According to a 2023 survey discussed in Global Executives Say Greenwashing Remains Rife in the WSJ, executives think greenwashing is widespread: almost “three-quarters of executives said most organizations in their industry would be caught greenwashing if they were investigated thoroughly.” Moreover, almost “60% say their own organization is overstating its sustainability methods.” However, the article suggested, although some companies may be intentionally overstating their progress, for the most part, the greenwashing is more benign: companies set their sustainability goals but didn’t have a “concrete plan” to achieve them or reliable data to measure them. According to the survey, 85% of executives believe that “customers and clients are becoming more vocal about their preference for engaging with sustainable brands,” creating more impetus for sustainability initiatives. By the same token, these external influences also create more pressure for greenwashing. The article reports that the risks related to greenwashing are increasing, with the threat of potential “crackdowns.” (See this PubCo post.) Last week, the SEC charged Keurig Dr Pepper with making inaccurate statements in its Forms 10-K for fiscal 2019 and 2020 regarding the recyclability of its K-Cup beverage pods used to make coffee and other beverages in Keurig’s single-serve brewing systems. According to the Associate Director of the SEC’s Boston Regional Office, “Public companies must ensure that the reports they file with the SEC are complete and accurate….When a company speaks to an issue in its annual report, they are required to provide information necessary for investors to get the full picture on that issue so that investors can make educated investment decisions.” To settle the SEC’s charges, Keurig agreed to pay a $1.5 million civil penalty. Commissioner Hester Peirce had a few words to say in dissent.
According to the SEC’s Order, back in 2014, Keurig’s Sustainability Report announced several sustainability goals, one of which was to make recyclable, by 2020, 100% of the pods that it manufactured for use in its coffee brewing systems. Keurig’s coffee systems business segment represented a significant percentage of Keurig’s net sales across all of its business segments and, in fiscal 2019, sales of pods represented a substantial proportion of net sales in that segment. From its research conducted back in 2016, Keurig was aware that, for certain consumers, environmental issues were a significant concern when deciding whether to purchase a Keurig brewing system.
So Keurig looked into ways to make its pods recyclable. One way, it discovered, was to make the pods out of polypropylene number 5 plastic (“PP5”) and sell them in packaging that included specific consumer recycling instructions. And, by the end of 2020, Keurig stated, all the pods that it manufactured for sale in the U.S. and Canada were made of PP5.
But, according to the Order, a concern arose that small items, like pods, might not be processed and recycled at recycling facilities. To address that concern, Keurig performed tests at various recycling facilities, tagging pods with tracking chips and using radio frequency identification readers to follow movement of the pods through the facility to their ultimate destination to determine if the pods were processed and sorted correctly. The tests showed that the pods could typically be successfully separated out, sorted into groups and made available for sale for further processing and reuse.
But was it a financially viable process for recycling companies? Maybe not so much. After completion of the testing process, the Order alleged, Keurig received “significant negative feedback…regarding the commercial feasibility of curbside recycling of pods at that time” from two of the largest recycling companies (including one with the most high-tech equipment), operating over a third of U.S. recycling facilities. They contended that there was just “not a sufficient benefit for small format materials, and/or hard-to-recycle materials—including K-Cup pods—to make the financial case for inclusion as part of curbside recycling programs.” These recycling companies also conveyed to Keurig that “they did not presently intend to accept pods at their own recycling facilities.”
This negative feedback notwithstanding, in Keurig’s Forms 10-K for fiscal 2019 and 2020, the Order alleged, Keurig reported that “we have conducted extensive testing with municipal recycling facilities to validate that [pods] can be effectively recycled.” In its Form 10-K for 2020, Keurig also added that it was continuing “to engage with municipalities and recycling facilities to advance the quantity and quality of recycled polypropylene and have committed $10 million toward the advancement of polypropylene recycling in the U.S. through the Polypropylene Recycling Coalition….”
But it wasn’t only what Keurig said; just as importantly, it was what it didn’t say. The SEC charged that “Keurig’s statements in these Forms 10-K that its recyclability testing had validated that pods could be ‘effectively recycled’ were incomplete and inaccurate because they did not also disclose the negative feedback received from recycling companies involved in the testing concerning the recyclability of pods.” The Order noted that, by contrast, starting in its Form 10-K for fiscal 2021, Keurig omitted mention of the recyclability testing. Apparently, to the SEC, one of the implicit underpinnings of “effectively recyclable” was that recycling companies would actually accept the pods for recycling, and the explicit refusal of two of the biggest recyclers participating in the testing to accept pods for recycling—for whatever reason—threw sand in the gears. As a result, the SEC claimed, omission of information known to the company about the negative feedback made the statements inaccurate or misleading.
The SEC charged Keurig with violation of Section 13(a) of the Exchange Act and Rule 13a-1 thereunder, which requires reporting companies to file complete and accurate annual reports. Keurig agreed to pay a civil money penalty of $1.5 million.
According to Reuters, a Keurig spokesperson “said the company is pleased to have resolved the matter and its K-Cup pods are made from a recyclable plastic that is widely accepted at curbside recycling systems across North America. ‘We continue to encourage consumers to check with their local recycling program to verify acceptance of pods, as they are not recycled in many communities.’”
Commissioner Peirce dissented. She likened the Keurig statement to “a car company’s claim—proven by company speed tests—that its top-of-the-line sports car can go from 0-60 MPH in 2.9 seconds” although “the company knows that its more conservative drivers do not press the pedal to the metal.” Is that claim then really misleading, she asked? Won’t the “disclosure standard embodied in this settlement…expose companies to endless second-guessing by the Commission unless they pad any statements they do make with a mountain of caveats”?
What does it mean to be “effectively recyclable”? In her view, the SEC had misinterpreted the Keurig statement: “The Commission both misreads Keurig’s statement and overreacts to its own misreading. The pods were recyclable: Keurig chose a type of plastic that was recyclable and ran tests to show that the pods could be recycled. That claim is all Keurig’s statements reasonably should be read to say. Branding Keurig’s Forms 10-K as incomplete or inaccurate because Keurig did not also disclose that two recycling companies ‘did not presently intend to accept pods’ for ‘commercial feasibility’ reasons misreads Keurig’s statement that the pods could be recycled as an implicit assertion that the pods would be recycled.” The SEC, she contended, was reading way too much into the word “effectively.” To the SEC, she argued, the pods could not be “effectively” recycled because two recycling companies balked at accepting Keurig’s pods for curbside recycling. But, she asked, would the SEC have also concluded “that the pods could not be ‘effectively’ recycled if all recycling companies accepted them, but most consumers simply threw them in the trash bin because it was easier? In both cases—the recycling company seeking profits and the consumers seeking convenience—the pods could be effectively recycled, but intervening decisions by a third-party meant that it was probable that they would not be recycled. The former fact is not rendered false or misleading by the latter consequence of the intervening decision.”
And now to the SEC’s overreaction. Beyond the interpretive issue, Peirce observes that the “Order nowhere states that [the statements] were material.” The closest the Order comes, she suggests, is in statements “that pod sales were a material portion of Keurig’s revenue in 2019” and perhaps that, in 2016, environmental concerns were “a significant factor, among others” in persuading consumers to buy coffee brewing systems. But what about in 2019? And even if recyclability was material to consumers, does that necessarily mean it was material to investors?
In conclusion, Peirce points out that the SEC rarely brings “standalone Section 13(a) and Rule 13a-1 charges.” To her, the “absence of other charges—such as charges under Exchange Act Section 10(b) and Rule 10b-5, Securities Act Section 17(a), or even under Exchange Act Rule 12b-20, which requires issuers to add to their statements or reports such further material information, if any, as may be necessary to make the required statements, in the light of the circumstances under which they are made, not misleading”—was particularly telling. In her view, Keurig’s recyclability statements would not have supported those charges because the statements were not “false or misleading, which means there is no basis for Section 13(a) and Rule 13a-1 charges either. The Commission’s pedantic parsing of Keurig’s recyclability statements and its $1.5 million penalty do little to disguise the weakness of this case.”
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