ESG Claims in Private Equity Investment Documents: Mapping Liability for Sustainability Statements

Introduction : While there is nothing new in private equity funds featuring ESG-related commitments in their marketing materials, an increasing number of funds are now embedding ESG-related undertakings within the operative documents. This includes indicative ESG targets within term sheets, specific ESG-related exclusions and disclosure covenants inside letters and disclosure of portfolio-level ESG metrics within fund reports to LPs.

The practical significance of this development lies in the fact that the ESG-related claims no longer remain at the level of marketing puffery but instead may constitute representations and warranties subject to remedies in the event of misrepresentation. In the U.S. and U.K., regulators have already taken action against private equity firms for making unsubstantiated ESG claims in marketing materials or during investor presentations. In India, regulators have issued disclosure requirements to listed companies which indirectly impact upon value chain partners, although the enforcement environment remains less developed compared to the U.S. and U.K. This blog considers the question of who bears liability for ESG-related statements made by private equity funds and advisers in their documentation and concludes with practical guidance for transactional lawyers.

Legal Provisions

A. United States

Registered investment advisers are obliged to comply with antifraud provisions of Sections 206(1) and 206(2) and Rule 206(4)-7 of the Investment Advisers Act, 1940. In particular, advisers must have written compliance policies that provide for the strategies which they make available to their clients, including ESG strategies. The Climate and ESG Task Force, established by the SEC in March 2021, has pursued its mandate by focusing on the ESG-fund disclosure rules, not a separate ESG statute. A proposed rule for standardized ESG fund disclosures was abandoned in 2025; thus, Rule 206(4)-7 remains the main tool for enforcing ESG-related rules.

B. United Kingdom and European Union

The FCA’s ESG 4.3.1R anti-greenwashing rule came into force on 31 May 2024. It requires that any claims made by FCA-authorised undertakings relating to the features of a product or service to which they relate in a sustainability context are consistent with those features, as well as being fair, clear, and not misleading to the target audience. At the same time, EU Regulation 2019/2088, Sustainable Finance Disclosure Regulation, contains requirements for disclosing information about the sustainability characteristics of certain investment products, which are relevant to the EEA. This Regulation, which also indirectly affects non-EU sponsors marketing their products within the EEA, introduces requirements for Article 8 and Article 9 funds, which relate to specific disclosure rules.

C. India

India does not have a specific PE-focused ESG statute. The SEBI Business Responsibility and Sustainability Reporting (“BRSR”) framework, issued in May 2021 and amplified through the BRSR Core circular dated July 2023, imposes certain phased ESG disclosure and assurance obligations on the largest listed entities and, by virtue of the value-chain reporting requirements, indirectly on their suppliers and counterparties including PE owned portfolio companies transacting with them.

The default laws governing misrepresentation in various transactions are the Indian Contracts Act, 1872 (Sections 17 and 18) and the fiduciary obligations under the SEBI (Alternative Investment Funds) Regulations, 2012.

Legal Analysis

A. Term Sheets: From Puffery to Representation

Term sheets are typically indicative and non-binding, and ESG language inserted thereinto is generally aspirational. Once incorporated into the binding LPA or a side letter, however, aspirational language ceases to be indicative. Stated differently, ESG representations, warranties, covenants and other commitments made at the term-sheet stage cease to be mere "marketing language" when they resurface, in substantially the same form, in the LPA's representations or a side letter, as discussed below. Indeed, by virtue of the fact that the term sheet's language is carried forward into the LPA or side letter, it necessarily informs such documents' interpretation. Put yet another way, sponsors that fail to narrow the language of ESG commitments in the LPA or side letter to something less sweeping than what appeared in the term sheet may well find themselves bound by the more expansive phrasing at the term-sheet stage.

B. Side Letters: Bespoke Covenants, Concentrated Exposure

Side letters have become the preferred vehicle for capturing investor-specific ESG-related obligations, for example, negative screens, adherence to the UN Principles for Responsible Investment or the UN Global Compact, and customized reporting on principal adverse impacts. By virtue of being a side agreement, which is individually negotiated, any failure to perform under such a letter exposes the sponsor to direct contractual liability to the investor-counterparty. In addition, most-favoured-nation clauses in such letters, which are common in practice, can exponentially increase the potential liability surface of the sponsor, as any ESG-related concession granted to one investor would be applicable to all other MFN investors who have such a clause in their letters, thereby creating additional contractual liability exposure for the sponsor, for example, in the case of reporting defaults.

C. Fund Reports: Ongoing Representations

Periodic fund reports that quantify ESG performance are much closer to ongoing representations than to isolated statements, and in any case, US enforcement practice overwhelmingly points to a policies-and-procedures theory of liability, not a theory based on proving that the defendant made a knowingly false statement. In each of the cases described below, the SEC’s enforcement proceeding against the fund adviser was based on the fact that the adviser’s ESG evaluation procedures did not actually reflect the practices described in its disclosures.

D. The Verification Gap

A weakness common to PE ESG reporting is the potential lack of assurance over reported information. For listed companies, assurance of BRSR Core metrics is becoming mandatory in India; it is less common for unlisted PE-owned portfolio companies to be subject to, or covered by, similar requirements. Moreover, ESG information reported to limited partners (LPS) typically lacks independent scrutiny. If a fund’s report significantly diverges from the reality of its portfolio’s practices, the absence of such assurance may hinder the fund’s ability to mount a reasonable defense.

E. Allocating Responsibility

The primary liability is borne by the sponsor: the general partner or investment adviser, who makes the representations and is in any case the first port of call for regulators and/or limited partners under either the Advisers Act or English or Indian law general agency and fiduciary principles. The portfolio companies are the repositories of information on the portfolio’s ESG compliance but will seldom if ever be directly obliged to the limited partners and thus be second parties to the fund’s indemnities. The ESG advisers and verifiers, by contrast, are in a more precarious position, as the liability exposure is determined by whether the limited partner can be said to have relied on the advice or report of a verifier in its investment decision-making. Thus, in India, the doctrine of negligent misrepresentation is not as firmly established in law as it is in England and the US, and so a private individual or entity will find it comparatively more difficult to rely on the tort to action a claim against a third-party ESG adviser or verifier.

Relevant Case Laws

In the Matter of Goldman Sachs Asset Management, L.P. (SEC Administrative Proceeding, File No. 3-21245, Nov. 22, 2022): The SEC found that GSAM's ESG mutual funds and a separately managed account strategy lacked consistently followed written policies for evaluating ESG factors between April 2017 and February 2020, violating Section 206(4) of the Advisers Act and Rule 206(4)-7. GSAM consented to a $4 million penalty without admitting or denying the findings. Liability turned on internal process failure rather than a single false statement, a template later followed in subsequent actions.

In the Matter of BNY Mellon Investment Adviser, Inc. (SEC Administrative Proceeding, May 2022): The SEC found that the adviser represented that all investments in certain funds had undergone an ESG quality review when this was not consistently accurate, resulting in a $1.5 million penalty. The matter shows that even a narrow factual overstatement about internal review coverage can constitute an actionable misrepresentation, independent of broader strategy claims.

In the Matter of WisdomTree Asset Management, Inc. (SEC Administrative Proceeding, Oct. 2024): The SEC found that WisdomTree misrepresented its funds' investment strategies to its board of trustees and to investors, resulting in a $4 million penalty; the funds held investments investors would not have expected given WisdomTree's disclosures. The case shows ESG misrepresentation exposure extends to statements made to a fund's own governance body, not only external marketing.

DWS Investment Management Americas Inc. (SEC Order, Sept. 2023) and related German regulatory proceedings: The SEC imposed a $19 million penalty on DWS's US adviser for materially misleading statements about ESG integration, following allegations first raised by the firm's former sustainability officer and a parallel German investigation. [Verification Required: exact SEC order/file number and German proceeding citation.] The matter remains among the largest ESG-related SEC penalties and shows how one set of ESG representations can generate parallel civil, regulatory, and criminal exposure.

Practical Implications

For sponsors, the compliance-rule enforcement pattern reflects an increased liability risk over ESG governance infrastructure, including policy design and consistent implementation, and attendant audit trail, in addition to ESG-related commitments per se. For limited partners, scrutiny of side-letter ESG covenants requires enhanced monitoring of MFN-type cascading effects, and potentially prolonged reporting regimes, which may stretch far beyond the tenure of individual LPs. For portfolio companies, the BRSR-based value-chain sustainability reporting trajectory in India, suggests a similar ESG data collection compliance risk across unlisted suppliers and holdings, beyond direct listings. For advisers and verifiers, the expanded enforcement perimeter creates both markets and liabilities, as a confluence of US, UK, and India disclosure rules now target process, not merely outcomes, thereby linking ESG-related commitments to their effective implementation.

Conclusion

What the US, UK and India have in common is that the sustainability statements in the portfolio company documents of their private equity funds are tested against reality in determining fund level ESG credentials, with the largest risks being associated with the discrepancy between the fund’s declared approach and its actual practices, where the difference often lies in what is disclosed versus what can be demonstrated.

India’s capital market infrastructure for private funds is still relatively nascent, so while the value chain for BRSR Core indicates that unlisted PE owned portfolio companies will not be entirely exempt from similar scrutiny for much longer, the only effective shield for now for sponsors of private funds in India, until more detailed sector specific guidance emerges, is precision in disclosures.

ESG Drafting Guidance

• Anchor every ESG representation to a specific, disclosed methodology, and resist the temptation to carry aspirational language from term sheets into LPAs or side letters through binding language, unless it has been tightened

• When negotiating side-letter ESG commitments, use quantified, time-bound language, and make sure to include an express basis-of-representation clause specifying the limitations of the data sources

• Where applicable, tie down cross-border fund-of-funds MFN elections by ESG commitments, because the aggregation of investors’ demands may turn a suitor-specific concession into an industry-wide standard

• Keep an internal audit trail demonstrating that the disclosed ESG policies have been followed, since enforcement has so far focused on the adherence to procedures rather than on the aspirations of the language per se

• If the fund provides ESG data at the portfolio company level, but without third-party assurance, disclose this qualification explicitly, since failures to report on ESG have tended to be interpreted as implicit certifications of sustainability performance

Author: Resham Jha in case of any queries please contact/write back to us via email to content@khuranaandkhurana.com or at  Khurana & Khurana, Advocates and IP Attorney

Endnotes / References

1. Investment Advisers Act of 1940, 15 U.S.C. § 80b-6(1)-(2).

2. 17 C.F.R. § 275.206(4)-7 (Compliance Procedures and Practices Rule).

3. U.S. Securities and Exchange Commission, In the Matter of Goldman Sachs Asset Management, L.P., Investment Advisers Act Release No. 6189, File No. 3-21245 (Nov. 22, 2022).

4. U.S. Securities and Exchange Commission, In the Matter of BNY Mellon Investment Adviser, Inc. (May 2022) [Verification Required: precise release number].

5. U.S. Securities and Exchange Commission, In the Matter of WisdomTree Asset Management, Inc. (Oct. 2024) [Verification Required: precise release number].

6. U.S. Securities and Exchange Commission, In the Matter of DWS Investment Management Americas Inc. (Sept. 2023) [Verification Required: precise release/file number and cross-reference to German BaFin proceedings].

7. FCA Handbook, ESG 4.3.1R (Anti-Greenwashing Rule), in force 31 May 2024; FCA, Policy Statement PS23/16, Sustainability Disclosure Requirements (SDR) and Investment Labels (Nov. 2023); FCA, FG24/3, Finalised Non-Handbook Guidance on the Anti-Greenwashing Rule (Apr. 2024).

8. Regulation (EU) 2019/2088 of the European Parliament and of the Council on Sustainability-Related Disclosures in the Financial Services Sector (SFDR), arts. 8-9.

9. SEBI, Business Responsibility and Sustainability Reporting Circular, SEBI/HO/CFD/CMD-2/P/CIR/2021/562 (May 10, 2021).

10. SEBI, BRSR Core – Framework for Assurance and ESG Disclosures for Value Chain, Circular No. SEBI/HO/CFD/CFD-SEC-2/P/CIR/2023/122 (Jul. 12, 2023).

11. SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, reg. 34(2)(f).

12. Indian Contract Act, 1872, ss. 17-18 (India).

13. SEBI (Alternative Investment Funds) Regulations, 2012 (India).

14. U.S. Securities and Exchange Commission, Press Release 2022-209, SEC Charges Goldman Sachs Asset Management for Failing to Follow its Policies and Procedures Involving ESG Investments (Nov. 22, 2022).