K-Cup Disclosures Cost Keurig $1.5M
Well here’s news that will wake up all you sustainability reporting enthusiasts: the Securities and Exchange Commission just fined coffee giant Keurig Dr. Pepper $1.5 million for making misleading disclosures about the recyclability of those little K-cups.
The SEC announced the enforcement action Tuesday morning. According to the settlement order, Keurig stated in its annual reports for 2019 and 2020 that its testing with recycling facilities “validate[d] that [K-Cup pods] can be effectively recycled.” Except, Keurig did not disclose that two of the largest recycling companies in the United States had expressed “significant concerns” about the commercial feasibility of curbside recycling of K-Cup pods and didn’t intend to accept the pods for recycling.
That, the SEC said, qualified as a material omission to investors. While neither admitting or denying the findings in the order, Keurig agreed to a cease-and-desist order (it had stopped talking about the recyclability of K-Cups by its 2021 report anyway) and to pay the $1.5 million civil penalty.
This case is interesting because SEC officials had warned companies several years ago to start paying attention to sustainability disclosures — and now, right on schedule, we have an enforcement action demonstrating the point. To the best of my recollection, this is the first sanction we’ve seen over sustainability disclosures.
Filers can’t say they were never warned. In early 2021, then-SEC commissioner Allison Herren Lee delivered several speeches and statements stressing that the SEC would begin reviewing the sustainability disclosures that companies made, to determine the accuracy of those disclosures and the basis upon which those disclosures were made.
For example, if a company promised in 2018 to be carbon-neutral by 2024, what statements was it making along the way to chart its progress? Or if a company made statements about the recyclability of its products — well, how did the company make that determination? Based on what evidence?
Now we have an example of what the SEC will do when it believes the company’s sustainability disclosures don’t stand up to scrutiny.
K-Cup Recyclability Promises
As described in the SEC settlement order, Keurig’s predicament started back in 2014 when the company was still Keurig Green Mountain. That year, the company published a sustainability report promising that 100 percent of its K-cup pods would be made of recyclable material by 2020.
This was supposedly important stuff for Keurig. Consumer research in 2016 indicated that “for certain consumers, environmental concerns were a significant factor, among others, considered when deciding whether to purchase a Keurig brewing system,” as the SEC put it. To keep those environmentally conscious consumers happy, and to meet that K-cup recyclability goal, Keurig said all K-cups would be manufactured with a recyclable resin called PP5 by the end of 2020.
Keurig then began testing the K-cups in actual recycling plants — and while those tests did prove that the K-cups could be recycled, two of the largest recycling companies in the United States “conveyed significant negative feedback to Keurig regarding the commercial feasibility of curbside recycling of pods at that time.” The companies said they would not be accepting K-cups at their facilities.
Now come the questionable disclosures. Despite that resistance from the big recyclers, Keurig’s 2019 annual report (published in February 2020) stated: “We have conducted extensive testing with municipal recycling facilities to validate that [pods] can be effectively recycled.” The company said the exact same thing again in its 2020 annual report published one year later.
At no point, however, did Keurig include the negative feedback from the recyclers. That omission made Keurig’s sentence incomplete and inaccurate, the SEC said, and here we are.
We should also note that Keurig dropped any reference to its recyclability testing in the annual reports for 2021 and 2022 — which were filed after Lee started warning companies that a crackdown on sustainability disclosures was coming.
Republican SEC commissioner Hester Peirce disagreed (as she so often does) with the sanction against Keurig. She released her own statement about the case, noting that the K-cups were indeed recyclable, as Keurig said. She then continued:
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 … 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.
Peirce raises a good point. Maybe SEC lawyers could’ve addressed it, but they just ignored it; and Keurig decided to settle rather than spend even more money trying to see who might prevail.
Lessons on Sustainability
The obvious question here is whether we’ll see more such enforcement from the SEC, and on other sustainability disclosures that companies might make: reductions in carbon emissions, promises of renewable energy usage, pledges for fair labor practices, and the like. Which brings us to a perennial concern I have about sustainability disclosures.
Who confirms all this stuff before it goes into the 10-Q or some other statement to the investing public?
I’ve written before about the rise of so-called “ESG controller” jobs, where someone (usually somebody from internal audit) is charged with confirming the data behind a company’s sustainability disclosures — usually because until quite recently, nobody at said company paid any attention to whether those sustainability factoids were indeed factual.
Those jobs, and the internal reporting systems necessary to capture and validate ESG data before they go into an investor communication, are only going to become more important in the future. Even if the Keurig enforcement action isn’t a perfect example of the risk here (because, let’s be honest, Peirce raises a good counter-argument), more enforcement actions will follow. SEC reporting teams, plan accordingly.