that pre-dates the international
institutionalization of BHR. Specifically, "[a]n institutionalized socially
responsible investing industry (SRI) has existed at least since the 1970s, when
the first socially screened mutual funds were established." 59 ESG investing
evolved out of this context. The term ESG was first used in a 2005 United
Nations report, entitled "Who Cares Wins," that launched a new UN
initiative-the Principles for Responsible Investment. 60 In essence, these
principles were a mission statement for asset owners and managers,
encouraging them to take ESG factors into account when making investment
decisions. The take-up of the term of ESG since 2005 has been phenomenal,
but with this has come some confusion about what exactly is encompassed by
the term "ESG." As Elizabeth Pollman says: "The word that follows the
famous refrain of 'environmental, social, governance' shapeshifts from 'criteria'
to 'factors,' 'standards,' 'strategies,' 'risks,' 'issues,' 'activity,' or even 'goals."' 6 1
In this Article we define ESG as three issue areas (with factors or criteria in
each) that have been devised to evaluate a company's performance.

3. The Intersection ofFraud, the SEC and ESG

In the United States, what little regulation of ESG there is occurs chiefly6 2
at the hands of the SEC. Using its general regulatory authority, the agency
attempts to provide companies with guidance regarding evaluating and
reporting on ESG. For instance, in a February 26, 2021 Investor Bulletin 63 the

59 John Ruggie, Corporate Identiy in Play: The Role of ESG Investing, (Mossavar-Rahmani Center
for Bus. & Gov't Fac. Working Paper Series, Working Paper No. 2019.05, 2019).
60 U.N. Glob. Compact, Who Cares Wins: Connecting Financial Markets to a Changing
World, at i-ii (2005).
61 Pollman, supra note 30, at 3.
62 Chiefly, but not exclusively. For instance, the Department of Labor has also thrown its hat
in the ESG ring by issuing a final rule regarding what ESG criteria an ERISA-covered plan
should consider. See 29 C.F.R. § 2550 (2022). For an analysis of the final rule, see Ropes
&

Gray, DOL FinalRule EmbracesPrinciples-BasedApproach to ESG Factorsin Investments and Proxy

Voting - Initial Reactions (Nov. 23, 2022),
https://www.ropesgray.com/en/newsroom/alerts/2022/november/dol-final-rule-
embraces-principles-based-approach-to-esg-factors-in-investments-and-proxy-voting.
63 U.S. Sec. & Exch. Comm'n, Environmental, Social and Governance (ESG) Funds
-

Investor Bulletin (Feb. 26, 2021), https://www.sec.gov/oiea/investor-alerts-and-

bulletins/environmental-social-and-governance-esg-funds-investor-bulletin [hereinafter
SEC, Investor Bulletin].
18:93 (2023) The SEC as Human Rights Enforcer? 107

SEC sought to discuss the concept of ESG and how mutual funds analyze these
concepts. However, as the SEC notes at the outset, "[f]unds that elect to focus
on companies' ESG practices may have broad discretion in how they apply
ESG factors to their investment or governance processes." 64 According to the
SEC, the criteria fund managers can use in the evaluative process include:
1. For the "environmental component":
* A company's energy use
* Its assessment regarding climate change risks
* Impacts that its operations may have on the environment as a
whole 65
2. For the "social component":
* The company's "relationship with people ... that impact diversity
and inclusion, [or] human rights" 66
* The corporation's treatment of its employees
* Any efforts the company may make to invest in its surrounding
community 67
3. For the "governance component": "[I]ssues [regarding] how the
company is run," 68 including
* Its transparency
* Its ethics
* Its relationship with shareholders 69
The main enforcement tool of the SEC, in turn, is rule 10b-5 of the
Securities Exchange Act. 70 Rule 10b-5 is the SEC's chief weapon deployed in
the fight against fraud. Under the rule, the SEC can go after any person that
engages in some deception in connection with the purchase or sale of a

64 Id.
65 Id.
66 Id. We note that this is the only time that the SEC used the term "human rights" in the
bulletin.
67 Id.
68 Id.
69 Id.
70 Securities and Exchange Act of 1934, 17 C.F.R. § 240.10b-5.
108 Virginia Law & Business Review 1
18:93 (2023)

security. 71 Specifically, for a "garden-variety" fraud case, 72 the following

elements are at play: (1) a material misstatement or omission; (2) that is made
(or omitted) with scienter; (3) that an investor has re/ied73 upon; (4) and that
subsequently causes losses in connection with the purchase or sale of a security. 74
A private litigant must prove all of these elements. In contrast, the SEC must
only prove that there was a material misstatement or omission that was made
with scienter.7 5 As such, proving the issue of materiality becomes crucial to
advancing the SEC's case under Section 10(b) and Rule 10b-5.
The concept of materiality originally developed within the reporting and
disclosure ambit of the SEC's realm as the baseline threshold for information
that the mandatory reporting system would require firms 76 to disclose;
however, it has since been used within the context of securities fraud
enforcement cases. Courts have stated that something is material if there is a
"a substantial likelihood that the disclosure of the omitted fact would have been
viewed by the reasonable investor as having significantly altered the 'total mix'

71 Specifically, the language of the rule states the following:

"It shall be unlawful for any person, directly or indirectly, by the use of any
means or instrumentality of interstate commerce, or of the mails or of any
facility of any national securities exchange, (a) To employ any device,
scheme, or artifice to defraud, (b) To make any untrue statement of a
material fact or to omit to state a material fact necessary in order to make
the statements made, in the light of the circumstances under which they
were made, not misleading, or (c) To engage in any act, practice, or course
of business which operates or would operate as a fraud or deceit upon any
person, in connection with the purchase or sale of any security."
17 CFR § 240.10b-5 (1934).
72 The term "garden-variety fraud" refers to the case where "a company or executive tells a
significant lie-or makes a significant misrepresentation-that misleads investors about
some important aspect of the company." Jena Martin, Why Facebook'sMark Zuckerberg May
Be in Hot Water with the SEC, THE CONVERSATION (Sep. 29, 2021),
https: / /theconvers ation.com/why-facebooks-mark-zuckerberg-may-be-in-hot-water-
with-the-sec-168797 [hereinafter Zuckerberg & the SEC].
73 In class action lawsuits, the reliance element can be proved using a "fraud-on-the-market"
theory, which is itself (in turn), an outgrowth of the Efficient Market Hypothesis (EMH).
EMH stands for the proposition that stock prices automatically reflect material information
in the market. Therefore, under the fraud-on the-market theory, plaintiffs in class actions
can show reliance by providing evidence of how the market, as a whole, reacted to a
corporation's misstatements, rather than being required to interview each and every person
in a class to determine why they purchased a stock.
74 Erica P. John Fund, Inc. v. Halliburton Co., et. al., 563 U.S. 804, 809-10 (2011) (citing
Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 37-38 (2011)).
75 For an overall discussion of scienter see Zuckerberg & the SEC, supranote 72.
76 See, e.g., Securities and Exchange Act of 1934, 17 CFR § 229, 229.10 (discussing the need
to disclose "material facts, both favorable and unfavorable, regarding their financial
condition" when providing projections).
18:93 (2023) The SEC as Human Rights Enforcer? 109

of information made available." 77 The definition of materiality is therefore

intrinsically intertwined with what the reasonable investor thinks. Much has
been written about the lack of a precise definition of materiality and the
resulting confusion in lower court decisions. 78 As one commentator wryly
states: "What is [m]aterial? The SEC [s]ays [y]ou [d]ecide." 79 As investors' views
of what they believe will alter the "'total mix' of information" have evolved,
the type of cases that the SEC can bring may also be affected. 80
To be clear, both financial and non-financial statements and information
can implicate materiality under the current case law standard. 8 1 However, in
both instances, the SEC is exclusively using materiality from an investor's
perspective as the basis for its arguments, 82 and its most consistent benchmark
for materiality is linked to statements that somehow relate to the financial
performance of the company. 83 Nonetheless, even within this paradigm, the
agency has some flexibility. To wit, (as we discuss below) the SEC's initiative
within its rulemaking space, specifically with regards to ESG.

II. CURRENT SEC INITIATIVES: RULEMAKING ON ESG

Historically, the SEC has been known as the nation's premier securities
market regulator. The stock market, in turn, (in the words of one report)
currently represents "around a record 40% of the nation's wealth." 84 This
amounts to a seismic level of influence and leverage on the nation's finances
(and at least indirectly) on the nation's values. Although, for most of its
existence, the SEC has styled itself as a "financial" regulator, over the years
some of its policies have reflected (sometimes explicitly and sometimes
implicitly) the larger societal values of the time. 85 Arguably, however, the SEC's
current ESG initiatives represent the boldest proclamation that the agency is

77 Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988) (citing TSC Indus., Inc. v. N.way, Inc.,
426 U.S. 438, 449 (1976)).
78 Ruth Jebe, The Convergence of Financialand ESG Materia/ip:Taking Sustainabikbi Mainstream, 56
AM. Bus. L.J. 645, 658 n.63 (2019).
79 Timothy J. Horstmann & Erica M. Wible, "What Is Material? The SEC Says You Decide,"
MCNEES WALLACE & NURICK LLC (Dec. 7, 2018), https://www.mcneeslaw.com/what-is-
material-the-sec-s ays-you-decide/.
80 Id. (citing TSC Indus., Inc. v. N.way Inc., 426 U.S. 438, 449 (1976)).
81 See infra Section V.D.
82 See infra Section V.D.
83 See SEC Vale Complaint, supra note 1.
84 Desmond Lachman, The Stock Market Isn't the Economy. It's StillBad Newsfor the Partj in Power,
BARRON'S (May 13, 2022), https://www.barrons.com/articles/the-stock-market-isnt-the-
economy-its-still-bad-news-for-the-party-in-power-51652391415.
85 See, e.g., Jena Martin, Hidingin the Leight, supra note 30, at 538, 551.
110 Virginia Law & Business Review 18:93 (2023)

interested in more than "just the numbers" with corporate disclosures.

Specifically, on March 4, 2021, the SEC announced the creation of an
"Enforcement Task Force" that would focus on climate and ESG Issues. 86 In
announcing the initiative, the agency noted that their prioritization of ESG-
related fraud and disclosures was "[c]onsistent with increasing investor focus
and reliance on climate and ESG-related disclosures and investment." 87 To that
end, the SEC identified specific actions that the task force would undertake. As
the release noted, the work of the task force would include the following:
* Identifying material gaps in a company's disclosures relating to
climate risk
* Analyzing corporate disclosures related "to investment advisers' and
funds' ESG strategies"
* Providing complementary support for other divisions in the
Commission who do work in this area 88
One year later, on March 21, 2022, the SEC proposed rules that would
require issuers to include specific climate-related disclosures in their filings with
the SEC, including disclosures related to potential climate risks that may have
a material impact on the corporation's business, operations, or activities. 89
As such, the SEC has been taking a three-tiered approach to ESG
rulemaking. First, it has tried to provide specific parameters regarding what will
and will not comprise environmental corporate disclosures-effectively
providing substantive guidelines around this element of ESG. Second, it is
attempting to expand its regulatory requirements related to ESG by proposing
rules that would require Investment Advisers (IAs)90 and Investment
Companies (ICs) 9 1 to report on ESG-related disclosures. Finally, the
Commission is attempting to expand its regulatory scope to include current
third-party index and data providers that are providing ESG data.

86 Press Release, U.S. Sec. & Exch. Comm'n, SEC Announces Enforcement Task Force
Focused on Climate and ESG Issues (Mar. 4, 2021) [hereinafter SEC ESG Task Force
Announcement] (emphasis added), https://www.sec.gov/news/press-release/2021-42.
87 Id. See infra Section V.C.
88 SEC ESG Take Force Announcement, supra note 86.
89 Press Release, U.S. Sec. & Exch. Comm'n, SEC Proposed Rules to Enhance and
Standardize Disclosures for Investors (Mar. 21, 2022), https://www.sec.gov/news/press-
release/2022-46 [hereinafter SEC 2022 Climate Rule].
90 Investment Advisers Act of 1940, § 202(a)(11), 15 U.S.C. § 80(b)-2 [hereinafter the'40 Act];
see also U.S. Sec. & Exch. Comm'n, Regulation of Investment Advisers (Mar. 2013),
https://www.sec.gov/about/offices/oia/oiainvestman/rplaze-042012.pdf.
91 See U.S. Sec. & Exch. Comm'n, Investment Companies,
https://www.sec.gov/answers/mfinvco.htm (last visited Feb. 7, 2023).
18:93 (2023) The SEC as Human Rghts Enforcer? 111

A. The SEC's Rule on Climate Change: Addressing the "E" in ESG

Previously, the SEC had made modest moves toward encouraging climate-
related disclosure with its 2010 guidance on the materiality of climate change-
related risk. 92 However, this did no more than identify specific areas in which
disclosure under federal securities law would be required by reporting
companies. 93 In contrast, the SEC's draft climate change rule, proposed in
March 2022, is designed specifically to standardize the climate-related
environmental aspect of ESG reporting.9 4 The proposal provides for specific,
measurable, and actionable items that would ensure that corporations are
providing consistent disclosures related to its actions on climate and its risk
exposure. For instance, the proposal would require companies to report on
their emissions processes-depending on their scope of emissions. 95
The response to the SEC's proposed rule has varied dramatically. For
instance, sustainability organizations have lauded the move saying "[i]nvestors
need consistent and comparable information about climate-related risks from
the companies they invest in."96 On the other side of the spectrum, some
corporations and business associations have lampooned the proposed rule, 97
telling the agency to "dramatically scale back its climate mandates." 98
Specifically, business associations are keen to ensure that disclosure mandates
relate to financial materiality only and, as such, are contending that the rules
should be "flexible" rather than "prescriptive." 99 Interestingly, investors appear
to be supportive of the proposed rule. IO Finally, some state officials have also

92 Guidance Regarding Disclosure Related to Climate Change, Securities Act Release No.
9106, Exchange Act Release No. 61,469, 97 SEC Docket 2414 (Feb. 2, 2010) [hereinafter
SEC 2010 Climate Rule].
93 Id.
94 SEC 2022 Climate Rule, supranote 89.
9s See, e.g., U.S. Env't Prot. Agency, Greenhouse Gases at EPA (July 18, 2022),
https://www.epa.gov/greeningepa/greenhouse-gases-epa (discussing the various scopes in
relation to corporate operations).
96 Ceres, Get Readfor Standardized C//mate Disclosure, https://ceres.org/accelerator/regulating-
climate-financial-risk/sec (last visited on Feb. 8, 2023).
97 Tom Quaadman, Exec. Vice President, U.S. Chamber Ctr. for Cap. Mkt. Competitiveness,
Comment Letter Requesting Information on Climate Change Disclosure (June 11, 2021)
https://www.sec.gov/comments/climate-disclosure/cll2-8907271-244249.pdf.
98 Andrew Ramonas & Amand Iacone, SEC Clmate Rules Pushed Back amid Bureaucratic, Legal
Woes, BLOOMBERG (Oct. 19, 2022), https://news.bloomberglaw.com/securities-law/sec-
climate-rules-pushed-back-amid-bureaucratic-legal-woes.
99 Tom Quaadman, supra note 97.
* Steven M. Rothstein, Analysis Shows that Investors Stron Support the SE C's Proposed C//mate
Disclosure Rule, CERES (Oct. 11, 2022), https://www.ceres.org/news-center/blog/analysis-
shows-investors-strongly-support-secs-proposed-climate-disclosure-rule.
112 Virginia Law & Business Review 18:93 (2023)

entered the fray, decrying the SEC's move. For instance, Patrick Morrisey, the
Attorney General for West Virginia, led a coalition of twenty-four states'
attorneys general, stating that the SEC's proposed rule was an unconstitutional
encroachment upon the regulatory authority of state power.101

B. Tackling the "S"-The SEC's Hope for Human Capital

In regard to the SEC's rulemaking strategy for further developing the

"social" prong related to ESG, the SEC seems to be taking a multi-faceted
approach. First, the agency has announced plans to update its 2020 rules on
"human capital management"10 2 (HCM) in corporate disclosures.1 03
The SEC also appeared to be taking action seemingly related to the "S"
part of ESG when, in September 2022, it held an open meeting of its Investor
Advisory Committee to discuss HCM and how it might be valued by
investment companies.1 04
In addition, the SEC received comments related to a rulemaking petition
that would require issuers to provide HCM-related information, and recently
proposed similar rules would have required corporations "to disclose
information about their human capital management policies, practices and
performance."1 05 The submission process (which began in 2017) resulted in
new regulation that took effect in November 2021. The new rule states that a

101 See Patrick Morrisey, W. Va. Att'y Gen., et al., Comment Letter on Proposed Rule
Amendments Entitled "the Enhancement and Standardization of Climate-related
Disclosures for Investors" (July 13, 2022) https://www.sec.gov/comments/s7-10-
22/s71022-20134128-303943.pdf.
102 See Alison Omens et. al., The Current State of Human CapitalDisclosure, HARV. L. SCH. F. ON
CORP. GOVERNANCE (Oct. 31, 2021), https://corpgov.law.harvard.edu/2021/10/31/the-
current-state-o f-human-capital-disclosure/.
103 See Erin Martin & Celia Soehner, How to Respond to SEC's Focus on Human CapitalDisclosures,
BLOOMBERG (Oct. 14, 2022), https://news.bloomberglaw.com/esg/how-to-respond-to-
secs-focus-on-human-capital-disclosures (stating "[t]he Securities and Exchange
Commission may now be shifting focus from the "E" to the "S" in environmental, social,
and governance matters.").
104 Press Release, U.S. Sec. & Exch. Comm'n, SEC Investor Advisory Committee to Discuss
Human Capital Labor Valuation, Security-Based Swaps, Beneficial Ownership, and ESG
Disclosure on Sept. 21 (Sep. 19, 2022), https://www.sec.gov/news/press-release/2022-
166.
10s Comments on Rulemaking Petition to Require Issuers to Disclose Information about their Human Capital
Management Po/ides, Practices and Performance, https://www.sec.gov/comments/4-711/4-
711.htm (last modified Aug. 31, 2023); see Jessica Mach, Will New SEC Disclosure Rules on
'Human Capital' Further Befuddle Companies?, LAw.COM (Mar. 15, 2022),
https://www.law.com/corpcounsel/2022/03/ 15/will-new-sec-disclosure-rules-on-
human-capital-further-befuddle-companies/?slreturn=20220508115653.
18:93 (2023) The SEC as Human Rghts Enforcer? 113

public company must provide "a description of [its] human capital resources,
including any human capital measures or objectives that [it] focuses on in
managing the business'; the information is required 'to the extent such
disclosure is material to an understanding of the [company's] business taken as
a whole."'1 06 "The formulation of the HCM [rule as] 'principles-based'-
placing heavy reliance on the complex and contested concept of materiality"
attracted criticism, e.g., from the two Democratic SEC commissioners.1 07
This effort also seems to be an attempt to push corporations to provide
more individually tailored disclosure that is specific to the issuer. As one
commentator noted: "I think the SEC in some effect has told the marketplace,
'We've told you repeatedly and for many years that we want companies to move
away from formulaic disclosure, toward disclosure that really focuses on the
specifics of the company and the industry, in markets in which they
operate."'1 08
In that regard it may be effective. For instance, in an empirical study of
comment letters regarding the SEC's attempt to streamline the disclosure
obligations of publicly traded companies, the vast majority of individual
comments discussed the SEC's attempt to incorporate ESG risk factors into
the larger disclosure framework.1 09 As Virginia Harper Ho notes:
[T]here is also evidence that material ESG information is
under-reported in public filings, in part because of companies'
failure to identify ESG information as material and in part
because of a lack of integration between the corporate risk
management, internal controls, and reporting functions that
apply to public filings, and those through which voluntary
reports are produced.110

106 See George S. Georgiev, The Human Capita! Management Movement in U.S. Corporate Law, 95
TUL. L. REV. 639, 678 (2021) (citing Modernization of Regulation S-K Items 101, 103, and
105, Securities Act Release No. 33-10825, Exchange Act Release No. 34-89670, 85 Fed.
Reg. 63726, 63789 (Oct. 8, 2020)). 17 C.F.R. § 229.101(c)(2)(ii) (2020).
107 Georgiev, supra note 106, at 680-82. See also George S. Georgiev, The SEC's New Proposalon
Climate Disclosure: Critiquing the Critics, OXFORD BUS. L. BLOG (Mar. 22, 2022),
https://www.law.ox.ac.uk/business-law-blog/blog/2022/03/secs-new-proposal-climate-
disclosure-critiquing-critics.
108 Mach, supranote 105.
109 Virginia Harper Ho, Disclosure Overload? Lessons for Risk Disclosure & ESG Reporing Reform
from the Regulation S-K Concept Release, 65 VILL. L. REV. 67, 77 (2020).
110 Id. at 82.
114 Virginia Law & Business Review 18:93 (2023)

C. The SEC's Expansion of ESG for Investment Advisers and

Investment Companies

Unlike the SEC's substantive attempts (discussed above) that would

provide for specific standards and markers, the SEC's rulemaking proposals
under the Investment Advisers Act are a hallmark of the agency's disclosure-
based regulatory framework."' The proposed rule, issued in May 2022, suggests
updating the fiduciary standards for IAs and ICs related to their ESG
practices.11 2 According to the release, the SEC's goal in promulgating the rule
is to ensure that investors are provided with "consistent, comparable, and
reliable" information that these investors can use to evaluate ESG products
such as ESG index funds." 3
Surely, the need is great.
As the SEC notes in the issuing release, the ESG industry has grown
exponentially in the last several years." 4 For instance, ESG-labeled index funds
now account for $2.7 trillion within the U.S. market," 5 with some
commentators predicting that it could hit $53 trillion worldwide by 2025.116
Unfortunately, the proposed rule would do little to address the greatest
concerns related to ESG standards for two reasons. First, the proposed rule,
rather than addressing corporate disclosures, takes aim at a much smaller
segment of the financial markets: ICs and IAs. As such, while ICs and IAs
command a large segment of the financial markets, much of the regulatory
effects against corporations would only be felt indirectly.
Second, and more importantly, the SEC's proposed rule does not provide
a substantive standard. Instead, it requires ICs and IAs to determine their own

11 For a comprehensive critique of the SEC's disclosure-based framework, see generally Jena
Martin, Changingthe Rules of the Game: Beyond a Disclosure Frameworkfor Securities Regulaton, 118
W.V. L. REV. 59 (2015) [hereinafter Beyond Disclosure] (discussing the general misalignment
between the securities regulatory disclosure-based framework and the way that securities
are currently being traded in the market).
112 Enhanced Disclosures by Certain Investment Advisers and Investment Companies about
Environmental, Social, and Governance Investment Practices, 87 Fed. Reg. 36654 (June 17,
2022) (to be codified at 17 C.F.R § 200, 17 C.F.R. § 230, 17 C.F.R. § 232, 17 C.F.R. § 249,
17 C.F.R § 274, 17 C.F.R § 279) [hereinafter SEC 2022 Proposed Rule on Investment
Advisers & ESG].
113 Id.
114 Id. at 7.
115 Sanjat Bhagat, An Inconvenient Truth About ESG Investing, HARV. Bus. REV. (Mar. 31, 2022),
https://hbr.org/2022/03/an-inconvenient-truth-about-esg-investing.
116 Bloomberg Intelligence, ESG Assets May Hit $53 Tallion by 2025, a Third of GlobalAUM,
BLOOMBERG (Feb. 23, 2021), https://www.bloomberg.com/professional/blog/esg-
assets-may-hit-53-trillion-by-2025-a-third-of-global-aum/.
18:93 (2023) The SEC as Human Rghts Enforcer? 115

standards and then disclose to investors what those standards are. This,
according to the SEC, is what will provide "consistent, comparable, and reliable
information."117
However, not everyone agrees.
Even under the compressed rulemaking schedule, the proposed rule still
generated close to 200 comments11 8 from a number of stakeholders, including
industry leaders, law firms, and members of civil society. Many of the
comments, particularly those from non-governmental organizations, expressed
the concern that, by leaving IAs and ICs to their own devices, the SEC
essentially undermines its very aim of providing for consistency across the
investment industry. For instance, a group comment letter from Inclusive
Development International (IDI); Accountability Counsel and Friends of the
Earth notes that:
[I]t is seemingly illogical to, on the one hand, note that ESG funds attract
a typical type of investor who would like their investments to 'do good',
while, on the other hand, fail to ensure that these same investors have
access to the very type of information that is necessary to making these
investment choices.119

D. The SEC's Other Attempt to Expand its Regulatory Reach for ESG

The third way that that the SEC is expanding its reach into ESG is through
proposed rulemaking expansion to include "index providers, model portfolio
providers, and pricing services."120 While the SEC's proposed rule does not
focus exclusively on ESG funds, the proposed rule does specifically
contemplate having ESG-related index providers121 and pricing services within

117 U.S. Sec. & Exch. Comm'n, FactSheet: ESG Disclosuresfor Investment Advisers and Investment
Companies, https://www.sec.gov/files/ia-6034-fact-sheet.pdf.
118 Comments on E nvironmental, Social, and Governance Disclosuresfor InvestmentAdvisers and Investment
Companies, https://www.sec.gov/comments/s7-17-22/s71722.htm (last modified Aug. 21,
2023); see, e.g., Inclusive Dev. Int'l et. al., Comment Letter on SEC Proposed Rule on
Enhanced Disclosures by Certain Investment Advisors and Investment Companies About
Environmental, Social, and Governance Investment Practices (Aug. 16, 2022),
https://www.sec.gov/comments/s7-17-22/s71722-20136257-307294.pdf (commenting
on the SEC proposed rule).
119 Inclusive Dev. Int'l et al., supranote 118.
120 Request for Comment on Certain Information Providers Acting as Investment Advisers,
Inv. Adv. Act Rel. No. 6050 (Jun. 15, 2022), https://www.sec.gov/rules/other/2022/ia-
6050.pdf.
121 Id. Index providers are a crucial part of the ESG value chain. Specifically, they will purchase
ESG scores from ESG ratings firms and then use those models to determine which
116 Virginia Law & Business Review 18:93 (2023)

the proposed rule's ambit.1 22 As such, the Commission sought comments

"regarding information providers to facilitate consideration of whether
regulatory action is necessary and appropriate to further the Commission's
mission."1 23
A growing chorus of commentators have recognized how crucial an effect
ESG-related index providers have on this segment of the market. However,
many also recognize that, given the lack of oversight, the calculations that ESG
index providers make are, at best, opaque and, at worst, creating false
impressions regarding what (and how) they value portfolio companies within
their ESG bundle. As one civil society organization notes:
For the large index providers like MSCI and S&P Dow Jones
Indices, weighting is based not on a company's ESG
performance, as a reasonable person might assume, but on its
market capitalization, a rough approximation of its size. In
other words, being large and valuable-as opposed to getting
high ESG ratings-[sic] is the key factor in determining how
much investment a particular company receives.124
While each of these actions on the part of the SEC may not be enough,
individually, to move the SEC forward with regard to ESG-related litigation,
the cumulative effect on all three fronts is, at a minimum, a strong signaling
device to the market that the SEC is willing to engage with ESG explicitly.125
However, the agency does not regulate in a vacuum. More than likely, the SEC's
actions are at least, in part, influenced by the changing focus of institutional

companies should be a part of their index models. This information is subsequently used
to help ICs and IAs create an ESG related portfolio.
122 See, e.g., Inclusive Dev. Int'l et al., supranote 118, at 7-8 (noting that certain model portfolio
advisers "design allocation models [that] may . . provide various degrees of customization
... [based on] defined outcomes or investment strategies ... for example, models that focus
on sustainable or 'ESG' (environmental, social, and governance) investments"); see also SEC
2022 Proposed Rule on Investment Advisers & ESG, supranote 112, at 8.
123 Inclusive Dev. Int'l et al., supranote 118, at 4.
124 Inclusive Dev. Int'l & ALTSEAN-Burma, MyanmarESG Files: How 'Responsible Investment"
is Enabing a Mi/tay Dictatorsip (Mar. 9, 2022),
https://www.inclusivedevelopment.net/myanmaresgfiles/.
125 As the law firm White & Case noted, "These proposals [along with the SEC's Vale litigation]
... [t]aken together with the recent formation of the SEC's Climate and ESG Task Force
in the Division of Enforcement, [make it] clear that the SEC Staff is increasingly focused
on reviewing disclosure with respect to ESG issues." White & Case, SEC Proposes
Amendments to Rules Regulating ESG Disclosures (June 13, 2022),
https: / /www.whitecase.com/insight-alert/ sec-propo ses-amendments-rules-regulate-esg-
disclosures-investment-advisers-investment.
18:93 (2023) The SEC as Human Rghts Enforcer? 117

and other investors.1 26 As we discuss in Section III, below, the influence of

large, institutional, investors such as BlackRock and the members of the
Investor Alliance for Human Rights have also likely played a role in the SEC's
new seemingly enthusiastic embrace of ESG indicia.

III. THE EFFECT OF OTHER ACTORS

There are a number of different ways that institutional investors-and the

standard setters1 27 upon which they rely-can alter the overall ESG landscape.
In this section, we discuss three. First, we discuss how shareholders have
increasingly been using their voice and leverage (either informally or through
the shareholder proposal mechanism) to move the needle on ESG issues. Next,
we provide an overview of another time honored tool used by investors-
litigation-and analyze how the claims in these lawsuits may be changing what
we see as important in a shareholder action. Finally, we discuss the role of ESG
standard setters specifically, and how they may help to institutionalize ESG
norms.

A. Shareholders' Voice

For decades, shareholders have attempted to leverage their voice as

investors to communicate their interest in the larger societal impact of the
corporations they invest in. The most common avenue for leverage seems to

126 For instance, in the first sentence of their proposed rule regarding enhanced ESG
disclosures, the agency notes, "Many registered funds and investment advisers to
institutional and retail clients consider environmental, social, and governance ('ESG')
factors in their investment strategies." SEC 2022 Proposed Rule on Investment Advisers
&

ESG, supra note 112, at 7. In the citing footnote, the agency then goes on to provide
evidence that "ESG [i]nvesting [n]ow [a]ccounts for [o]ne-[t]hird of [t]otal U.S. [a]ssets
[u]nder [m] anagement." Id. at n.1 (citing Debbie Carlson, ESG Investng Now Accountsfor One-
Third of Total U.S. Assets Under Management, MKT. WATCH (Nov. 17, 2020),
https: / /www.marketwatch.com/ story/esg-investing-now-accounts-for-one-third-of-total-
u-s-assets-under-management-11605626611). According to the U.S. Sustainable
Investment Forum Foundation (the report that was, in turn, cited in MarketWatch's story),
this amounts to $17.1 trillion in assets under management in the United States representing
"a 42% increase over 2018." Id.
127 Standard setters refer to several different organizations that operate in this space. As the
name implies, the mission of standard setters is to provide consistent metrics that
companies can use in measuring their ESG impacts. Institutional investors, in turn, benefit
from a consistent standard that allows it to compare apples to apples in the ESG space.
Examples of standard setters for ESG include the Sustainability Accounting Standards
Board (SASB), now part of the International Sustainability Standards Board (ISSB). See infra
discussion III.C. for a fuller decision of the major standard setters in this area.
118 Virginia Law & Business Review 1
18:93 (2023)

occur within the shareholder proposal process. However, as we note below,

there are some institutional investors who are so large that they only need to
muse out loud on what they expect from the companies in which they invest
for those corporations to pay attention. Enter Larry Fink.

1. Lany Fink and the Letter Heard 'Round the World

One of the most news-making events regarding investors and social justice
occurred when Larry Fink, the CEO of BlackRock Investments (one of the
largest institutional investment companies in the world)1 28 sent out an open
letter to CEOs in 2018 stressing the importance of articulating an expansive
corporate purpose in order for companies to prosper financially while
simultaneously benefiting corporate stakeholders. "Without a sense of
purpose," he wrote, "no company, either public or private, can achieve its full
potential. It will ultimately lose the license to operate from key stakeholders."1 29
Since then, Fink's annual letter to CEOs has consistently included the
message that the corporation's focus should go beyond mere financial
performance. His most recent letter, written with a nod to critiques of so-called
"woke capitalism,"130 argued that a focus on ESG issues does not conflict with
money-making.131 He wrote: "[m]ake no mistake, the fair pursuit of profit is
still what animates markets; and long-term profitability is the measure by which
markets will ultimately determine your company's success."1 32
There has been much speculation about why Fink has been engaging in
such a practice. The more cynical commentators have noted that, as the
millennial generation comes of age as a key investor segment of the population,
they will control trillions of dollars' worth of wealth.1 33 In addition, this same

128 Specifically, the company commands over $8.5 trillion in assets under management. Total
Assets Under Management (AUM) of BlackRock from 2008 to 2ndQuarter2022, STATISTA, (Sept.
14, 2023), https://www.statista.com/statistics/891292/assets-under-management-
blackrock/.
129 Larry Fink, Larr Fink's 2018 Letter to CEOs: A Sense of Purpose, BLACKROCK (2018),
https: / /www.blackrock.com/corporate/investor-relations /2018-larry-fink-ceo-letter.
130 For a discussion of Fink's actions within the context of "woke capitalism," see Sam
Meredith, BlackRock CEO Larr Fink Says Stakeholder Capitalism is Not 'Woke', CNBC Jan.
18, 2022), https://www.cnbc.com/2022/01/18/blackrock-ceo-larry-fink-says-
stakeholder-capitalism-is-not-woke.html.
131 Id.
132 Larry Fink, Lar Fink's 2022 Letter to CEO's: The Powerof Capitalism, BLACKROCK (2022),
https://www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter; see also
infra Part IV, for a discussion of long-term profitability.
133 See, e.g., Hernando Cortina, The New Investor Imperative, FORBES (Feb. 6, 2018),
18:93 (2023) The SEC as Human Rghts Enforcer? 119

group of potential investors have, on numerous occasions, indicated that they

care about socially conscious investing.134 Seen in this light, Fink's open letters
could be understood as a bid to appeal to those would-be investors. A
counterpoint to Fink's letters is the viewpoint of former chief investment
officer for sustainable investing at BlackRock, Tariq Fancy, who has argued
that ESG investment is a sham.135 There are also vocal critics who argue that
BlackRock is disingenuous and does not practice what Fink preaches in his
letters.1 36 Fancy's critiques notwithstanding, Fink's letters have, at a minimum,
exposed the growing shift in popular culture regarding the ends of investing.
This, in turn, could influence how we categorize what matters to investors.
Alas, not all have Fink's level of influence. For the rest of us, there are
shareholder proposals.1 37

2. The IncreasingImportance of ShareholderProposals

Investors have long attempted to leverage their voice to communicate their

interest in the larger societal impact of the corporations they invest in, but
shareholder proposals that relate to human rights issues have made it on the

https://www.forbes.com/sites/justcapital/2018/02/06/the-new-investor-imperative/
(stating that "[c]hanging demographics are one factor behind the shift towards" socially
responsible investing).
134 John G. Ruggie & Emily K. Middleton, Money, Millennials and Human Rzihts: Sustaining
'Sustainable Investing' (Harv. Kennedy Sch., Working Paper No. 2018-01, 2018),
https://www.hks.harvard.edu/centers/mrcbg/publications/fwp/2018-01 (discussing the
rise in number of millennial investors, and their investment preferences); Keith Robinson,
Managing the Millennial Generation, INVS. & WEALTH (Nov.-Dec. 2016),
https://investmentsandwealth.org/getattachment/c0aeea35-bf2f-4138-b788-
c71eac724b32/IWM16NovDec-ManagingMillennialGeneration.pdf (stating that, for
millennials, "[i]t's not about making money for the wealthy. It's about socially responsible
investing.").
135 Tariq Fancy, FinancialWorld Greenwashingthe Publicwith Deadly Distractionin SustainableInvesting
Practices, USA TODAY (Mar. 16, 2021)
https://www.usatoday.com/story/opinion/2021/03/16/wall-street-esg-sustainable-
investing-greenwashing-column/6948923002/ ("In truth, sustainable investing boils down
to little more than marketing hype, PR spin and disingenuous promises from the investment
community. . . . [E]xisting mutual funds are cynically rebranded as 'green' - with no
discernible change to the fund itself or its underlying strategies - simply for the sake of
appearances and marketing purposes.").
136 See, e.g., the campaign "BlackRock's Big Problem." BLACKROCK's BIG PROBLEM,
https://blackrocksbigproblem.com (noting the problem being that "BlackRock invests in
climate destruction").
137 And even then, thanks to SEC rules regarding which shareholder proposals can be excluded
from a corporate ballot, those who fall into "the rest of us" category is still a rather small
subset of the population.
120 Virginia Law & Business Review 1
18:93 (2023)

ballot with increasing frequency in recent years.1 38 For instance, requests for
companies to conduct "Racial Equity Audits (to remove systemic racism) were
on nine corporate ballots" in 2022.139 There have also been requests for
companies to conduct human rights due diligence, such as one made to Tyson
Foods in 2020.140 In a related important trend, on average, human rights-related
shareholder proposals are securing greater shareholder support compared to
years past.141 While the regulatory wind has not always blown in favor of these
developments,1 42 recent support for proxy voting is taking place in the Senate,
with a 2022 hearing on the proposed Index Act14 3 which provided shareholders
who lack a voice with a place on proxy ballots.144
Research examining this trend of shareholder proposals concerning
corporations' larger societal impact has identified that these proposals are
increasingly being supported by institutional investors who have significantly

138 See Kishanthi Parella, Investors as InternationalLaw Intermediaries:Using Shareholder Proposalsto

Enforce Human Rzghts, 45 SEATTLE U. L. R. 41, 69 (2021) (noting the number of faith-based
organizations and other organizations dedicated to sustainable investment that have filed
shareholder proposals in recent years).
139 See, e.g., a proposal for a Racial Equity Audit at Home Depot, which was supported by
62.7% of shareholders. HOME DEPOT, PROXY STATEMENT AND NOTICE OF 2022 ANNUAL
MEETING OF SHAREHOLDERS 42 (2022), available at
https://www.sec.gov/Archives/edgar/data/354950/000035495022000116/hd-
2022proxystatement.htm#ic093c1edc810406d92fceac310f5482e_106; Between The Lines
Issue #6: The INDEX Act And Pass-Through Voting, CIVEx (June 29, 2022),
https://www.civex.io/between-the-lines-issue-6/.
140 TYSON FOODS, INC., PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 23 (2020), available at
https://www.sec.gov/Archives/edgar/data/100493/000010049322000129/a2O22proxyst
atement.htm.
141 Parella, supra note 138, at 46 (citing COURTENEY KEATINGE ET AL., 2020 PROXY SEASON
REVIEW: SHAREHOLDER PROPOSALS 32 (2020)).
142 In 2020, for example, the SEC amended certain requirements regarding both eligibility and
resubmission of proposals in a move that inhibited the ability of shareholders to hold
companies accountable through shareholder proposals. Press Release, U.S. Sec. & Exch.
Comm'n, SEC Adopts Amendments to Modernize Shareholder Proposal Rule (Sept. 23,
2020). These changes have been met with criticism and opposition. Parella, supra note 138,
at 48.
143 Lauren Foster, ProposedLegislaton Promises to Empower Investors. What to Know, BARRON'S Jun.
14, 2022), https://www.barrons.com/articles/proposed-legislation-promises-to-empower-
investors-what-to-know-51655172926.
144 CIvEX, supra note 139 (explaining that "[i]ndex ETF and mutual funds make up a significant
[proportion] of the investment [world].... Proxy votes are a shareholder right that direct
shareholders receive. . . . [I]ndex ETF and mutual funds shareholders do not have a right
to proxy voting as their money managers vote for them." The Index Act is viewed as a
potential solution in that it gives mutual fund and ETF shareholders "a voice on proxy
ballots.").
18:93 (2023) The SEC as Human Rghts Enforcer? 121

more power than the previous incarnation of activist shareholders.1 45 Gone, for
instance, are the days when shareholder activism was consigned to retail
investors who bought shares in a company solely to influence the corporate
agenda. While there remains a dominance of faith-based organizations and
other organizations dedicated to sustainable investment among the entities
making shareholder proposals that communicate interest in societal impacts,
their proposals are being supported by institutional investors such as
BlackRock and Vanguard.146 Thus, the shareholders who are making and
supporting these claims are increasingly of the ilk that care about both the
financial and the social bent of the companies in which they invest. In short,
investment is no longer just the means to the end of activism; rather, activism
is the means to the end of a shareholder's investment.

B. Shareholders' Action(s)

Shareholder lawsuits are not new. The first investor lawsuit under 10b-5
occurred shortly after the rule was promulgated in 1943. However, more
recently, these lawsuits have begun to follow a pattern. With ever increasing
frequency, shareholder actions will arise after a major corporate failing that falls
in the "environmental," "social," or "governance" bucket. Specifically,
shareholders have brought lawsuits in the wake of corporate scandals related
to corporate harms surrounding human rights abuses.1 47 In this Section, we
discuss three: (1) the BP Oil Spill; (2) Walgreens' role in the opioid crisis; and
(3) the massive fraud enacted by Elizabeth Holmes, the former CEO of
Theranos, that may have led to hundreds of Theranos' customers being
misdiagnosed with various health conditions. By examining these three lawsuits
from a BHR perspective, we show how human rights violations have in effect
been taken up by investors to hold corporations accountable.148

145 Parella, supra note 138 (outlining the role of institutional investors like BlackRock in
supporting shareholder proposals).
146 BlackRock and Vanguard, for instance, supported the Tyson Foods proposal. Parella, supra
note 138, at 76.
147 We should also note that private investors have brought securities actions against Vale
Corporation for the same conduct that was subject to the SEC's investigation, as well for
the earlier dam bursting. See In re Vale S.A. Sec. Lit., No. 19-CV-526-RJD-SJB (E.D.N.Y.
Mar. 31, 2022) (order granting class certification); In re Vale S.A. Sec. Litig., No. 1:15-cv-
9539, 2017 U.S. Dist. LEXIS 42513 (S.D.N.Y. Mar. 23, 2017).
148 While our focus remains on the use of the federal securities laws to shift the paradigm with
regard to human rights enforcement, we note that this trend may also be occurring on the
state level with the use of corporate governance theories regarding breaches of fiduciary
122 Virginia Law & Business Review 18:93 (2023)

1. The BP OilSpill

On April 20, 2010, an explosion occurred off the coast of the United States
on the Deepwater Horizon drilling rig.14 9 The explosion killed 11 people and
led to the biggest offshore oil spill in U.S. history.1 50 While the company's
actions have been discussed within an environmental,151 workers' rights and
safety lens,1 52 some scholars have also classified the spill from a human rights
perspective. Specifically, the spill affected individuals' rights to a healthy
environment and disproportionally affected communities of color.1 53
Researchers have also examined the oil spill through the lens of human health
and the ecosystem as a whole.1 54 For instance, as Dr. Maureen Lichtveld and
others have noted:
Epidemiologic studies conducted in workers and vulnerable

duties to advance this claim. See, e.g., Complaint at ¶ 64, McRitchie v. Zuckerberg et. al., No.
2022-0890 (Del. Ct. Ch. Oct. 3, 2022) (alleging that Meta's board breached their fiduciary
duties when they changed their algorithm to increase the company's profits while explicitly
knowing that doing so would " 'tap{] into anger' [and] increase the risk of political instability
globally." Surely these allegations, if proven true, would implicate a number of IHRL
principles, including the right to health). See also Zijia Song, Meta DirectorsSuedfor 'Outdated'
Focus on Profits Over All Else, BLOOMBERG (Oct. 4, 2022),
https://www.bloomberg.com/news/articles/2022-10-04/meta-directors-sued-for-
outdated-focus-on-profit-over-all-else.
149 Lis a Friedman, Ten Years After Deepwater Horizon, U.S. Is Still Vulnerable to CatastrophicSpills,
N.Y. TIMES (Apr. 21, 2020), https://www.nytimes.com/2020/04/19/climate/deepwater-
horizon-annivers ary.html.
150 Id.
151 Ten years after the spill, the environmental impact could still be felt. See, e.g., Edward
Helmore, Deep water Horizon Disaster HadMuch Worse Impact than Believed Study Finds, THE
GUARDIAN (Feb. 13, 2020),
https: / /www.theguardian.com/environment/2020/ feb/13/deepwater-horizon-disaster-
oil-worse-impact-study-finds (discussing a federal report that details the long-term
environmental consequences of the spill).
152 See, e.g., McKenzie Turner, Workplace Safeo Lessons from the Deepwater Horizon Oil Spill,
SEMICONDUCTOR ENG'G (Nov. 18, 2021), https://semiengineering.com/workplace-safety-
lessons-from-the-deepwater-horizon-oil-spill/ ("The events of the Deepwater Horizon Oil
Spill, while tragic, serve as an important reminder of how workplace safety plays in the
success of a company's endeavor.").
153 See Perry Wallace, Commentary: EnvironmentalJustice and the BP Oil Spil: DoesAnyone CareAbout
the "Small People" of Color?, 6 THE MOD. AM. 65 (2010),
https://digitalcommons.wcl.american.edu/cgi/viewcontent.cgi?article=1133&context=tm
a.
154 See Maureen Lichtveld et al., The Deep water Horizon Oil Spill Through the Lens of Human Health
and the Ecosystem, 3 CURRENT ENV'T HEALTH REP. 370 (2016),
https://www.ncbi.nlm.nih.gov/pmc/articles/PMC5112119/.
18:93 (2023) The SEC as Human Rights Enforcer? 123

communities in the spill's aftermath showed that non-

chemical stressors affect resilience. Ecosystem-wise salt
marsh species showed variability in structural and functional
changes, attributed to species-specific tolerance, oil exposure,
and belowground plant organs damage.1 55
Finally, at least one scholar has noted that the "quick compensation"
scheme implemented in the wake of the disaster may have undermined
individuals' due process rights related to judicial adjudication.1 56
While most of the world focused on the environmental consequences of
the oil spill, investors began alleging securities violations related to the disaster.
For instance, four employee investments and savings (ERISA) plans that had
invested in BP filed a complaint in the wake of the scandal alleging securities
law violations, including violations under Rule 10b-5 of the Exchange Act.1 57
Significantly, plaintiffs' Second Amended Complaint characterized their cause
of action in human rights undertones. As the filing notes, the action against BP
was brought "to recover for the investment losses they suffered as a result of
numerous false and misleading statements made by BP and its representatives
that were designed to downplay the magnitude of the worst environmental disaster
in the history of the United States."1 58 To that end, the plaintiffs' case specifically
cites to twelve different instances of false and misleading statements made by
the company and various numbers of executives.1 59 Nonetheless, the plaintiffs
also discussed the environmental and human harm element of BP's actions, at
least suggesting that bringing BP to justice for these claims would provide some
measure of accountability for the harms that the company caused to people and
planet. As such, though framed within the language of securities fraud litigation,
the underlying message of harm to community remains clear-the harm that
was inflicted by BP did more than just damage shareholders' investments; it
damaged the environment and the living standards of the impacted

155 Id. at 370.

156 See Arthur Ewencyk, For a Fisful of Dollars:Quick Compensation and ProceduralRzihts in the
Aftermath of the 2010 DeepwaterHorizon Spill, 44J. MAR. L. & COM. 267 (2013). In addition to
procedural rights being codified in various U.S. statutes, the right to due process has been
recognized under international law as a fundamental human right. See ICCPR, supra note
39, art. 26.
157 Similar to Vale, BP is a foreign corporation that is nonetheless subject to U.S. securities
enforcement by dint of having its American Depository Receipts traded on U.S. exchanges.
158 Second Amended Complaint and Jury Demand, In re BP P.L.C. Sec. Litig., 2016 WL 706549
(S.D. Tex. Jan. 19, 2016) (No. 4:15-cv-01061), at¶ 1 (emphasis added).
1s9 Id. at 61-70.
124 Virginia Law & Business Review 18:93 (2023)

communities, both of which constitute clear human rights violations.1 60

2. Wagreens' Role in the Opioid Crsis

The opioid crisis in the United States that exploded in the last ten years has
been categorized as an epidemic,161 a public health emergency,1 62 and
significantly, a human rights scandal.1 63 As one commentator notes in a recent
blog, "Human rights concerns connected to the epidemic have begun to grow
in recent years as controversies regarding the United States health care system
and law enforcement systems have come to light."164 Even more heart-breaking
than the crisis itself is that it was the result of corporate practices that rewarded
the prescription of opioids to an untold number of patients who sought medical
help-at least initially-for legitimate, diagnosed health issues.1 65 The loss to

160 See, e.g. id. at ¶ 86 (stating BP's public statement was "a less-than-subtle attempt by BP to
distance itself from any responsibility for the Deepwater Horizon explosion, the resulting
loss of life, and for preventing the environmental damage and other harm that was likely to
ensue"); id at ¶ 121 ("The Macondo blowout produced the largest marine oil spill in United
States history. Its impact on the environment, the economy, and human health was
devastating."); id. at ¶124 (alleging that "[f]rom a human health standpoint, in addition to
the eleven lives that were lost and the multiple injuries that crew members sustained as a
result of the explosion on the Deepwater Horizon, the psychological harm and physical
ailments that have been inflicted by the oil spill on the residents of the Gulf of Mexico are
immeasurable").
161 Center for Disease Control and Prevention, Understandingthe Op/old Overdose Epidemic (Aug.
8, 2023), https://www.cdc.gov/opioids/basics/epidemic.html.
162 State of Georgia, Office of the Attorney General, Opioid Abuse,
https://law.georgia.gov/key-issues/opioid-abuse ("In October 2017, the U.S. Department
of Health and Human Services declared the opioid crisis a national public health
emergency.").
163 Anna Presnall, A Human Rzghts Perspective on the Opioid Crisis in Ameritca, UNIV. OF ALA. AT
BIRMINGHAM INST. FOR HUM. RTS. BLOG (Jul. 2, 2020),
https://sites.uab.edu/humanrights/2020/07/02/a-human-rights-perspective-on-the-
opioid-crisis-in-america/.
164 Id.
165 For instance, the CDC groups the national opioid crisis into three waves, which began with
the first wave in the 1990s that resulted from an increased rate of prescription for opioids
by medical professions. This, in turn led to the second wave where the now addicted
patients began turning to illegal street drugs like heroin. Finally, in 2013, there were
"significant increases in overdose deaths involving synthetic opioids, particularly those
involving illicitly manufactured fentanyl. The market for illicitly manufactured fentanyl
continues to change, and it can be found in combination with heroin, counterfeit pills, and
cocaine." Center for Disease Control and Prevention, supranote 161. Significantly, at least
one scholar claims that a "state prescription drug policy first adopted in 1939, and last ended
in 2004, appears to have influenced where Purdue Pharma chose to market its opioid drug
OxyContin upon launch in 1996." Janet Weiner, The Origins of the Opioid Epidemic, UNIV. OF
18:93 (2023) The SEC as Human Rghts Enforcer? 125

affected individuals and communities has been devastating, with the crisis
causing loss of life (which in turn violates the IHRL principles around the right
to life), right to health (regarding access to quality treatment and management
care for the underlying conditions that led to increased prescriptions), as well
as issues surrounding principles of non-discrimination. As Presnall notes, "The
crisis has highlighted the racial disparities in the U.S. healthcare system...."1 66
In the wake of the crisis, shareholders filed suit against Walgreens, alleging
that the corporation's actions in relation to the crisis sound in fraud.1 67
However, tellingly, much of the language in the investors' lawsuit echoes the
language used by human rights advocates.1 68 For instance, in paragraph one of
the plaintiffs complaint, which was filed as a shareholder derivative action, the
plaintiff contextualizes their cause of action within the larger societal landscape
immediately:
The United States is in the grips of the deadliest drug epidemic
in its history. The opioid epidemic takes many forms-from
illegal narcotics to those prescribed by licensed physicians. In
2019 alone, nearly 50,000 people died from an opioid
overdose in the United States. And according to the U.S.
Department of Health and Human Services, an estimated
40% of opioid overdose deaths involved a prescniption
opioid. In recent years, prescription painkillers have been

PA. LEONARD DAVIS INST. OF HEALTH ECONS. Jan. 11, 2022), https://ldi.upenn.edu/our-
work/research-updates/the-origins-of-the-opiod-epidemic/.
166 Presnall, supra, note 163. Among the issues that Presnall notes:
[M]any experts believe that the number of opioid related deaths in minority
populations would be greater if minorities had access to the same level of
health care as white Americans. It is known that people of color have had a
significant lack of access to the American healthcare system throughout
history and throughout the recent years. This disparity lowers the
probability that non-whites in American [sic] would be prescribed opioids
and thus lowers the chance that the population would suffer fatal overdoses.
Despite the low death rates due to the exclusions within the health care
system, the abuse of opioids is still abundant in communities of color.
Scientists have witnessed a doubling of overdose death rates among African
Americans, a factor that is being overshadowed by the media and societal
focus on the death rates of whites.
Id.
For an overall look at the crisis and its origins, seegenera/9 JOHN TEMPLE, AMERICAN PAIN:
HOW A YOUNG FELON AND HIS RING OF DOCTORS UNLEASHED AMERICA'S DEADLIEST
DRUG EPIDEMIC (2015).
167 See Verified Stockholder Derivative Complaint, Vladimir Gusinsky Revocable Tr. v.
Walgreens, 2022 WL 19396524 (N.D. Ohio 2022) (No. 1:22-cv-1717).
168 Id.
126 Virginia Law & Business Review 1
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responsible for more deaths than all illegal street drugs,

cocaine, heroin, and amphetamines combined169
While the case was brought, among other causes of action, under Section
14(a) of the Securities Exchange Act (which entails a lower standard of
culpability than 10b-5), the complaint nonetheless details acts that provide
culpability and accountability under the securities law that could later be used
in connection with fraud actions.1 70 Specifically, plaintiffs note:
The misrepresentations and omissions in the proxy statement
were material to Company shareholders in voting on the
proxy statement. The proxy statement solicited and obtained
shareholder votes for: (i) director nominees and (ii) executive
compensation. ... The Company was damaged as a result of
the defendants' material misrepresentations and omissions in
the proxy statement.171

3. E§Zabeth Holmes and Theranos

Prior to the discovery of the actions that led to her conviction on January
3, 2022,172 Elizabeth Holmes was a genuine rock star in the elite circles of
Silicon Valley.1 73 Her professed advances in medical devices were heralded as a
tectonic shift in patient health care-seemingly bolstering patient's rights to
health surrounding issues of access to health care. During her time leading
Theranos, Holmes repeatedly claimed that "with one drop of blood" Theranos
could run diagnostic tests to detect a host of different diseases and conditions.
In doing so, Holmes bilked a number of different and high-profile investors

169 Id. at ¶ 1 (emphasis in original).

170 Despite the lower standard of culpability needed for accountability under Section 14(a)
(which prohibits false and misleading statements in a company's proxy statements), an
examination of a cause of action under this portion of the act is nonetheless informative.
Specifically, under both 10b-5 and 14(a) a key element is materiality. This materiality prong,
in turn, relates to the reasonable investor standard discussed in Section IV infra.
171 Verified Stockholder Complaint, supranote 167, at ¶¶ 181-82.
172 U.S. v. Elizabeth Holmes, Case Notification, U.S. ATT'Y'S OFFICE FOR N.D. CAL. (Dec. 12,
2022), https://www.justice.gov/usao-ndca/us-v-elizabeth-holmes-et-al.
173 The coverage of Elizabeth Holmes' rise and fall as the founder and CEO of Theranos has
been comprehensive, encompassing everything from multiple investigative newspaper
stories (led by John Carreyrou who went on to write the book Bad Blood that documents
much of the same), podcasts, two documentaries, and even a Hulu television story that is
based on Holmes' tenure at Theranos. See Penguin Random House Speakers Bureau, John
Carreyou, Penguin Random House, https://www.prhspeakers.com/speaker/john-
carreyrou; Alec Boj alad, The Dropout: UnderstandingElizabeth Holmes and the Theranos Scandal,
DEN OF GEEK (March 3, 2022), https://www.denofgeek.com/tv/the-dropout-elizabeth-
holmes-theranos-scandal-real-life/.
18:93 (2023) The SEC as Human Rghts Enforcer? 127

out of multi-millions of dollars, at one point leading Theranos to being valued

at over $9 billion.1 74 Unfortunately, it was all a lie. While most of the attention
for the case focused on the impact of Theranos' lies to investors, at least one
whistleblower was concerned with Theranos' actions from (arguably) a human
rights perspective. For instance, in an interview with John Carreyou after the
jury's verdict was announced, Theranos' whistleblower Tyler Shultz expressed
disappointment at the jury's focus on the securities violation of the case.
Specifically, Shultz noted that what motivated him to finally come forward and
expose Holmes was the potential risk to consumers of Theranos' devices who
were relying on the tests the company performed to their detriment, often being
misdiagnosed for their harms. In many ways, analyzing the Theranos lawsuit is
more challenging than other private investor actions. Specifically, because
Theranos was not a publicly traded company, its shares were held by a much
smaller number of investors, many of whom may not have wanted the publicity
that comes from a long, drawn-out civil action. That could, in turn, explain why
a settlement was quickly reached by the investors shortly after a lawsuit had
been filed.1 75 Nevertheless, Theranos makes a compelling case for exploration
because of the way that investor harms and community harms intersect.

C. Standard Setters: The New Influencers

Institutional investors who are interested in more than just the financial
performance of a corporation use corporate sustainability reporting to
understand the societal impacts and approaches of the corporation in question.
One of the main challenges that has arisen within the context of ESG reporting
is that, to date, there is no one standard for what constitutes accurate ESG
reporting. As one research study noted: "Despite the surge in environmental,
social, and governance (ESG) reporting worldwide, company ESG reports
display wide variations in content. The prevailing discrepancies in disclosure
content stand in the way of effective comparisons and raise concerns over the
credibility of these reports."1 76 As such, even corporations that are trying

174 The company was privately held with Holmes owning 50%. See Roomy Khan, Theranos'$9
Bilon Evaporated: Stanford Expert Whose Questions Ignited the Unicorn's Trouble, FORBES (Feb.
17, 2017), https://www.forbes.com/sites/roomykhan/2017/02/17/theranos-9-billion-
evaporatedstanford-expert-whose-questions-ignited-the-unicorn-trouble/.
175 ChristopherWeaver, Theranos Settles Investor Suit as Funds Run Low, WALL ST. J. (July 22, 2018,
9:14 PM), https://www.wsj.com/articles/theranos-settles-investor-suit-as-funds-run-low-
1532275276.
176 Mert Demir et al., Discrepancies in Reporing on Human Rghts: A MateralB Perspective, in
CORPORATE RESPONSIBILITY RESEARCH CONFERENCE 139 (2019),
128 Virginia Law & Business Review 18:93 (2023)

diligently to maintain ESG standards may run into difficulties when those
standards do not align with those set forth by standard setters. The question
then becomes, are the corporations using a particular standard because they
think it provides greater clarity, or are they engaging in a type of "standard
shopping" wherein corporations look for the least stringent standard that,
nonetheless makes it appear as if they are engaged on the issue of ESG. If so,
this is, in effect, the latest iteration of greenwashing or bluewashing.1 77 As
Harper Ho notes:
At present, in fact, information on corporate ESG risks is
reported primarily in corporate sustainability reports.
Although voluntary reporting is less prevalent among smaller
public companies, 90% of public companies in the S&P 500
produce such reports, which must often be accessed from
individual corporate websites. ... [B]ecause sustainability
reporting is generally directed at a wide range of stakeholders
identified by the company [itself], it is subject to self-defined
materiality standards that are not aligned with the financial
definition of materiality that applies to public reporting.
As a result, the informational content of voluntary reports,
even if based on the same framework, may vary widely across
sectors and among companies in the same industry.1 78
The need to hold corporations to more specific reporting standards is one
of the drivers behind SEC rulemaking in this area.1 79 In other words, private
standard-setting serves to encourage regulators like the SEC to up their game.
All of the outside factors discussed in this Part likely play a role in the
SEC's recent push in the area of ESG. However, the effect of these (and, as we
will discuss in more detail below, the SEC's new and not-so new push into ESG
enforcement) may go beyond what the SEC intended. To wit, moving the
standard of materiality beyond its current parameters in litigation. Whether or
not the SEC's explicit moves in the ESG space signal a willingness to enforce

https://www.crrconference.org/files/3115/6805/9672/Book_ofabstractsCRRC2019.p
df#page=140.
177 Martin, End of the Beginning, supra note 37.
178 Virginia Harper Ho, Modernigjng ESG Disclosure, 2022 U. ILL L. REV. 277, 288-90 (2022)
(emphasis added).
179 The SEC, in announcing the decision to review climate-related disclosure, explained the
need for "developing a more comprehensive framework that produces consistent,
comparable, and reliable climate-related disclosures." Public Statement from Allison Herren
Lee, Comm'r, SEC, Statement on the Review of Climate-Related Disclosure (Feb. 24, 2021),
https://www.sec.gov/news/public-statement/lee-statement-review-climate-related-
disclosure.
18:93 (2023) The SEC as Human Rghts Enforcer? 129

BHR cases is the subject that we take up in Part IV. First, however, we compare
the regulatory context for BHR in European states to that in the United States.

IV. THE GLOBAL CONTEXT

Whether or not the SEC's explicit moves in the ESG space signals a
willingness to enforce BHR cases is the subject that we take up in the next
section. The question is not an idle one. If, in fact, the SEC's actions related to
ESG signal a shift within the agency to engage in corporate accountability for
businesses' role in social impacts, then this will mark a significant shift in the
way BHR issues are litigated in the United States. To that end, current activity
that is occurring-most notably in Europe-with regard to corporate
compliance and accountability may provide some useful indicia regarding ways
that the regulatory landscape may unfold in the United States around BHR. In
this section we focus on three: double materiality,1 80 mandatory human rights
due diligence, and the increasing amount of regulatory oversight in the business
and human rights field that, we feel, could become a part of the SEC's arsenal
in later years. However, in each instance, we believe that the only way these
frameworks could be incorporated into the SEC's enforcement arsenal is if it
were executed from an investor-protection perspective. We question later
whether this is a desirable development or not.

A. Double Materiality

The question of whether ESG issues (including human rights) are material
to investors has been the subject of great debate. On the one hand, there are
authoritative statements confirming that they are indeed material, for instance,
from the International Organization of Securities Commissions (IOSCO):
"ESG matters, though sometimes characterized as non-financial, may have a
material short-term and long-term impact on the business operations of the
issuers as well as on risks and returns for investors and their investment and
voting decisions."181 On the other hand, certain companies and the U.S.

180 'Double materiality' ... describes an approach whereby materiality has two alternative
prongs, a financial one and a social/environmental one. Double materiality considers both
environmental and social impacts on a company and impacts of a company on the
environment and people." This is exemplified in the E.U. Non-Financial Reporting
Directive's provision: "Companies should disclose not only how sustainability issues may
affect the company ... but also how the company affects society and the environment."
Int'l Org. Sec. Comm'ns (IOSCO), Statement on Disclosure of ESG Matters by Issuers 1 Jan.19,
2019), https://www.iosco.org/library/pubdocs/pdf/IOSCOPD619.pdf (acknowledging
the potential impact of ESG factors on issuer operations and investment risk and return).
130 Virginia Law & Business Review 1
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Chamber of Commerce "have categorically rejected the materiality of ESG

information in the past."1 82 When considering this question, Harper Ho
differentiates types of investor, arguing that ESG information may become
material in the aggregate to institutional investors due to the amplification of
systematic (i.e. market) risk related to ESG factors across a broad or even
market-wide portfolio.1 83 She highlights that large institutional investors are
particularly exposed to such risks.1 84 Overall she supports the generally
accepted view that at the very least some ESG information is financially
material. This however leaves other business impacts on people and planet that
are not financially material. To cater for these, the concept of "double
materiality" has been coined.
"Double materiality"1 85 sometimes known as "dynamic materiality"1 86
describes an approach whereby materiality has two prongs, a financial one and
a social / environmental one. Double materiality considers both environmental
and social impacts on a company and the impacts of a company on the
environment and people. This approach has been adopted at the European
Union, in contrast to the strict adherence to financial materiality adopted by
the SEC. Double materiality is expressed in law through the E.U. Corporate
Sustainability Reporting Directive's obligation to: "report information
necessary to understand the undertaking's impacts on sustainability matters,
and information necessary to understand how sustainability matters affect the

182 Harper Ho, supra note 178 at 293 (citing U.S. CHAMBER OF COM. CENTER FOR CAP. MKTS.
COMPETITIVENESS, ESSENTIAL INFORMATION: MODERNIZING OUR CORPORATE
DISCLOSURE SYSTEM 13-14 (2017),
https: / /www.centerforcapitalmarkets.com/resource/es sential-information-modemizing-
our-corporate-disclosure-system/). Harper Ho acknowledges that the argument "that ESG
information is categorically immaterialfl is no longer widely held." Id. at 304.
183 Id. at 293-94.
184 Id. at 294. See discussion of long v. short term, infra Part V.C.1.
185 The European Commission, for instance, describes the NFR Directive as having "a double
materiality perspective . . The reference to the company's 'development, performance [and]
position' indicates financial materiality, in the broad sense of affecting the value of the
company [while] [t]he reference to "impact of [the company's] activities" indicates
environmental and social materiality . . . Companies should consider [disclosing climate-
related information] if they decide that climate is a material issue from either of these two
perspectives." See 2019/C 2019/01 Communication from the Commission, Guidelines on
Non-financial Reporting: Supplement on Reporting Climate-related Information, 62 O.J. 1,
4 (June 20, 2019), https://eur-lex.europa.eu/legal-
content/EN/TXT/uri=CELEX%3A52019XC0620%2801 %29.
186 Donato Calace, Double and Dynamic: Understandingthe ChangingPerspectives on Mater/a/, SASB
(Sept. 2, 2020), https://sasb.org/blog/double-and-dynamic-understanding-the-changing-
perspectives-on-materiality/.
18:93 (2023) The SEC as Human Rghts Enforcer? 131

undertaking's development, performance and position."1 87 There are

competing schools of thoughts about whether, from a human rights or
environment perspective, it is better to stress that the two aspects are different
(see e.g., Business for Social Responsibility,1 88 which stresses that each is
separate and stands on its own merit) or it is better to argue that the two are
one and the same:
Double materiality may be a distinction without a difference.
If the fundamental concept of materiality is whether a matter
impacts the judgment and actions of a person relying on that
information, does the directional effect really matter (climate
on company vs. company on climate)? If any information is
truly important, the results will ultimately be reflected in the
company's value.1 89
The following explanation helps to distill why double materiality may be "a
distinction without a difference," responding to the question why information
on environmental impacts could be material in the first place:
* Either because environmental impacts could translate into
financial risks, e.g. through legal liabilities or negative effects
on a company's reputation, etc. (a weak conception of
double materiality)
* Or because a "reasonable person" might consider the
information material for reasons other than direct financial
repercussions (a strong conception of double materiality).1 90
In the second category, the "reasonable person" might consider
information material because they wish to follow a specific investment policy
for instance one guided by social and/or environmental considerations. They
may also consider this information material "because investors themselves are

187 Council Dirctive 2022/2464, 2022 O.J. (L 322) 15, 42; see also Council Directive 2014/95, 2014
O.J. (L 330) 57 ("companies should disclose not only how sustainability issues may affect
the company . . . , but also how the company affects sociep and the environment . . ") (emphasis
added).
188 Dunstan Allison-Hope & Paloma Munoz Quick, Human RightsAre NotJustan "ESG Factor';
BUS. FOR SOC. RESP. (Sept. 23, 2021), https://www.bsr.org/en/blog/human-rights-are-
not-just-an-esg-factor ("[T]he two dimensions of double materiality-to investors, for the
creation of enterprise value, and to society, for impacts on people and the environment-
are distinct and exist entirely on their own merits.").
189 Jeffrey Johanns, ESG and the Myth of Double Mater/aID, LINKEDIN Jan. 17, 2022),
https://www.linkedin.com/pulse/esg-myth-double-materiality-jeffrey-johanns/.
190 Matthias Tager, 'Double MateralD':What Is It and Whj Does ItMatter?, LONDON SCH. ECON.
& GRANTHAM RSCH. INST. ON CLIMATE CHANGE & ENV'T (Apr. 21, 2021),
https: / /www.lse. ac.uk/granthaminstitute/news /double-materiality-what-is-it-and-why-
does-it-matter/.
132 Virginia Law & Business Review 1
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required to report on these impacts, especially under the EU's Sustainable

Finance Disclosure Regulation"191 If this "reasonable person" considers
information material, i.e., important to them, then arguably the concept of
"double materiality" is inapplicable. Their focus is not on business impacts on
people and planetper se, but on their particular interest in these impacts.

B. Mandatory Human Rights Due Diligence

The question of the materiality of human rights impacts and response, at

least for investors might also be revisited in light of new laws which are placing
increased human rights obligations on companies. The text of a proposed E.U.
Directive, for example, requires companies to identify, prevent, and
mitigate/bring to an end risk to human rights and the environment by
conducting human rights and environmental due diligence.1 92 These obligations
extend to a company's own operations and those of its subsidiaries, and to
entities within its value chain with whom the company has "an established
business relationship."1 93
The E.U. Directive builds on the experience of the first state to have a
human rights due diligence law in force, France. The French Law on the
Corporate Duty of Vigilance, requires companies meeting the threshold
requirements for size to create, implement, and publish an annual "vigilance
plan."1 94 The plan is aimed at identifying and preventing human rights

191 Sustainable Finance, EUROPEAN COMM'N NEWSROOM (Jul. 26, 2022),

https://ec.europa.eu/newsroom/fisma/items/754701/en.
192 Proposal for a Directive of the European Parliament and of the Council on Corporate
Sustainability Due Diligence and Amending Directive (EU) 2019/1937, COM (2022) 71
final (Feb. 23, 2022) 1, 1 [hereinafter Sustainability Due Diligence Directive]. The following
actions are specified: integrating due diligence into their policies in accordance with art. 5;
identifying actual or potential adverse impacts in accordance with art. 6; preventing and
mitigating potential adverse impacts, and bringing actual adverse impacts to an end and
minimizing their extent in accordance with arts. 7 and 8; establishing and maintaining a
complaints procedure in accordance with art. 9; monitoring the effectiveness of their due
diligence policy and measures in accordance with art. 10; and publicly communicating on
due diligence in accordance with art. 11. Id. at 24.
193 Id. at 46. This test is akin to the test found in the French Law on the Corporate Duty of
Vigilance, which extends to the activities of subcontractors or suppliers with whom there is
an established commercial relationship. Loi de Vigilance, supra note 49.
194 Loi de Vigilance, supra note 49. The law applies to any company registered in France that has
(a) 5,000 or more employees, including employees of its direct or indirect French-registered
subsidiaries; or (b) 10,000 or more employees, including employees of its direct or indirect
French-registered or foreign subsidiaries. Id. The law applies to approximately 150
companies. Anna Triponel & John Sherman, Legislating Human Rzihts Due Dilgence:
18:93 (2023) The SEC as Human Rghts Enforcer? 133

violations in companies' domestic and international operations, including those

associated with their subsidiaries and supply chains.1 95 The plan must set out
the steps that the company will take to detect risks and prevent serious
violations with respect to human rights and fundamental freedoms, health and
safety, and the environment.1 96 This includes mapping out and analyzing the
risks, putting measures in place to mitigate any risks and address any negative
impacts, and monitoring the plan's implementation.1 97 Other European
countries are following France. Germany, for instance, has enacted its own
supply chain due diligence law.1 98 The Netherlands has passed a due diligence
law focused on the issue of child labor.1 99
If human rights due diligence is a legal obligation, fulfilling this obligation
therefore becomes a compliance matter for companies, meaning that whether
it is done properly or not becomes material to investors. While the enactment
of such laws seems a long way off at this time in the United States, U.S.
companies may be caught by the provisions in European laws. For instance,
the proposed Sustainability Due Diligence Directive applies directly to certain

Opportunities and Potential Pifalls to the French Duty of Vigilance Law, INT'L BAR ASS'N (May
2017), https://respect.intemational/wp-content/uploads/2018/08/Legislating-human-
rights-due-diligence-opportunities-and-potential-pitfalls-to-the-French-duty-of-vigilance-
law.pdf.
195 This covers the companies that the company controls directly or indirectly and, moving
down the supply chain, the activities of its subcontractors and suppliers "with which [it]
maintainsan established commercialrelationship."Loide Vigilance, supra note 49, art. 1, ¶ 3.
196 Id.
197 Id. at I¶ 4-9.
198 Gesetz fiber die unternebmer/schen SorgfaltspZichten in Lieferketten [Act on Corporate Due
Diligence Obligations in Supply Chains], July 16, 2021, Bundesgesetzblatt [BGBI] I at 2959
(Ger.), translatedinhttps://www.bmas.de/SharedDocs/Downloads/DE/Intemationales/act-
corporate-due-diligence-obligations-supply-chains.pdf? blob=publicationFile&v=3; see
Constanze Illner, Germany Announces Supply Chain Due Diligence Law - Everthing You Need to
Know, DQS HOLDING GMBH (Feb. 22, 2021), https://dqs-cfs.com/2021/02/germany-
announces-supplychain-due-diligence-law-everything-you-need-to-know/. Norway
enacted a similar law, Lov om virksomheters apenhet og arbeid med gunnleggende
menneskerettigheter og anstendge arbeidsforhold[Act relating to enterprises' transparency and work
on fundamental human rights and decent working conditions (Norwegian Transparency Act)],
on June 18, 2021. An unofficial English translation can be found at
https://ovdata.no/dokument/NLE/lov/2021-06-18-
99#: :text=The%20Act%20shall%20promote%20enterprises.
199 Child Labor Duty of Care Act, Stb. 2019. Although enacted a few years ago, this law has not
come into force and may be superseded by a law not limited to the issue of child labor but
rather requiring companies to undertake due diligence on all human rights impacts.
Covington & Burling LLP, Business and Human Rights: Developments and What to Watch For
(Jan. 24, 2022), https://www.cov.com/en/news-and-insights/insights/2022/01/business-
and-human-rights-developments-and-what-to-watch-for.
134 Virginia Law & Business Review 18:93 (2023)

U.S. (and other non-E.U.) companies operating in the E.U. market, 200 and
indirectly to U.S. (and other non-E.U.) companies that are in the value chains
of companies subject to the proposed Directive. 2 1 As such, U.S. companies
may be willing to comply with a higher standard than is currently enforced in
the United States, rather than aligning their standard to different legal
regimes.202
While HRDD laws may seem a distant possibility in the United States at
this time, certain legislative developments take steps in this direction. The
Uyghur Forced Labor Prevention Act (UFLPA),203 which recently went into
effect, creates a rebuttable presumption that no goods produced wholly or in
part in the Xinjiang Uyghur Autonomous Region (XUAR), China, may be
imported into the United States. In order for companies to rebut this
presumption, they need to present clear and convincing evidence that goods
were not produced using forced labor. Guidance from U.S. Customs and
Border Protection (CBP)204 assists companies in understanding some of the
types of information that CBP will require if they request an exception to the
UFLPA's presumption. Types of information include due diligence system
information, supply chain tracing information, and information on supply
chain management measures. 205 A due diligence obligation is also found in the
Conflict Mineral Rule, a rule which was promulgated by the SEC pursuant to
1502 of Dodd-Frank. 20 6 The rule imposes disclosure requirements on any

200 Luca Enriques & Matteo Gatti, The ExtratemitoralImpact of the Proposed EU Directive on
Corporate Sustainabiity Due Dizgence: Why CoporateAmerica Should Pay Attention, EUR. CORP.
GOVERNANCE INST. (Apr. 26, 2022), https://www.ecgi.global/blog/extraterritorial-
impact-proposed-eu-directive-corporate-sustainability-due-diligence-why ("[I]f a U.S.
company's own, as opposed to its [E.U.] subsidiaries', activities cross the threshold
requirements (namely, if its net turnover within the [European Union] is above (150 million
or (40 million if it operates in critical sectors), the Proposed Directive will directly apply to
it.").
201 Id.
202 Cf Directive 2016/679, 2016 O.J. (L 119) 1 (EU) [hereinafter GDPR]. Under the terms of
the Directive, companies that operate in Europe need to request consent from users who
were navigating websites in Europe. However, to maintain operational simplicity it seems
that corporations have now embedded the request to web users outside of Europe as well.
203 U.S. Customs & Border Prot., Uyghur Forced Labor Prevention Act,
https://www.cbp.gov/trade/forced-labor/UFLPA (last modified July 21, 2023).
204 U.S. CUSTOMS & BORDER PROT., UYGHUR FORCED LABOR PREVENTION ACT: U.S. CUSTOMS
AND BORDER PROTECTION OPERATIONAL GUIDANCE FOR IMPORTERS (2022),
https:/ /www.cbp.gov/document/guidance/uflpa-operational-guidance-importers.
205 Id. at 13-15.
206 Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111- 203,
1502 (2010).
18:93 (2023) The SEC as Human Rghts Enforcer? 135

reporting20 7 company that uses conflict minerals as a necessary part of their

business model. 208 If conflict minerals are used, the rule requires that the
disclosure "includes a description of the measures taken by the [issuer] to
exercise due diligence on the minerals' source and chain of custody." 209
Finally, should the SEC be willing, the agency is currently able to bring
cases under 10b-5 of the Exchange Act for violations that relate to a
corporation's activities and statements overseas. To wit, if a corporation lied in
its statements related to its mandatory human rights due diligence disclosures,
the SEC would be able to sue based on those statements even if the corporation
is a foreign one. 210

C. Regulatory Oversight

The field of business and human rights law has, until recently, been
characterized by a lack of regulatory oversight. 211 The first phase of laws passed
in this field, namely modern slavery reporting laws, 212 conflict minerals laws, 21 3
and human rights reporting laws, 214 relied on the market for oversight-in
other words, investors, consumers, and civil society organizations. While these
laws had some built-in enforcement mechanisms, they were modest and rarely,
if ever, used in practice. In recognition of this deficiency, reform proposed for
the UK Modern Slavery Act specifies stronger enforcement powers. 215 Human

207 Reporting companies are any companies that have registered their securities with the SEC,
and as such, are required to file periodic reports with the Commission pursuant to §1, 13,
or 15(d) of the Exchange Act. See Securities Exchange Act of 1934, §12, 13, 15; 15 U.S.C.
§781, 78m, 78o.
208 Conflict Minerals, 77 Fed. Reg. 56274, 56276 (Sept 12, 2012) (codified at 17 C.F.R. § 240,
17 C.F.R § 249b).
209 Id. Companies must submit a Conflict Mineral Disclosure Report, which requires the
following items: (a) a description regarding what due diligence measures the company took;
(b) a statement regarding the company's independent audit mechanisms; and (c) a risk
mitigation analysis that discussed additional steps the company took to improve its due
diligence in this area. See id. at 56363.
210 See SEC Vale Complaint, supra note 1.
211 Rachel Chambers & Anil Yilmaz-Vastardis, Human Rzihts Disclosure and Due DilIence Laws:
The Role of Regulatog Oversight in Ensuring CoporateAccountabiliD, 21 CI. J. INT'L L. 323, 350
(2021).
212 Id. at 338.
213 Id. at 340-41.
214 Companies Act of 2006, c. 46, § 414C, 414CB pt. 15 (Eng.), at 326-28.
215 In January 2021, the Foreign Secretary announced that the Home Secretary would be
introducing legislation that included fines for businesses that did not comply with their
transparency obligations under the Modern Slavery Act. This was followed in June 2021 by
136 Virginia Law & Business Review 1
18:93 (2023)

rights reporting that forms part of annual corporate reports has seemingly gone
under the radar of financial regulators in Europe, 216 and ironically it seems that
the United States, despite having no BHR law on the books, is seen as being a
leader in ESG regulation. 217 The creation of the SEC's ESG Enforcement
Taskforce has prompted regulators in Europe to think about how they should
enforce in the ESG sphere.2 18
The enactment of a second wave of BHR laws has brought greater
attention to the question of regulatory oversight. Such oversight is still at a fairly
embryonic phase. For instance, the E.U. Conflict Minerals Regulation specifies
that E.U. Member States must designate a "competent authority" to conduct
checks on how corporations that import goods to the European Union comply
with the Regulation. 219 This system has drawbacks, including divergent
implementation of the law and lack of sanction for noncompliance, but
compared to the original conflict minerals law, Dodd Frank Section 1502,220 it
is a step forward in that there is enforcement in place for it. As due diligence
laws are debated and adopted, the question of regulatory oversight has received
even greater thought and attention. 221
Turning to enforcement of the new wave of BHR laws, the French Duty
of Vigilance law relies on courts for oversight and enforcement. 222 The German
Supply Chain Law establishes the powers of oversight and enforcement and
names the Federal Office for Economic Affairs and Export Control as the

the Department for Business, Energy, and Industrial Strategy's confirmation that it would
be creating a new Single Enforcement Body which would have powers to impose financial
penalties against those organisations which did not comply with their statutory obligations
under Section 54 of the Modern Slavery Act. In May 2022, these commitments were
formalised in the announcement in the Queen's Speech of the Modern Slavery Bill which
set out proposals including the introduction of civil penalties for non-
compliance. Katherine Tyler, UK: The Modern Slavery Act 2015 - What You Need to Know,
ONETRUST DATAGUIDANCE (Aug. 2022), https://www.dataguidance.com/opinion/uk-
modern-slavery-act-2015-what-you-need-know.
216 Chambers & Yilmaz-Vastardis, supra note 211, at 362-63 (discussing oversight of the E.U.
Nonfinancial Reporting Directive, and of civil society efforts to engage the FRC).
217 Sophie Kemp et al., Greenwashing: Engaging with regulatorson ESG concerns, KINGSLEY NAPLEY
(Aug. 8, 2022), https://www.kingsleynapley.co.uk/our-news/press-
releases/greenwashing-engaging-with-regulators-on-esg-concerns.
218 Id.
219 Chambers & Yilmaz-Vastardis, supra note 211, at 342 (discussing that this includes audits
of records as well as on-the-spot inspections).
220 Id. at 357 (noting that any enforcement of this provision was specifically stopped under the
Trump Administration).
221 Rachel Davis, Enforcement ofMandato0 Due Dilgence: Key Design ConsiderationsforAdministratve
Supenision, SHIFT & U.N. HIGH COMM'R FOR HUM. RTS. (Oct. 2021),
https://shiftproject.org/resource/enforcement-mhrdd-design/.
222 Chambers & Yilmaz-Vastardis, supra note 211, at 332-35 (discussing the drawback of this).
18:93 (2023) The SEC as Human Rghts Enforcer? 137

responsible body. 223 A Norwegian due diligence Law names the Consumer
Authority as the body to monitor compliance with the act. 224 The proposed
E.U. Directive has a specific provision for regulatory oversight. Articles 17 and
18(1) of the proposal require that Member States designate one or more
national independent supervisory authorities of a public nature with
appropriate powers and financing to take on this role. The proposal leaves it to
the Member States to decide whether they will establish a new public supervisor
or embed this task with existing supervisors. Unlike the French, German, and
Norwegian laws, the European proposal contains a new civil cause of action
for victims in addition to the regulatory oversight over the HRDD process just
discussed. Thus, we see overall a far more sophisticated regulatory approach in
these European States to that taken in the United States.

V. THE SEC'S ROLE IN THE BHR FIELD-WHAT'S AT STAKE

The SEC's willingness to bring enforcement actions for ESG-related

misstatements has been heralded as a welcome development. Proponents of
the SEC's actions believe that it could bring corporate accountability for
corporations that fail to take ESG-related issues seriously. However, the
agency's actions are not a panacea to all of the harms that corporations inflict
on affected communities and individuals. Indeed, the fact that the SEC, an
agency whose tripartite mission includes protecting investors (rather than
victims), is viewed as the best defender of business- and human rights-related
harms in the United States is, in itself, problematic for several reasons. For
instance, as we have previously discussed in another article, 225 the SEC's
disclosure-based framework is not an adequate tool for complying with the
United States' professed human rights obligation under the UN Guiding
Principles on Business and Human Rights (UNGPs)-a key business and
human rights tool.
Second, given that the SEC's current focus on ESG is being pushed as an
agency agenda (rather than embedded in the law), it can easily be de-prioritized
or worse, ignored, as the agency's priorities or the composition in the SEC's
Commissioners' office changes. However, notwithstanding these two

223 Lieferkettensorgfaltspflichtengesetz [LkSG] [Act on Corporate Due Diligence Obligations

for the Prevention of Human Rights Violations in Supply Chains], § 19 (Ger.).
224 Norwegian Transparency Act, supranote 198.
225 See generally Jena Martin & Rachel Chambers, Remagining Coporate AccountabiliD: Moving
Beyond Human Rights Due Dilgence, 18 N.Y.U. L. & Bus. 773 (2022) (analysing the inadequacy
of various accountability models, including disclosure). See also Jena Martin, Hiding in the
Liht, supra note 30, 566-75.
138 Virginia Law & Business Review 1
18:93 (2023)

challenges, we believe that the SEC's recent enforcement action is still the best
option for those who would like to increase corporate accountability in the
business and human rights field in the United States. Moreover, as we also
discuss in this section, despite the perils in changing Commission composition
or priorities, the SEC might have given others a significant tool by potentially
changing the jurisprudential landscape. Specifically, if the agency's enforcement
action leads to a favorable court ruling on the issue of materiality and how it
applies to ESG harm, then this will effectively embed and expand the standard
of materiality as it relates to disclosing human rights abuses. As such, we believe
that until such time as there is the political will or desire to create an agency
that focuses on BHR abuses in the United States, the SEC's role in enforcing
ESG-related actions is a welcome development for the United States and the
world.

A. The Perils of Disclosure

The SEC's regulatory heft is based on a disclosure-based paradigm. Rather

than providing recommendations on the value of a corporation and its
substance, the SEC primarily requires corporations to truthfully disclose
material information. 22 6 Should a corporation do so, the SEC largely has no
jurisdiction over what the corporation says as long as the information is
truthful. Similarly, in private action litigation, if defendants successfully proffer
evidence that certain key information was disclosed, then they will not be found
liable-even if what they disclose is terrible, terrible news. In a previous article,
one of us has described this method of regulation as a laisse.zfaire approach in
that "[r]ather than directly intervene in the corporate governance of a company,
the SEC primarily uses a disclosure paradigm [which] ... rests on the premise
that 'an educated investor is a protected investor."' 227 As such, and specifically

226 Martin, Changing the Rules of the Game: Beyond a Disclosure Framework for Securities Regulation,
supra note 111, at 60.
227 Id. In the context of her earlier research, Martin felt like this was problematic primarily
because most of the major players in the market (i.e., institutional investors and high
frequency traders) do not rely on corporate filings and information in the way that retail
shareholders traditionally did. As such, Martin noted that this marked a shift from an
investor paradigm to a consumer paradigm where the price of the stock was disaggregated
from the value of the company. Since Martin wrote that article, some significant plays in
the market have borne out her perspective. See, e.g,Jena Martin, Wbj GameStop Shares Stopped
Trading: 5 Questions Answered, THE CONVERSATION Jan. 28, 2021),
https://theconversation.com/why-gamestop-shares-stopped-trading-5-questions-
answered-154255. While Martin's initial assessment bore true with regard to HFTs, since
18:93 (2023) The SEC as Human Rghts Enforcer? 139

within a business and human rights framework, there is little incentive for
corporations to engage substantively with business and human rights issues
unless doing so is part of a specific, calculated, reputational advantage that the
corporation would like to promote. For instance, if a corporation cares little
about its impact on surrounding communities, or human rights issues, or the
environment, there is no downside to engaging in activities or relationships
with others that might not be the best for these communities or individuals as
long as the corporation accurately discloses what it is (or is not) doing. So, for
instance, if you are a large multi-national corporation that derives the bulk of
its income from the extractive industry-with coal, oil, and gas operations
around the world-and you operate within the bounds of the law, then there
may be no incentive for you to pretend to engage in either environmental or
human rights issues. Indeed, under a disclosure paradigm, there may even be
disincentives if you make any material misstatements on the subject. 228 Under
this scenario, presumably investors in your company know what kind of
company you are, have made an educated cost-benefit analysis regarding the
perils of pollution versus the profits that might be gained from investing in
your company and have decided that they would rather have the profits now.
In this scenario, there is nothing the SEC could do even if there was a later
showing that the company's actions inflicted environmental harm. So long as
the company disclosed that this might be a risk of their operations, there is no
cause of action under 10b-5. Moreover, even if the corporation were found to
have actively polluted an area or, for instance, somehow discriminated against
a class of workers (thereby violating these workers' rights to be free from
discrimination under IHRL), if the company or its executives did so without

then, another category of "socially conscious" institutional investor (such as BlackRock)

has also come into play that has actually made the best of a disclosure-based framework by
engaging with corporations directly, often times on the issues of human rights and the
corporation's overall environmental footprint. Despite these developments, Martin still
finds the overall disclosure paradigm to be problematic for a number of reasons, including
that (1) most of the disclosure-based laws do not provide a direct access to remedies for
the victims and (2) "there is a growing unease that disclosure is nothing more than a
government-mandated public relations campaign," and (3) "rather than illuminate an issue,
disclosure can actually obfuscate matters for its intended target. For instance, in the U.S
securities regulatory framework, corporations must file volumes of reports that, in practice,
amount to hundreds of pages of boilerplate text with little substantive information." Jena
Martin, Hidingin the Light, supra note 30, at 575-76.
228 In fact, one of the hallmarks of securities regulation here in the United States is that not
everything must be disclosed, but if you choose to disclose it, you must tell the whole truth.
In other words, if an omission essentially makes your statement a half-truth, that alone is
enough to bring you within the fraud ambit of Rule 10b-5. See supra Section L.A for more
details.
140 Virginia Law & Business Review 18:93 (2023)

scienter there would still be no recourse under securities fraud claims even if
individuals or communities were negatively impacted. 22 9

B. Shifting Agency Priorities

Another challenge that may endanger the progression of the business and
human rights movement is not specific to the SEC itself but rather could affect
all agencies in a political environment-namely shifting agency priorities. Right
now, the agency seems to have taken a great interest in ESG-related matters.
However, a closer examination shows that while the ESG mantle still exists,
the actual genesis for this current push may have come at the hands of the
previous SEC Chairman rather than its current leader, Gary Gensler. This has
many potential consequences. First, as Gensler begins to define his own tenure
at the SEC, it is entirely possible that he may relegate ESG to second-class
status. In addition, (as mentioned earlier) the agency itself is facing significant
push-back from politically conservative state administrations who view the
SEC's stance on ESG to be antithetical to the way the SEC should behave. 230
In addition, even though the SEC is an independent agency, 23 1 it may
nonetheless be subject to the political winds of the time. So, while now the
Biden administration's current push regarding "responsible business
conduct" 232 may align well with the agency's stance on ESG, should the
administration's priorities change, it is not a leap to think that this may also
impact the agency. More directly, should a Republican take the White House
in the next election cycle, this would have an immediate impact on composition
of the agency. Under Congressional mandate, whichever political party

229 Indeed, outside the human rights context, the Supreme Court has made it very clear that an
action for 10b-5 cannot stand if a company or its executives only acted negligently. Ernst
& Ernst v. Hochfelder, 425 U.S. 185, 185-86 (1976).
230 See Patrick Morrisey, supranote 101.
231 Cornell L. Sch. Legal Info. Inst., Securities and Excange Commission,
https://www.law.comell.edu/wex/securities_and_exchangecommission_(sec) (last
visited Feb. 8, 2023).
232 In June 2021, the Biden Administration announced that it would update its National Action
Plan on Responsible Business Conduct (largely viewed as the Administration's primary
method of engaging with business and human rights related issues). As part of their work
in that area, representatives from the Administration attended numerous stakeholder
consultations on various issues implicating the National Action Plan including one
organized by Martin on May 23, 2022 regarding ESG related issues. See U.S. Dept. of State,
National Action Plan on Responsible Business Conduct, https://www.state.gov/responsible-
business-conduct-national-action-plan/# (last visited Dec. 3, 2023) (discussing stakeholder
engagements on, among other things, "ESG investing."); Jena Martin, Comment Letter for
NAP on Responsible Business Conduct (May 31, 2022),
https://www.regulations.gov/comment/DOS-2022-0002-0030.
18:93 (2023) The SEC as Human Rghts Enforcer? 141

occupies the White House, that same political party will make up a majority of
the five-member Commission. 233 So, if a Republican becomes president before
the agency has solidified its actions on ESG, then this could likely mean the
death of this endeavor by the agency as a whole.
However, despite both of these challenges, we remain cautiously optimistic
regarding the SEC's legacy on ESG and its impact in the BHR field. Specifically,
while the SEC's current enforcement portfolio on this matter is made up
entirely of either settled or pending actions, all it would take is one litigated
action to transform an agenda item into embedded case law. We discuss how
this could happen in the following section.

C. Bringing in the Reasonable Investor

As we mentioned earlier, the heart of materiality under Rule 10b-5 relates

to the reasonable investor standard. Specifically, to meet the materiality
standard, the plaintiff (either the SEC or an investor) must show that the
information "is material if there is a substantial likelihood that a reasonable
shareholder would consider it important." 23 4
But who exactly is the reasonable investor? Well, apparently, that seems to
be changing. For instance, the reasonable investor of today seems to care much
more about social justice issues and the environment than their older
counterparts from the baby boomer generation. 235 The number of investors
who state that they care about ESG issues has increased dramatically and is the
subject of discussion and commentary.2 36 At a minimum, there are enough
changes in the manner and focus of today's investors to truly challenge the
notion that these investors only care about financial misstatements.
As discussed earlier, when Larry Fink of BlackRock made his first
declaration that investors care about more than money and corporations should
too, this was significant enough deviation to make national news 237 Here was
the world's biggest investor telling corporations that they could not only be
profit-centered. News articles were replete with speculation about what could

233 Id. (noting that "so that the SEC would remain independent and apolitical, Congress
requires that no more than three commissioners may be members of the same political
party").
234 TSC Indus., Inc. v. N.way, 426 U.S. 438, 449 (1976). While the standard was first articulated
within the context of a proxy statement regulated under Section 14(a) of the Securities
Exchange Act, it has since been applied to Rule 10b-5 actions as well. See, e.g., Matrixx
Initiatives, Inc. v. Siracusano, 563 U.S. 27, 38-39 (2011).
235 See Robinson, supra note 134, at 6.
236 See supra Section III.A-B and surrounding footnotes. But seeJebe, supra note 78, at 693.
237 See supra Section III.A.1 and surrounding footnotes.
142 Virginia Law & Business Review 1
18:93 (2023)

have motivated him. In light of the trend of millennial and generation Z

investors just highlighted, Fink's missives do not seem as radical as first seemed
to be the case.

1. Adding long-term matenak40 standardsdiscussion

Related to the reasonable investor is the issue of short-term versus long-

term profitability. Taking human rights into consideration in the investment
processes hinges upon the argument that human rights risks affect a company's
operations and profits, and therefore its share price and return to investors.
This argument depends on the investor taking a long-term approach to
profitability and investing accordingly. The message from Larry Fink is that
long-term profitability is the measure by which markets will ultimately
determine a company's success. The Social Accounting Standards Board
(SASB), an initiative to create financially material ESG standards, has also
explicitly linked long-term profitability to financial materiality, stating that
"information is financially material if omitting, misstating, or obscuring it could
reasonably be expected to influence investment or lending decisions that users
make on the basis of their assessments of short-, medium-, and long-term
financial performance and enterprise value." 238 Thus, we see convergence
around this viewpoint, but the open question is whether investors are
integrating this viewpoint into their investment decisions.

D. Current SEC Enforcement Actions: The Evolving Nature of Fraud?

Since the SEC launched its ESG taskforce in 2021, the Division of
Enforcement has brought several significant actions that could be classified as
ESG-related enforcement actions. 239 Notably, many of these actions were
brought outside of the SEC's specific ESG taskforce mandate and, instead,
focused more on traditional notions of fraud and the reasonable investor (as
discussed earlier). However, unpacking some of these lesser-known actions
shows that the shifting standard of materiality and what a reasonable investor

238 SASB, PROPOSED CHANGES TO THE SASB CONCEPTUAL FRAMEWORK & RULES OF
PROCEDURE 30 (2020), https://www.sasb.org/wp-content/uploads/2021/07/PCP-
package_vF.pdf; Int'l Fin. Reporting Standards Found., SASB Standards,
https://www.ifrs.org/issued-standards/sasb-standards/ (last visited Dec. 3, 2023). SASB
has been incorporated into the IFRS Foundation's International Sustainability Standards
Board (ISSB), which is expected to take the same approach to materiality as SASB did.
239 U.S. Sec. & Exch. Comm'n, Enforcement Task Force Focused on Climate and ESG Issues (Apr.
11, 2023), https://www.sec.gov/spotlight/enforcement-task-force-focused-climate-esg-
issues.
18:93 (2023) The SEC as Human Rghts Enforcer? 143

might think is important may already be happening. As such, in this section, we

take note of the SEC's known (as well as lesser known) cases in this area to
distill what this may bode for in terms of future 10b-5 actions, either ones
brought by the SEC or ones brought by private plaintiffs.
An action under 10b-5 of the Securities Exchange Act is, at its heart, an
action for fraud. As such, a key SEC enforcement strategy is to prove up the
magnitude and nature of the fraud. In addition, given the fact that what the
SEC must prove is significantly narrower in scope than a private plaintiffs
cause of action, the SEC's case will almost always be designed to highlight the
fraud at issue. As such, examining what the SEC chooses to focus on in its
complaint can serve as a useful method for understanding the evolving nature
of two of the three key elements that it must prove, namely: the nature of the
fraud (i.e., the nature of the relevant misstatement or omission in the case of a
garden-variety fraud); and why that statement is material.2 40
To that end, it seems that while the SEC may slowly be moving toward
taking a position that highlights ESG-related matters as part of the fraud, in the
end, the SEC is still relying on its standard playbook for determining whether
an individual's or company's actions amounted to a violation of 10b-5. For
instance, in 2020, the SEC brought an action against Thunderbird Power Corp.,
et. al.241 In that case, the misleading statement related to parties' claims that
they were developing an energy-efficient wind turbine technology; statements
touting this as an alternative, cleaner, energy source were likely the reason why
many investors chose to buy securities in the company. 242 This is in contrast to
many of the previous cases that the SEC brought in this industry, where the
nature of the fraud was unrelated to the actual industry itself.243
Other cases brought by the SEC in the era of the ESG taskforce seem to
bear this out. For instance, the SEC currently maintains a section on its site

240 In cases that involve other types of fraud, the SEC's tactic may be a little different. For
instance, in accounting fraud, the SEC will frequently focus on the overall scheme and its
intention to deceive. To that end, the SEC's case against Enron Energy Corporation still
remains emblematic of these types of cases.
241 SEC v. Thunderbird Power Corp., SEC Litigation Release No. 24853 (July 14, 2020),
https://www.sec.gov/litigation/litreleases/2020/lr24853.htm.
242 Id.
243 For instance, the SEC has traditionally brought cases against a company that implicated
ESG issues (i.e., because it was an oil and gas company); however, often the actual fraud
itself was unrelated to the industry (for instance, fraud actions that the SEC brought because
the executives lied about what they were doing with investors' funds, not because the
company lied about the technology). See, e.g., SEC v. Kevin T. Carney, SEC Litigation
Release No. 25107 (June 2, 2021),
https://www.sec.gov/litigation/litreleases/2021/lr25107.htm.
144 Virginia Law & Business Review 1
18:93 (2023)

entitled "Enforcement Task Force Focused on Climate and ESG Issues." 244 To
that end, the page purportedly lists a "non-exhaustive list" of matters related to
the SEC's ESG priorities.245 Significantly, of the sixteen 2 46 cases currently listed
on the site by the SEC, ten of them pre-date the SEC's official launch of the
ESG taskforce, some by over a decade. 2 47 Indeed, a closer examination of the
older SEC cases listed shows that there was little change in the way the SEC
went about showing elements of fraud under 10b-5, (perhaps leading a more
cynical commentator to conclude that the only thing that changed was how the
SEC marketed its enforcement actions before and after the announcement of
the taskforce).

1. Vale

Despite the SEC's increased rhetoric and focus on ESG issues, by and
large, the agency's modus operandi-the focal point of their investigations-
remains the same. For instance, the Commission's case against Vale, is widely
seen as the most notable (if not the first) case that falls within the Division of
Enforcement's ESG era. 248 And yet, a closer reading of the SEC's complaint in
the matter ties the underlying facts related to materiality to events and
occurrences that could be justified under a breach of financial materiality-i.e.,
issues that would directly impact the company's revenue stream and position
on the securities market, rather than something that would be considered a
material impact to other stakeholders. In other words, the fact that the
misleading statements and omissions happened to be in the ESG space is
almost incidental to the nature of the fraud. The SEC could have made the
same allegations if, for instance, the false and misleading statements were
related to lies Vale told in order to falsely recognize revenue in an earlier

244 U.S. Sec. & Exch. Comm'n, Enforcement Task Force Focused on Climate and ESG Issues, supra
note 239.
245 Id.
246 Id. (this particular webpage seems to be updated with cases as the Division of Enforcement
brings them).
247 See, e.g., Press Release, U.S. Sec. & Exch. Comm'n, SEC Charges Mutual Fund Manager for
Violating Socially Responsible Investing Restrictions (July 30, 2008),
https://www.sec.gov/news/press/2008/2008-157.htm [hereinafter SEC Release for
Mutual Fund Manager Violation].
248 In fact, many commentators have billed this case as the SEC's first ESG case, a claim that
the Commission itself disputes. Kevin B. Muhlendorf & Martha E. Marrapese, SEC's First
ESG Enforcement Action Is Latest Move in Ageng 's ESG Efforts, WILEY (May 17, 2022),
https://www.wiley.law/alert-SECs-First-ESG-Enforcement-Action-Is-Latest-Move-In-
Agencys-ESG-Efforts. However, certainly the SEC's case was highlighted (by both the
agency and other commentators) as a prime example of the SEC's focus on ESG issues.
18:93 (2023) The SEC as Human Rights Enforcer? 145

quarter. In both of these scenarios, the SEC would be under the aegis of 10b-
5 of the Securities Exchange Act-trying to prove that the false and misleading
statements are tied to a materiality standard that, in the end, is determined by
what issues an investor (rather than a community) thinks are important.
Nonetheless, this is still an important development for materiality
jurisprudence. Specifically, by enforcing an increasing number of cases that
relate to ESG-related statements, the SEC is creating an iterative process that
will help subsequent cases (brought by both private litigants and the SEC)
regarding what issues a reasonable investor feels are important. As such, it may
be that the cases that the SEC subsequently brings could fit within the
definition of materiality even fthere is no financial impact to the company or
its stock.
However, a comparison of the SEC's oldest case listed on the site and the
newest case listed on the site is illuminating. In many ways the two cases serve
as synergistic bookends that highlight that, despite the language and the
increased focus of the SEC on ESG issues, little has changed in the way that
the SEC brings its cases.

2. Bookend Actions

On July 30, 2008, the SEC announced that it had charged a New
Hampshire-based investment advisor with defrauding investors by "violating
investment restrictions in socially responsible mutual funds." 2 49 According to
the SEC's Order Instituting Administrative Cease and Desist Proceedings
against Pax, the company (an investment advisor under the '40 Act) represented
to investors that the fund would not invest in "securities issued by companies
that derived revenue from the manufacture of weapons, alcohol, tobacco or
gambling products." 250
Now, nearly fifteen years later, on November 22, 2022, the SEC once again
charged a company with not living up to its ESG-related standards for

249 SEC Release for Mutual Fund Manager Violation, supranote 247.
250 Pax World Mgmt. Corp., Inv. Adv. Act Rel. Nos. 2761, 28344 (July 30, 2008),
https://www.sec.gov/litigation/admin/2008/ia-2761.pdf. Because the entity at issue was
an investment advisor under the '40 Act (rather than a publicly traded corporation) the
relevant statute used by the Division of Enforcement was Section 34(b) of the Investment
Company Act rather than Section 10(b) and Rule 10b-5 of the Securities Exchange Act.
However, the underlying elements between the two causes of action are largely the same-
they both prohibit materially misleading statements. Id at 8 (discussing how Section 34(b)
prohibits materially misleading statements).
146 Virginia Law & Business Review 18:93 (2023)

investors. 25 1 In this instance, the SEC charged Goldman Sachs Asset

Management "for [flailing to [f]ollow its [p]olicies and [p]rocedures [i]nvolving
ESG [i]nvestments." 25 2 Specifically, according to the Commission's order
instituting and settling the proceedings, the Commission noted that Goldman
Sachs had made statements to its Fund investors stating that it would maintain
an ESG "materiality matrix," in essence a checklist for ensuring that the
companies in which it was investing were in keeping with the Fund's stated
ESG protocol. 2 53 However, according to the SEC's order, the "investment
teams did not routinely follow the policies and procedures and description of
its ESG investment process." 2 4

CONCLUSION

This article has analyzed whether the SEC's Division of Enforcement-

as the country's leading financial markets enforcer- has begun broadening its
focus to include BHR issues; whether it should do so, and; with what
consequences.
To the first point, it seems clear that the SEC has begun to make the shift
both with regulation and enforcement, towards considering ESG related issues.
While it is unclear whether this trend will continue (given potentially shifting
agency priorities) the agency's stated actions on this point, at a minimum have
created a record aligning the SEC with an ESG-as-fraud stance that others,
particularly shareholder litigants, may be able to use in the future. Clearly, the
SEC has not acted in a vacuum in this regard. Indeed, the trends around
shareholder litigation (at both the state and federal level) and the increased level
of shareholder proposals related to ESG may already be changing crucial
aspects of corporate governance in the United States. More broadly, the dual
trends in other countries of (1) double materiality and (2) human rights due

251 Press Release, U.S. Sec. & Exch. Comm'n, SEC Charges Goldman Sachs Asset
Management for Failing to Follow its Policies and Procedures Involving ESG Investments
(Nov. 22, 2022), https://www.sec.gov/news/press-release/2022-209.
252 Id.
253 Id.
254 Id. at 2. While the final cause of action in this instance seemingly amounted to a lesser
violation than that alleged against Pax (in that there were no specific allegations of fraud,
rather the harm alleged was a failure to follow policies and protocols) the crux of case-a
failure to align its practices with its representations-remains the same. In this instance, the
seeming differences are not the acts in question but rather the level of scienter (and, as such,
culpability) ascribed to these actions. Specifically, it would seem that the SEC's action
against Goldman Sachs sounds more in negligence. In contrast, the SEC's action against
Pax World sounds in deception. But, to be clear, the crux of the fund's actions remains the
same.
18:93 (2023) The SEC as Human Rights Enforcer? 147

diligence seems to show that this shift-from merely considering corporate

financial impacts to considering corporate communitarian impacts-will likely
remain for some time.
Moreover, while not without reservations, we do find that the SEC could
serve as a crucial gap-filler in the search for corporate accountability for human
rights violations. Specifically, by using tools like Rule 10b-5, 255 the SEC can tie
a corporation's actions and statements to larger societal harms and, in doing so,
begin changing the discussion regarding what matters to a reasonable
investor-a crucial element in a corporate fraud charge-to include BHR
issues. Finally, we believe that this change to the reasonable investor standard,
in the absence of any currently viable alternatives, gives the SEC a vital role to
play.25 6

255 Rule 10b-5 of the Exchange Act is the primary fraud tool used by the agency to hold
corporations and other individuals liable for fraudulent misstatements and omissions. See
supra Section I.A for more details.
256 Further empirical research on the SEC ESG enforcement actions to date is needed in order
to gain a complete picture of SEC activity in this area. Likewise, a fuller analysis of the
different regulatory models for BHR that have been adopted in Europe, and how they
compare and contrast to the SEC, is recommended. Lastly, a deeper dive into the SEC ESG
rulemaking is another gap in the scholarship. We hope these lines of research in this
important and contested field are pursued, with some urgency.
 Virginia Law & Business Review (ISSN 1930-627X)
Cite: Va. L. & Bus. Rev.

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VIRGINIA LAW & BUSINESS REVIEW
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