Greenwashing as Securities Fraud: Can Misleading ESG Disclosures Attract SEBI Action?
Misleading ESG disclosures can influence investment decisions, raising questions about whether greenwashing should be treated as securities fraud under SEBI’s PFUTP framework.
Greenwashing as Securities Fraud: Can Misleading ESG Disclosures Attract SEBI Action?
Environmental, Social and Governance (ESG) considerations are becoming increasingly important in investment decisions. As investors pay greater attention to sustainability credentials, companies are under growing pressure to disclose information about their environmental and social performance.
This has also increased the risk of greenwashing—where a company presents its sustainability performance in a false, misleading or incomplete manner.
The legal question is increasingly important: When can misleading sustainability information become a securities-market violation?
An IndiaCorpLaw analysis examines whether misleading disclosures in a company's Business Responsibility and Sustainability Report (BRSR) could attract liability under the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (PFUTP Regulations).
What Is Greenwashing?
Greenwashing generally refers to presenting a company's environmental or sustainability performance in a manner that creates a misleading impression.
This could involve:
- False sustainability claims
- Selective disclosure of environmental information
- Misleading ESG metrics
- Incomplete sustainability reporting
- Overstating environmental achievements
The concern becomes particularly serious in capital markets because investors may rely on ESG information when deciding whether to buy, sell or hold securities.
India's ESG Disclosure Framework
India's ESG reporting framework is closely connected with Regulation 34(2)(f) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.
SEBI's July 2023 circular also requires the top 1,000 listed companies to prepare a Business Responsibility and Sustainability Report (BRSR) as part of their annual reports.
The growing importance of BRSR disclosures means that sustainability information is increasingly becoming part of the information available to investors in the securities market.
This creates an important regulatory responsibility for companies to ensure that their disclosures are accurate and reliable.
When Can ESG Misstatements Become Fraud?
Not every error in a sustainability report will necessarily amount to securities fraud.
The key issue is materiality and investor inducement.
Under the PFUTP framework, the analysis focuses on whether misleading conduct can induce investors to deal in securities.
Therefore, an ESG misstatement would generally need to be sufficiently significant to potentially influence investment decisions before it reaches the threshold associated with securities fraud.
Materiality Is Critical
A minor error in an ESG report may not automatically constitute fraud.
The seriousness of a disclosure can depend on factors such as:
- The nature of the company
- Its industry
- The significance of the sustainability claim
- The company's market positioning
- The potential effect on investors
- Whether the information affects access to ESG-focused capital
For example, environmental performance may be particularly significant for a fossil-fuel company seeking access to ESG-screened funds or green financing.
In contrast, investors may rely more heavily on profitability, technology and business performance when evaluating certain software companies.
The Role of Investor Inducement
One of the most important elements in determining PFUTP liability is whether the misleading information could influence investors to deal in securities.
ESG investing in India is still developing, but sustainability information is becoming increasingly relevant to investment decisions.
As ESG-focused investment products and sustainability-linked financial instruments expand, misleading sustainability claims could potentially have a greater impact on market behaviour.
What About Directors and Compliance Officers?
The existence of an incorrect statement does not automatically mean that every person involved in preparing or approving the BRSR is liable for fraud.
The source analysis notes that a director or compliance officer who signs a BRSR without knowledge of an error, merely to fulfil the relevant reporting obligation, would not automatically attract liability under the PFUTP provisions.
At the same time, the regulator does not necessarily have to establish traditional deceit to establish fraud under the applicable framework.
This makes the circumstances surrounding the preparation and approval of the disclosure particularly important.
Third-Party Assurance and Board Responsibility
SEBI's BRSR framework also involves third-party assurance.
The board has a responsibility to ensure that the assurance provider has appropriate expertise and that conflicts of interest are avoided.
A compromised assurance process can become particularly significant where it supports unreliable sustainability disclosures.
The existence of a conflict of interest may therefore become relevant when assessing whether a company knowingly or recklessly published unreliable ESG information.
Why PFUTP May Be the Stronger Enforcement Route
The analysis distinguishes between enforcement under:
- PFUTP Regulations
- LODR Regulations
- Section 15HB of the SEBI Act
Each framework serves a different purpose.
The LODR Regulations contain compliance requirements for listed companies, while Section 15HB operates as a broader penalty provision for certain regulatory non-compliance.
However, where the conduct involves deliberately or materially misleading investors through ESG disclosures, the PFUTP framework may provide a more appropriate legal route because it directly addresses fraudulent and unfair practices in the securities market.
Limitations of LODR-Based Enforcement
Regulation 98 of the LODR Regulations allows stock exchanges to take measures against non-compliance.
However, the standard enforcement mechanism discussed in the source primarily addresses failures such as delayed filing of annual reports.
Such penalties may not adequately address a situation where a company has actually published a BRSR but the information contained in it is materially misleading.
This distinction is important.
The problem in a greenwashing case may not be failure to disclose, but rather disclosing information that creates a false impression.
Section 15HB and BRSR Violations
Section 15HB of the SEBI Act provides a residual penalty for certain regulatory non-compliance.
However, the source analysis suggests that its application to misleading BRSR statements may be less suitable than PFUTP.
The distinction lies in the nature of the violation: publishing misleading information to the market is different from simply failing to furnish information or records to SEBI.
What About Section 15A?
A related question is whether Section 15A of the SEBI Act could apply.
The source's later discussion argues that Section 15A is unlikely to be the most appropriate provision for misleading BRSR statements.
The provision primarily addresses failures to furnish documents, returns or information, whereas a greenwashing allegation concerns the content and reliability of information already published to the market.
This again supports the argument for using the anti-fraud framework where the conduct actually involves misleading investors.
Penalties Under the PFUTP Framework
The consequences can also be significantly more serious under the anti-fraud regime.
Section 15HA of the SEBI Act provides for a penalty that can extend to ₹25 crore or three times the amount of profits made from the fraudulent practice, as applicable.
This is substantially more severe than the relatively smaller penalties associated with certain routine LODR compliance failures.
The stronger penalty framework reflects the greater seriousness of conduct that potentially distorts investment decisions and market integrity.
Why Greenwashing Can Harm Investors
Greenwashing can create economic advantages for companies that present an artificially positive sustainability profile.
A company with inflated ESG credentials may potentially receive:
- Greater investor interest
- Access to ESG-focused funds
- Better access to green financing
- Sustainability-linked funding opportunities
- Lower financing costs
If those advantages are obtained through materially misleading disclosures, the consequences can extend beyond reputational harm and become a securities-market issue.
Industry Context Matters
ESG disclosures cannot always be evaluated using the same materiality threshold for every company.
The environmental risks associated with a business depend heavily on its industry and operations.
For example, environmental metrics can be particularly significant for companies involved in:
- Fossil fuels
- Mining
- Heavy manufacturing
- Energy
- Chemicals
- Infrastructure
The same ESG statement may have a very different impact on investors depending on the company's business model.
What Companies Should Do
As BRSR reporting becomes increasingly important, companies should strengthen their internal controls around sustainability disclosures.
Important measures include:
1. Verify ESG Data
Companies should ensure that sustainability figures are supported by reliable records and internal verification.
2. Review Material Claims
Statements that could materially influence investors should receive particular scrutiny.
3. Strengthen Board Oversight
Boards should understand the ESG information being approved and published.
4. Manage Assurance Conflicts
Third-party assurance providers should have appropriate expertise and independence.
5. Avoid Selective Disclosure
Companies should ensure that important negative information is not deliberately omitted while positive sustainability achievements are highlighted.
The Broader Regulatory Message
The development of ESG investing means that sustainability disclosures are increasingly becoming part of the information ecosystem of India's capital markets.
As investors rely more heavily on these disclosures, regulators may need to ensure that greenwashing is treated seriously where it crosses the line into conduct capable of misleading investors.
The key distinction should remain between ordinary reporting errors and material, misleading conduct capable of affecting securities-market decisions.
Key Takeaways
- Greenwashing involves misleading or incomplete representations about sustainability performance.
- India's BRSR framework has made ESG information increasingly relevant to listed companies.
- Not every ESG reporting error will automatically constitute securities fraud.
- Materiality and the potential to induce investors to deal in securities are important considerations.
- PFUTP may be a more appropriate enforcement mechanism for serious greenwashing than routine LODR penalties.
- Third-party assurance and board oversight are important safeguards.
- Industry context can affect the materiality of an ESG misstatement.
- Serious greenwashing can potentially affect investor confidence and market integrity.
- Companies should strengthen internal controls over ESG disclosures.
Conclusion
Greenwashing is increasingly becoming a securities-market concern rather than merely a sustainability issue.
As ESG information becomes more relevant to investment decisions, misleading sustainability disclosures can potentially distort how investors assess companies and allocate capital.
India's existing regulatory framework provides multiple routes for dealing with disclosure failures. However, where misleading ESG information is material and capable of influencing investors, the PFUTP framework may offer the most direct mechanism for addressing the conduct as securities fraud.
For listed companies, the message is clear: BRSR reporting should not be treated as a routine compliance exercise. Sustainability disclosures increasingly form part of the information on which the market relies, making accuracy, transparency and reliable assurance essential to investor confidence.
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