Rule 10b-5 at the Intersection of Greenwash and Green Investment: The Problem of Economic Loss

Abstract

Despite the recent growth of socially responsible investment (“SRI”), there is little evidence supporting its central claim: that it can affect a company’s cost of capital, thus inducing good behavior. Accordingly, this Note questions whether there are legal ramifications for a company that misrepresents its environmental and social practices, when such practices in fact do not affect the expected future cash flows of the company, the company’s cost of capital, and in turn, the price of the company’s stock. SEC Rule 10b-5 provides a private right of action for securities fraud, but requires that an investor sustain an economic loss as a result of a company’s material misrepresentation. If SRI cannot affect a company’s cost of capital, and ultimately its stock price, then Rule 10b-5 is unavailable—the economic loss element of the claim cannot be satisfied. The human motivations for SRI are complex, however, and financial professionals continue to make investment decisions based on companies’ social and environmental representations, which the companies continue to make, perhaps, to gain reputational benefit in the eyes of consumers. For these reasons, this Note argues that there should be a legal remedy for “green misrepresentations” that do not cause a drop in share price. It goes on to suggest that preventative measures be implemented because, regardless of the economic harm to the investor, there is a direct moral harm in being misled into supporting environmental practices counter to one’s beliefs, and an opportunity cost in foregoing investments that produce real-world benefits for the environment and society.