SEC Extends Comment Period for Proposed Rules on ESG Related Disclosures

The Securities and Exchange Commission has extended the public comment period on the proposed rulemaking to enhance and standardize climate related disclosures until June 17, 2022.

As a regulation that has been described as a single act that “will change the way business and the economy function,” the ramifications of a short “notice and comment” process, should not be ignored.

Specifically, the SEC extended the comment period for a release proposing amendments to its rules under the Securities Act of 1933 and Securities Exchange Act of 1934 that would require companies to provide certain ESG information in their registration statements and annual reports. The comment period for the release was originally scheduled to close on May 20, 2022. The new comment period will end on June 17, 2022.

The SEC has recently departed from its own precedent on major proposed rules for notice and comment of 60 days after publication in the Federal Register, shortening the comment period to only 30 days after publication in the Federal Register. With the several new final rule proposals issued on February 9 and 10, the SEC limited the public comment period to “whichever is greater” 30 days after publication in the Federal Register or 60 days after posting the notice of proposed rulemaking on the Commission’s website. However, the rule proposals with 30 day comment periods recently issued by the SEC have been published in the Federal Register, on average, 13 days after being posted on the SEC website. Thus, applying the “whichever is greater” standard to those rule proposals would have resulted in only 17 additional days, on average, for public notice and comment on each rule.

After concern was raised by more than a few policy making public officials and at least one SEC Commissioner, the SEC announced this delay intended to allow interested persons additional time to analyze the issues and prepare their comments, on this more than 500 page proposed rule, which we characterized in our earlier blog post, You Should Comment on the SEC’s Transformative Proposed ESG Rule, as being so sweeping as to literally “alter the trajectory of the U.S. economy.”

The SEC has requested comment on a release proposing amendments to its rules under the Securities Act and Exchange Act that would require companies to provide certain climate related information in their registration statements and annual reports. The proposed rules would require information about a company’s climate related risks that are reasonably likely to have a material impact on its business, results of operations, or financial condition.

Significantly, the required information about climate related risks would also include, for the first time, disclosure of a company’s greenhouse gas emissions, which the SEC suggests is a good metric to assess a business’ exposure to such risks (.. which by mandating disclosure of Scope 3 GHG emissions will by implication include not only public companies, but also disclosures by the many other businesses upstream and downstream of a public company’s activities).

In addition, under the proposed rules, certain climate related financial metrics would be required in a company’s audited financial statements.

The comment period for the release was originally scheduled to close on May 20, 2022. The SEC, in its announcement said it now believes that providing the public additional time to consider and comment on the matters addressed in the release would benefit the Commission in its consideration of final rules. Accordingly, the Commission extended the comment period for Release Nos. 33-11042; 34-94478, “The Enhancement and Standardization of Climate-Related Disclosures for Investors,” until June 17, 2022.

The scope and comment process for the proposed rules remains as stated in the original Federal Register notice of April 11, 2022.

We expect an active comment period and that a final rule, very much like that proposed, will be issued in 2022.

The final regulation will change the way business and the economy function. Like the analogy of building the plane while flying it, you should seek to advantage your business by commenting while you also prepare to make GHG emission disclosures. You can learn more about the SEC regulation and comment directly from the link in our blog post above.

ESG has become such a large component of my law practice that I am now collaborating with a fabulous group of attorneys in ESG Legal Solutions, LLC, a new law consulting firm. Nancy Hudes and I are now publishing a new blog at www.ESGLegalSolutions.com (.. yes, this blog will continue). This post originally appeared in that blog. If we can assist you or someone you work with in ESG strategy and solutions, from policy to project implementation, do not hesitate to reach out to me.

A Quick Science Refresher on Greenhouse Gas

With the federal government and state of Maryland each having announced within days of each other, the mandated disclosure of greenhouse gas (GHG) emissions, we have received, maybe not surprising, many calls in the last two weeks inquiring “what are GHGs?” and “what are Scope 3 GHG emissions (.. which are proposed to be a component of the SEC required disclosures but not the Maryland program)?”

On the cusp of these two regulatory programs, pushing broad sectors of the economy to the next frontier in innovation, SEC Climate Risk Rule is Transformative at a Cost and Maryland Resets its Trajectory with Greenhouse Gas Reduction Law, a quick 800 word refresher about GHG emissions makes an ideal blog post.

But make no mistake, the larger issue is the regulation for the first time of GHGs (including carbon) which will literally change the structure of the global economy, our political order, market capitalism and even our biological selves.”

Simply put, gases that trap heat in the atmosphere (.. maintaining the Earth’s temperature and contributing to global warming) are called greenhouse gases. The U.S. EPA tells us succinctly, ..

Carbon dioxide is the primary greenhouse gas emitted through human activities. In 2020, carbon dioxide accounted for about 79% of all U.S. greenhouse gas emissions from human activities. (Yes, water vapor is the most abundant GHG in the atmosphere, but it is a different animal and water vapor does control Earth’s temperature but, there is never a change in the amount of water on Earth.)

In 2020, methane accounted for about 11% of all U.S. greenhouse gas emissions from human activities. Human activities emitting methane include leaks from natural gas systems and the raising of livestock.

In 2020, nitrous oxide accounted for about 7% of all U.S. greenhouse gas emissions from human activities. Human activities such as spreading fertilizer, fuel combustion, wastewater management, and industrial processes are increasing the amount of nitrous oxide in the atmosphere.

Since the Industrial Revolution small amounts of other man made gases have been added to the mix.

Concentration, or abundance, is the amount of a particular gas in the air. Larger emissions of greenhouse gases lead to higher concentrations in the atmosphere. Greenhouse gas concentrations are measured in parts per million, parts per billion, and even parts per trillion. One part per million is equivalent to one drop of water diluted into about 13 gallons of liquid.

Surprising to some, carbon dioxide emissions in the U.S. decreased by about 8% between 1990 and 2020. Since the combustion of fossil fuel is the largest source of greenhouse gas emissions in the United States, changes in emissions from fossil fuel combustion have historically been the dominant factor affecting total U.S. emission trends. Changes in GHG emissions from fossil fuel combustion are influenced by many factors, including population growth, economic growth, changing energy prices, new technologies, changing behavior, and seasonal temperatures. In 2020, the decrease in carbon dioxide emissions from fossil fuel combustion corresponded with a decrease in energy use as a result of decreases in economic, manufacturing, and travel activity in response to the Coronavirus pandemic, in addition to a continued shift from coal to less carbon intensive natural gas in the electric power sector.

Today, without new technologies, there is little dispute the most effective way to reduce GHG emissions, including carbon dioxide, is to reduce fossil fuel consumption.

But reduce what to what? EPA suggests there were 5,981 million metric tons of greenhouse gas emissions in 2020. One million metric tons is equal to about 2.2 billion pounds, or 1 trillion grams. For comparison, a small car is likely to weigh a little more than 1 metric ton. Thus, a million metric tons is roughly the same mass as 1 million small cars!

And to have an impact those numbers need to be reduced. Appreciate that Scope 1 greenhouse (GHG) emissions are direct emission that occur from sources that are controlled or owned by an organization (e.g., emissions associated with fuel combustion in boilers, furnaces, vehicles), but are modest in abundance.

Scope 2 emissions, which are generally greater in contribution, are indirect GHG emissions associated with the purchase of electricity, steam, heat, or cooling. Although scope 2 emissions physically occur at the facility where they are generated, they are accounted for in an organization’s GHG inventory because they are a result of the organization’s energy use.

And Scope 3 emissions are the result of activities from assets not owned or controlled by the reporting organization, but that the organization indirectly impacts in its value chain. Scope 3 emissions include all sources not within an organization’s scope 1 and 2 boundary. (The scope 3 emissions for one organization are the scope 1 and 2 emissions of another organization.) Scope 3 emissions, also referred to as value chain emissions, often represent the majority of an organization’s total GHG emissions, both upstream and downstream of the organization’s activities.

With that refresher you can now ‘talk the talk’ of GHG emission regulation including in the context of this, now emergent to regulate GHGs. And please consider being an active participant in the discussions including commenting on proposed regulation, including as suggested in our post last week, You Should Comment on the SEC’s Transformative Proposed ESG Rule.

And we are happy to talk with you about how the new ESG laws, including the associated opportunities and risks in the mandates requires business disclosures of GHG emissions. We have been doing this GHG work since 2005.

Because, as we see it, we can repair the world and exponential growth across the globe can continue so long as in a rush to save the planet, we don’t weaponize GHG emissions and turn the regulations on ourselves destroying civilization and our very way of life.

You Should Comment on the SEC’s Transformative Proposed ESG Rule

Note, after this was posted, the SEC extended the public comment period on the proposed rulemaking to enhance and standardize climate related disclosures from the originally scheduled close date of May 20, 2022 until June 17, 2022.

We posted some weeks ago when the U.S. Securities and Exchange Commission issued a long awaited proposed new ESG rule to mandate climate risk disclosures by public companies and other businesses in their supply chains.

You could read the proposed rule that takes more than a ream of paper to print or read our 600 word post, SEC Climate Risk Rule is Transformative at a Cost. Given the impact that this rule will have on the economy not to mention individual businesses in America, you should comment to the SEC. Comments are due before May 20.

We are drafting comments to the SEC on behalf of clients to the proposed, “The Enhancement and Standardization of Climate-Related Disclosures for Investors” rule. Leading by example, what follows is an edited version of the comment we personally offered the SEC.

Selecting a single matter to comment on in the more than 500 page document, the proposal to require registrants to provide certain climate related information in their registration statements and annual reports, including information about climate related financial risks and the like in their financial statements, the matter of sole greatest concern is that the proposed rule is made too narrow with the limitation on who may be a “GHG emissions attestation provider.”

The proposal appears to not acknowledge that, today, there are lawyers already providing these and associated services, including law firms and attorneys associated with this commenter’s law firm, who have provided law and non-law professional services in the GHG emissions and larger climate change space, for more than 10 years.

One can only speculate that as proposed, a whole new cottage industry of large accounting firm associated businesses would spring up to begin to calculate GHG emissions? Admittedly the proposed rule does not require the attestation be by a registered public accounting firm, but it leans hard in that direction.

As noted in the proposal itself, the regulation builds on the SEC’s previous rules and guidance on climate related disclosures, which date back to the 1970s. In 2010, the SEC published guidance for registrants on how the Commission’s existing disclosure rules may require disclosure of the impacts of climate change on a business or its financial condition.

Attorneys, including the attorney drafting this comment, have since 2010 undertaken the efforts to make law and non-law recommendations on the impact of climate change on an annual basis advising those with management oversight and board oversight, including advising their accounting firm representatives.”

Additionally, this attorney commenter has done this and similar work for organizations voluntarily making climate related disclosures and has recently begun working with business required to measure and report GHG emissions to the State of Maryland under that state’s new mandatory statute.

This attorney commenter is an environmental practitioner and widely recognized as an expert in climate change including GHG emissions, with significant experience in measuring, analyzing, reporting, and attesting to GHG emissions.

The proposal describes that the SEC “staff has reviewed more than a dozen studies of climate-related disclosures conducted by third parties,” and all or all but one was apparently from a large accounting firm, but none appear to have been from a law firm or attributed to an attorney.

One can quibble about the ability “to obtain reasonable assurance such that its GHG emissions disclosure receives the same level of assurance as its financial statements” and such is not at all certain. That is in many instances, the science on climate change may be playing catch up to the law? Additionally there are legitimate concerns about the time, inconvenience and expense associated with attempting to reach that level of certainty across the many sectors of the U.S. economy.

But the larger and more important matter is that attorneys are uniquely qualified to do this work and should be expressly including in any SEC final rule.

Attorneys regularly provide written “legal opinions of counsel” and are well organized (with ethical protections including matters of independence built into the profession by mandatory state ethical rules) to prepare and sign a GHG emissions attestation report, as a GHG emissions attestation provider (see, proposed 17 CFR 229.1505(b)).

Attorneys currently regularly do very similar climate change work not only for existing SEC required climate disclosures but giving opinions of counsel for other federal and state government instrumentalities, including possibly most often in the realm of green mortgage finance to HUD, Fannie Mae and Freddie Mac (.. accountants cannot provide those certifications).

So, specifically in response to the proposal request for comment 144., “no” to the extent such is inconsistent with attorneys at law being the GHG emissions attestation provider, the SEC should not require a registrant to obtain a GHG emissions attestation report that is provided by a GHG emissions attestation provider that meets specified requirements, as proposed.

In response to request for comment 145., “yes” to the extent such is inconsistent with attorneys at law being the GHG emissions attestation provider, yes additional guidance is needed with respect to the proposed expertise requirement to make clear that attorneys are within the coteries? The SEC should not instead include prescriptive requirements related to the qualifications and characteristics of an expert under the proposed rules.

In response to request for comment 146., “yes” to the extent such is inconsistent with attorneys at law being the GHG emissions attestation provider, yes the SEC could require the GHG emissions attestation provider to be independent with respect to the registrant, and any of its affiliates, for whom it is providing the attestation report, as proposed.

In response to request for comment 147., “yes” to the extent such is inconsistent with attorneys at law being the GHG emissions attestation provider, yes the SEC could specify that the factors the Commission would consider in determining whether a GHG emissions attestation provider is independent.

If there is a second concern in the 510 page proposed rule, it is matters of Scope 3 GHG emissions (those that are from assets not owned or controlled by the reporting organization but that the organization indirectly impacts) and that the SEC should sever from these disclosure requirements Scope 3 GHG emissions, which there is little good science to support and the structure and behavior of which cannot be systematically studied through observation or experiment under current circumstances.

This proposed rule may well alter the trajectory of the U.S. economy and to make this expansive and complex regulation efficacious while also reasonably frictionless, recognizing the role that attorneys are today playing, the final rule should expressly identify attorneys as possible GHG emissions attestation providers.

We expect an active comment period and that a final rule, very much like that proposed, will be issued by mid 2022. The resultant regulation will change the way business and the economy function. Like the analogy of building the plane while flying it, you should seek to advantage your business by commenting while also preparing to make GHG emission disclosures.

ESG has become such a large component of my law practice that I am now collaborating with a fabulous group of attorneys in ESG Legal Solutions, LLC, a new law consulting firm. Nancy Hudes and I are now publishing a new blog at www.ESGLegalSolutions.com (.. yes, this blog will continue). This post originally appeared in that blog. If we can assist you or someone you work with in ESG strategy and solutions, from policy to project implementation (.. including GHG emission disclosures in response to the new SEC rule), do not hesitate to reach out to me.

California Racial, Ethnic and LGBT Quotas for Company Boards Ruled Unconstitutional

Last Friday a California court ruled unconstitutional the state’s racial, ethnic, and LGBT quotas for corporate boards of directors. This now voided law had been an ideological lodestone for the “G” (governance) in ESG.

Superior Court judge, the Honorable Terry Green, granted the plaintiff’s motion for summary judgment without a trial in Robin Crest, et al. v. Alex Padilla (No.20ST-CV-37513), a lawsuit asking the court to declare the corporate board quota law unconstitutional under the U.S. and California constitutions.

The lawsuit filed October 2, 2020 on behalf of three California taxpayers, Robin Crest, Earl De Vires and Judy De Vires, sought to prevent California from enforcing Assembly Bill 979.  AB 979 required that boards of directors of California based, public domestic or foreign corporations satisfy racial, ethnic, and LGBT quotas by the end of 2021.

It was clear to observers that constitutional norms were being ignored even in advance of AB 979 being signed into law on September 30, 2020, when the new Corporations Code section 301.4 required public companies headquartered in California to have at least one board director who is from an “underrepresented community” .. defined as “an individual who self-identifies as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaska Native, or who self-identifies as gay, lesbian, bisexual, or transgender.”  The law also required additional board members from underrepresented communities by the end of calendar year 2022, depending on the total number of members on a company’s board. Only 301 of the 716 public companies headquartered in California complied with the law last year, according to the Secretary of State. Companies that violated the law could have been fined $100,000 for the first violation and $300,000 for subsequent violations.

Even as it was considered by the legislature, debate included that should this law be judicially challenged, a reviewing court would find it violates the Equal Protection Clause of the U.S. Constitution and California’s Constitution section 31, which broader than the equal protection clause, categorically prohibits discrimination and preferential treatment.”

The new law also flouted the U.S. Supreme Court’s Regents of the University of California v. Bakke 1978 decision which struck down race exclusive quotas as violative of the U.S. Constitution and the Civil Rights Act of 1964.  This case is prescient with the U.S. Supreme Court soon to hear a challenge to Harvard University’s (a private institution) admission policies that are claimed to discriminate against Asian Americas.

It is suggested that the same fate will likely befall Maryland’s similar Corporate Diversity Law, enacted as House Bill 1210 in 2021 and effective July 1, 2022, unless possibly the yet to be issued regulations somehow cure the quota ‘problem’ in the statute including having express set asides based on racial, ethnic and sexual preference.

Despite that these two state laws run afoul of constitutional protections, ESG will no doubt thrive.

No party in this case challenged that as it stands today, corporate board seats by and large belong to members of one race, sexual orientation, and gender identity.

And as the judge noted, in a society based as ours is on inclusion and equal opportunity, in 2022 those observations are concerning on their own terms. Additionally, many would agree a homogenous board is vulnerable to stagnant thinking and common assumptions; it is also less flexible in responding to challenges. This results in poorer business practices, less innovation, and ultimately less profit. A heterogenous board potentially avoids these pitfalls and generally leads to a healthier business that makes more money. So, the legislature’s enactment may have been intuitively sensical, but it ignored that we are a nation with constitutional protections of the individual.

Corporations Code § 301.4 violates the Equal Protection Clause of the California Constitution on its face. It was a poor fix to a real problem by state legislators.

ESG will flourish as companies address inequality, including unequal access, systemic racism, gender discrimination, and lack of inclusion in their efforts to repair the world, not only driven by the marketplace, but to do the right thing.

ESG has become such a large component of my law practice that I am now collaborating with a fabulous group of attorneys in ESG Legal Solutions, LLC, a new law consulting firm. Nancy Hudes and I are now publishing a new blog at www.ESGLegalSolutions.com (.. yes, this blog will continue). This post originally appeared in that blog. If we can assist you or someone you work with in ESG strategy and solutions, from policy to project implementation (.. including GHG emission disclosures in response to the new SEC rule), do not hesitate to reach out to me.

Rooney Rule Revised Provides ESG Opportunity

Last Monday the NFL announced at the owners meeting that it had approved adjustments to the Rooney Rule, first adopted in 2003, “to enhance opportunities for people of color and women for nearly all league and team jobs.”

As companies, most that are far afield from the NFL, look to have a positive impact on the world, in increasing numbers addressing ESG governance factors, many businesses are striving to address inequality, including matters of unequal access, historical racism, gender discrimination, lack of inclusion and more.

It strikes us that the response to inequality should be as easy as “treat others the way they want to be treated” (.. yes, the Platinum Rule is the Golden Rule, where you treat people the way ‘you’ want to be treated, gone one step further).

But, we well recognize that ESG is an emergent and fast growing space where there are few laws, so in addressing matters of inequality, it is often ideal that companies seek out a good example of a race neutral measure that promotes business diversity and can be replicated. The Rooney Rule is widely suggested, and while not perfect, can be adapted for use by many organizations.

The Rooney Rule, named for Dan Rooney, the late owner of the Pittsburgh Steelers, responds to the problem within the NFL where despite that more than 70% of the league’s players are Black, with no Black owners and only two minority owners, and minority candidates do not have equal access to coaching and front office opportunities. The rule encourages “hiring best practices to foster and provide opportunity to diverse leadership” throughout the NFL, with the specific aim of increasing the number of minorities hired in head coach, general manager, and executive positions.

The NFL has tinkered with the Rooney Rule several times since the embarrassing hiring cycle following the 2019 season when just one of five coaching vacancies was filled by a person of color.

In 2021, the NFL approved changes requiring every team to interview at least two external minority candidates for open head coaching positions and at least one external minority candidate for a coordinator job. Additionally, at least one minority and/or female candidate must be interviewed for senior level positions (e.g., club president and senior executives). Practices like this are easily emulated across business sectors looking for good ESG governance practices.

With the most recent 2022 change to the Rooney Rule, beginning this season, all 32 football teams must actually employ a female or a member of an ethnic or racial minority to serve as an offensive assistant coach.

It may be a fair criticism of the Rooney Rule that today there is one fewer Black coach than when the rule was implemented in 2003.

Another commonly cited example of a race neutral measure that responds to inequality and promotes corporate diversity is the Security and Exchange Commission’s own internal self-assessment tool, available on its website, for evaluating the diversity policies and practices of entities regulated by the agency. Some businesses, including companies not subject to SEC regulation use the agency’s tool.

We do caution that all that has come before is not good or ideal including by way of example, a company may not want to emulate California’s racial, ethnic and LGBT quotas for company boards created in AB 979 that have Equal Protection Clause problems and recently been ruled unconstitutional. Maryland’s HB 2021-1210, currently with its regulations still pending is also constitutionally challenged. So, maybe stay away from government mandates and look to good private section initiatives.

We are regularly asked if there is a checklist for ESG compliance and while there is not, good guidance is often available by emulating best practices in other industries and copying what others have done before also mitigates risk while addressing the “G” in ESG.

As companies look to repair the world, whether their immediate interest is ESG disclosure or not, in 2022 businesses must strive to address inequality, including matters of unequal access, historical racism, gender discrimination, lack of inclusion and more. And maybe we all should treat others the way they want to be treated.

ESG has become such a large component of my law practice that I am now collaborating with a fabulous group of attorneys in ESG Legal Solutions, LLC, a new law consulting firm. Nancy Hudes and I are now publishing a new blog at www.ESGLegalSolutions.com (.. yes, this blog will continue). This post originally appeared in that blog. If we can assist you or someone you work with in ESG strategy and solutions, from policy to project implementation (.. including GHG emission disclosures in response to the new SEC rule), do not hesitate to reach out to me.

SEC Climate Risk Rule is Transformative At a Cost

Last Monday, the U.S. Securities and Exchange Commission voted 3 to 1 to issue a long awaited proposed new rule to mandate climate risk disclosures by public companies and other businesses in their supply chains.

The 510 page proposed rule will require public companies to include climate related disclosures in their registration statements and periodic reports such as 10-K annual reports, including information about climate related risks that are reasonably likely to have a material impact on their business, results of operations, or financial condition, and certain climate related financial statement metrics in a note to their audited financial statements. Most significant in this rule is that for the first time SEC mandated information about climate related risks will expressly include disclosure of a business’ greenhouse gas (GHG) emissions.

There are of course existing SEC rules that require companies to disclose material risks regardless of the source or cause of the risk, including climate risks. In 2010, the SEC issued guidance to companies advising how to apply existing disclosure rules in the context of climate change and last year supplemented that with additional climate change disclosure guidance. SEC staff, in reviewing nearly 7,000 annual reports submitted in 2019 and 2020, found that a third included some disclosure related to climate change risk (where presumably after consideration the other two-thirds concluded there was no material climate change risk requiring disclosure).

In point of fact, for more than 10 years we have been advising companies and their consultants about SEC climate change disclosures, and last year wrote a blog post describing how in anticipation of this now published rule there had been, A Sea Change in SEC Climate Change Disclosure.”

But a sea change is too modest a characterization of this new rule. This is profound and transformative potentially dwarfing all other existing SEC required disclosures. SEC Commissioner Hester M. Peirce, the sole Republican and dissenter having voted against this rule, said, “We are here laying the cornerstone of a new disclosure framework that will eventually rival our existing securities disclosure framework in magnitude and cost and probably outpace it in complexity.”

The rule, which SEC Chair Gary Gensler acknowledges is based on the U.K. Net Zero Strategy, will require companies to disclose information about (1) the company’s governance of climate related risks and relevant risk management processes; (2) how any climate related risks identified by the company have had or are likely to have a material impact on its business and consolidated financial statements, which may manifest over the short, medium, or long term; (3) how any identified climate related risks have affected or are likely to affect the company’s strategy, business model, and outlook; and (4) the impact of climate related events (severe weather events and other natural conditions) and transition activities on the line items of a company’s consolidated financial statements, as well as on the financial estimates and assumptions used in the financial statements.

But the reason this rule is consequential for business is that it will also require a company to disclose information about its direct GHG emissions (Scope 1) and indirect emissions from purchased electricity or other forms of energy (Scope 2). In addition, a company will be required to disclose GHG emissions from upstream and downstream activities in its value chain (Scope 3, and not defined in this rule), if material or if the company has set a GHG emissions target or goal that includes Scope 3 emissions (e.g., including if a company has committed to be carbon neutral by 2030, or the like [something that is today de rigueur]). The rule proposes a safe harbor for liability from Scope 3 emissions disclosure and an exemption from the Scope 3 emissions disclosure requirement for smaller reporting companies.

Under the rule accelerated filers and large accelerated filers would be required to include an attestation report from an independent attestation service provider covering Scopes 1 and 2 emissions disclosures, with a phase-in over time, “to promote the reliability of GHG emissions disclosures.” We have provided those services reliably for more than a decade and will be providing them under this mandatory rule.

The proposed rules would include a phase-in period for all companies, with the compliance date dependent on the company’s filer status, and an additional phase-in period for Scope 3 emissions disclosure, starting for fiscal year 2023 filed in 2024.

Nearly all, if not every company, including non public companies that are in the supply chain of a public company, will incur new and significantly greater time, effort and costs in complying with this new rule, including at a minimum in calculating GHG emissions.

Addressing ESG governance factors, this rule specifically requires disclosure of, among other matters, processes for how boards and management are informed of and make determinations about climate risks; all in a similar structure as the recent cybersecurity rule.

Comments on this proposed rule are due 30 days after publication in the Federal Register or May 20 (which is 60 days after issuance), whichever is later.

This rule is maybe best described as a big hairy audacious goal toward mandatory ESG disclosure. There are very real questions about what will ultimately be implemented after judicial challenges, complimentary actions by other nations, not to mention what the SEC will do after what is expected to be robust public comment.

What is clear, is that nearly all, if not every business will incur new and significantly greater costs in complying with this new rule, including at a minimum calculating GHG emissions that will dwarf the cumulative existing SEC disclosure requirement for public companies. Climate change will no longer be reduced to a footnote in a third of annual reports, but rather will require yearlong work efforts that will result in more robust annual reporting by all businesses.

All of which makes this new environmental rule an overarching environmental disclosure mandate all embracing of ESG, the biggest business opportunity in history, waiting to be unlocked.

If there is a takeaway, today, businesses across America should begin to read the more than 500 page rule, or better yet immediately begin to quantify their GHG emissions or in the alternative engage a consultant to develop a plan for GHG disclosures. Give us a call.

ESG has become such a large component of my law practice that I am now collaborating with a fabulous group attorneys in ESG Legal Solutions, LLC, a new law consulting firm. Nancy Hudes and I are now publishing a new blog at www.ESGLegalSolutions.com (.. yes, this blog will continue). This post originally appeared in that blog. If we can assist you or someone you work with in ESG strategy and solutions, from policy to project implementation, do not hesitate to reach out to me.

Modern Slavery a Key ESG Factor

Slavery exists today. The British government recently reported there are more enslaved people today than there have been at any time in history!

And if you doubt that modern slavery is here and now, 20 days ago, on March 1st, U.S. Customs and Border Protection officers seized four shipments of palm oil at the port of Baltimore because the palm oil was produced at the Sime Darby Plantation Berhad in Malaysia by forced or indentured labor, a form of modern slavery.

“There is no place for forced labor in today’s world, and Customs and Border Protection stands firm against foreign companies that exploit vulnerable workers,” said Marc Calixte, CBP’s Acting Area Port Director in Baltimore. “CBP will continue to ensure that goods made with forced labor do not enter our nation’s commerce and we will help to root out this inhumane practice from the U.S. supply chain.”

Modern slavery is broadly defined to cover all forms of forced labour. This exploitation involves a lack of consent, with victims unable to refuse or leave because of threats, violence, coercion, deception or abuse of power.

There are more than 40 million people in modern slavery.”

One in four victims of modern slavery are children.

And less than two tenths of one percent of victims of modern slavery are rescued each year.

The UK Independent Anti Slavery Commissioner describes that modern “slavery exists in every industry, in every country in the world,” yet in the United States where slave labour valued at more than $150 Billion annually exists, there is a low level of awareness of the prevalence of slavery.

A business having a statement on its website that it is concerned about human rights or slavery may sound nice, but in 2022 when so many are talking about ESG, that mere averment will not resonate and quite frankly falls short of decency and what a private enterprise should be doing to protect this most basic human right.

Claims by businesses about human rights including that no slaves or indentured servants are involved in manufacturing a product or its supply chain are not new, and have been prevalent in some form since at least the 1660s when the Quakers in England included those representations in promoting their confectionary businesses.

But today more is expected of business.

We work with companies giving them the tools to “stop slavery in our lifetime” from initial baseline risk assessments to confidential business audits including supply chain roadmapping and drafting written policies and modern slavery statements as well as to trainings and a broad breadth of other services to support antislavery processes.

But those tools are little utilized in the U.S. even as ESG is a cause celebre. The “S” (social) factors in ESG are among least measured factors in corporate sustainability despite being among the most impactful.

Widely cited as a checklist for Social factors are the first six of the ten principles of the UN Global Compact with human rights and labour rights being key. For example, among the Compact principles is “the elimination of all forms of forced and compulsory labour.”

That sounds simple enough, but how then are there more enslaved people today than there have been at any time in history?

Moreover, the widely accepted definitions of modern slavery expressly exclude “state imposed forced labour”, one of the issues most impactful and widely discussed ESG factors this year:  As companies look to their supply chains for violations of human rights and slavery, companies are including express language overcoming the presumption under the new Federal Uyghur Forced Labor Prevention Act (still being phased in) under which all “products produced in the Xinjiang region of China [where more than 80% of the world’s solar panels are sourced] are barred from importation into the United States” and concerned about the S (social) in ESG where China’s repression of the Uyghur minority is such that it amounts to genocide according to the U.S. government and The Group of Seven.

There are few laws in the ESG space, but we have for years worked with businesses in their disclosures required by the California Transparency in Supply Chains Act of 2010 describing their “efforts to eradicate slavery and human trafficking from [their] direct supply chain for tangible goods offered for sale.”

Despite that the California law is more than a decade old it is only in 2022 that modern slavery is becoming a litmus test for investors, consumers and other stakeholders in the U.S.

The British and the EU currently lead the world in these concerns and the EU Parliament voted a year ago this week, on March 10, 2021, to adopt mandatory legislation requiring  human rights due diligence including for many U.S. companies selling in the EU.

On the day this blog was drafted, the state of Maryland adopted the requirement that all public funded construction,

be designed and constructed to not include goods made with forced labor in supply chains. The project must seek to address human rights, protecting against social justice abuses (the “S” in ESG) at every stage, from extraction of raw materials to building erection.”

And human rights and ethical labor are becoming widely considered and articulated in ESG disclosures in 2022 by clients of this firm.

But today’s ESG statements are only a quick dopamine hit for the individual business, and quite frankly are not doing enough as is clear that there are more slaves than at any time in history. The ideal of social equity can be traced back to the works of Aristotle and while definitions vary and have evolved over thousands of years, nearly all would agree humanity has not done enough, including purporting to address Social as one of the three component parts of ESG.

Slavery has existed since ancient times and despite having been outlawed in every country in the world, contemporary slavery exists. At a time when ESG has become synonymous with sustainability and companies are coming to recognize that investors and stakeholders want to buy into businesses that protect the environment, those companies must aggressively consider not only the legal risk, reputational risk, but also the financial risk that people also want to buy into companies that protect people. Additionally, it is suggested in the U.S. it is better to do the right thing, now, rather than be forced to do so by impending ESG laws.

There is no morally defensible reason for not doing everything in our power to end modern slavery and human trafficking. All businesses, whether in pursuit of the S in ESG or in striving to repair the world, must examine and assess their business practices now.

ESG has become such a large component of my law practice that I am now collaborating with a fabulous group attorneys in ESG Legal Solutions, LLC, a new law consulting firm. Nancy Hudes and I are now publishing a new blog at www.ESGLegalSolutions.com (.. yes, this blog will continue). This post originally appeared in that blog. If we can assist you or someone you work with in ESG strategy and solutions, from policy to project implementation, do not hesitate to reach out to me.

SEC Chair Tweets about Upcoming ESG Regulation

ESG law is emergent and fast evolving such that today, the best sources are blogs and Twitter, not bound statutes and printed law reviews.

Last week U.S. Securities and Exchange Commission Chair Gary Gensler Tweeted about the future of ESG regulation.

You do not need to be a futurist to know that SEC regulation of ESG is coming although precisely when has been unclear, however, it is now apparent that the SEC will release a proposal at its March 21 Open Meeting. The last formal remarks on ESG by Gensler were on July 28, 2021 before the European Parliament and focused almost exclusively on greenhouse gas emissions to the detriment of other ESG factors. So, much can be gleaned from his Tweet last week, just days before the Open Meeting announcement about the “Enhancement and Standardization of Climate-Related Disclosures for Investors.”

Gensler Tweeted, with an embedded video from the SEC’s YouTube channel,

If it’s easy to tell if milk is fat-free by just looking at the nutrition label, it might be time to make it easier to tell if “green” or “sustainable” funds are really what they say they are.”

Significantly, he did not suggest new statutes or legislative action by Congress, but rather a regulatory act by the SEC. It is worthy of note the SEC has broad authority and it is difficult to conceive that the independent agency could exceed the powers granted to it (.. which is very different than the current Supreme Court challenge in West Virginia v. EPA that the executive agency exceeded its authority granted in 1970, when it was created, by now regulating greenhouse gases a pollutants).

Gensler’s Tweet describes that the new SEC effort might “build upon” the existing naming rules and conventions authorized by the Investment Company Act of 1940. Those rules prescribe that an investor should be able to tell what an investment firm does by the name of the fund.

And it should not be lost on anyone that the ESG space is far larger than only investment funds so this action all but certainly portends more and additional regulation by the Federal government, by states and by sovereigns around the globe. This may be a good step toward striking a balance by modifying and updating existing regulations versus enacting entirely new statutory systems.

Continuing with the analogy to fat free milk, Gensler described that an investor in a fund making ESG claims should be like a supermarket shopper reading a food box label for the “ingredients underlying these funds.” In the earlier talk to the European Parliament committee he spoke approvingly about the U.K. Net Zero Strategy, which may well be the basis of a new SEC requirement for funds to “disclose the criteria and underlying data they use in” in ESG investing. Which is consistent with his Tweet now describing that the public should be able to determine, “is a fund really what they say they are?”.

Gensler reported that there are currently more than 800 investment funds making ESG claims over trillions of dollars of assets. Those funds, including those making “green” or “sustainable” claims will be the first targets of the soon to be announced ESG regulations. And such may be well received by the business community that is already subject to regulation, from the Federal Trade Commission to the Department of Agriculture, defining terms of green, sustainable and the like.

We expect Gensler will answer his own question, “so what do investment funds have in common with fat free milk?” .. on March 21. And you can read about it here or get a jump on where the SEC may be going by reading the U.K. Net Zero Strategy.

ESG has become such a large component of my law practice that I am now collaborating with a group of daring, innovative and creative attorneys in ESG Legal Solutions, LLC, a boutique ESG driven non-law and consulting firm “powering sustainability, today, for tomorrow’s business.” Nancy Hudes and I are now publishing a blog  www.ESGLegalSolutions.com (.. yes, this blog will continue). This post originally appeared in that blog. If we can assist you or someone you work with in ESG strategy and solutions, from specific project implementation to fractional fully managed services, do not hesitate to reach out to me.

Ukraine is Now a Real ESG Issue

While there has been near universal condemnation of the war against Ukraine by Russia, and our empathy is unequivocally with the people of Ukraine, this invasion of a sovereign nation, something that echoes the darkest days in European history, today presents issues of ESG.

This blog post is being written 9 days after Putin’s war began (although the Russian Duma just criminalized calling it anything other than a “special military operation”).

Russia’s invasion of Ukraine has already triggered a humanitarian crisis far wider than only the fleeing refugees and international sanctions are beginning to ripple across the world’s economies impacting businesses large and small.

When matters of ESG are considered, in the vast majority of instances, what is being discussed is the ESG rating of a company, but there are also ESG rating of countries, from the highest AAA all the way down to CCC. The government ratings generally track how a nation state’s exposure to and management of ESG risk factors might affect the sustainability and competitiveness of its economy. While there is some variation among advisors, the methodology often applies a 50%, 25% and 25% weight for governance, social and environmental factors, respectively.

Two days ago, several key investment advisors downgraded Russia and Belarus in response to Russia’s invasion of Ukraine. MSCI, among the largest players in this space, said it cut Russia to “B” from “BBB” and Belarus to “B” from “BB” adding that both had a negative outlook.

It may appear unseemly to capitalize on the misery of the people of Ukraine to discuss matters of ESG, even with a blog post like this, but as ESG has exploded on the scene over the past 12 months it is evolving to a point where in encompasses nearly everything? But we are comfortable with this post because at the core of ESG is the oldest moral guidepost that exits, the Golden Rule,

Do unto others as you would have them do unto you,”

and there is no doubt that has been violated in Ukraine.

We are seeing a business response to this conflict with more good, like possibly never seen before including articulating the social and governance violations, including the governance factors of decision making by a sovereigns’ policymaking that this act of aggression represents. The business community appears to understand that protecting freedom and democracy (.. Putin reportedly “despises” democracy) is part of their ESG responsibility. We wrote in a blog just some days ago about a company’s relationship with supporting democratic values, The ESG Benefit of Paying Employees to Work at the Polls. In this instance companies appear to be aware of the critical role they must play if advocating for key ESG values like rule of law, good governance and human rights.

It is one thing for companies to comply with U.S. government imposed sanctions, but companies are now making voluntary elections to retreat from doing business with Russia.

The cynical will see businesses seeking to protect their reputations. Optimists will see this as aligning company values and taking an activist stance, even at some cost. We suggest companies are and will be judged on how they respond to this moment and that is real. The Ukraine invasion could be the 21st century equivalent of the late 20th century anti-apartheid movement, in which business banded together through boycotts to counter the racism of the white nationalist South African regime, but this time accelerated, with responses coming in hours not years, and amplified by social media, making it harder for us all to look away.

This is not the Cesar Chavez boycott of table grapes in the 1960’s that divided American businesses and people across our country. In the last 9 days, the response has been all but universal from a local liquor store removing Russian vodka from the shelves to a symphony orchestra cancelling performances by a renowned Russian violinist to major oil companies, that are an industry expressly exempt from sanctions, self sanctioning by not bidding on Russian oil at auction this week to overnight package delivery services suspending deliveries in Russia. With no good end to this war in sight, there are already issues of the efficacy in cancelling all things the Russian people versus the Communist leader Putin.

And there are other complicated issues here, including that many companies in the defense industry had been shunned by ESG investors, but as the Latvian deputy prime minister said this week “is national defense not ethical” so how are weapons manufacturers  going to be viewed as their armaments defend Ukraine? Also complicated are the Export Administration Regulations that essentially prohibit U.S. companies from complying with aspects of other country’s boycotts that our government does not sanction and while in this instance action by the government seems unlikely, the regulation exists.

In 2022 companies supporting democratic values will not only be awarded with high ESG scores, but also championed by the overwhelming number of people shocked and dismayed by the Russian invasion of a smaller sovereign state, who want to see more good and humanity do better at repairing the world.

To misappropriate the powerful words from 1963, “Ich bin ein Ukrainian.“

ESG has become such a large component of my law practice that I am now collaborating with a group of daring, innovative and creative attorneys in ESG Legal Solutions, LLC, a boutique ESG driven non-law and consulting firm “powering sustainability, today, for tomorrow’s business.” Nancy Hudes and I are now publishing a blog  www.ESGLegalSolutions.com (.. yes, this blog will continue). This post originally appeared in that blog. If we can assist you or someone you work with in ESG strategy and solutions, from specific project implementation to fractional fully managed services, do not hesitate to reach out to me.

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