Does Your Lease Need Greenhouse Gas Provisions?

Yes. It would be one thing if this topic was only prospective, about leases to be entered into in the future, but the reality is there are very large numbers of existing leases including with renewal terms that are for premises that will be regulated by emergent greenhouse gas emission disclosure and reduction statutes, rules, and regulations.

Just as there is no one homogeneous building type, this topic has implications that vary from place to place, but in jurisdictions from Maryland to California, New York City to Denver, and Seattle to Washington, DC, building energy performance standards that are driving reductions in GHG emissions have already been enacted. And that state and local government activity targeting building owners lies beneath the surface of national ESG mandates aimed at the businesses that are tenants which new laws are in many instances GHG emission disclosure heavy.

A lease is the most common real estate transaction in America. And lest there be any question many, if not most of these issues apply not only in commercial leases but also in multifamily residential leases.

Buildings are the sweet spot for GHG emission reductions because buildings generate nearly 40% of annual GHG emissions in the U.S.  

To aid in your review of this broad ranging subject, this blog post will consider leases in Maryland.

The aim of this post, about how to repair the planet through leasing, is to set the stage for new ideas:

Review leases.  As a starting point, every existing lease should now be reviewed in light of matters of GHG emissions (a subject that may not have even been conceived of when the document was written). Landlords and tenants should carefully consider any existing provision about whose obligation it is to comply with laws and government requirements related to leased premises or the building (e.g., in the past such a provision may have had implications for ADA compliance or retrofitting for sprinklers), and while such a provision may have a dramatic impact on this subject, it is just the starting place.

Share data.  As a threshold edit, nearly all existing leases will have to be modified and new leases drafted to include sharing GHG emission data. Of note, Maryland law was amended last year by SB 528 and now provides,

ELECTRIC COMPANIES AND GAS COMPANIES SHALL PROVIDE ENERGY DATA, INCLUDING WHOLE BUILDING AND AGGREGATE DATA, TO THE OWNERS OF COVERED BUILDINGS FOR BENCHMARKING PURPOSES.”

Maryland Senate Bill 2022 528

But that information is not enough for building owners to comply with the State’s mandatory GHG emission disclosure and reduction. An owner will need more and additional information (census of employees, number of computer screens, etc.) directly from the tenant for the owner to be able to calculate GHG emissions and report them to the government as required, beginning in Maryland in 2025. And that provision does not even attempt to address that many tenants, including public companies, federal government contractors, and more each need GHG emission data from their landlords so that they can report it as part of the required ESG disclosures.

New defined terms.  In jurisdictions where there are mandates for reductions in GHG emissions (.. a step beyond mere disclosures), it is key that leases now include as a defined term the Building Energy Performance Standards to be applied, including if created by statute or code or by the contract that is the written lease agreement.

Borrowing a concept that has been widely utilized in Europe but not in the U.S., if the tenant is going to have an “energy consumption limit” that must obviously be expressed in the lease. In some instances this will also include a “plug load standard” and if that is the case, the term must also be defined. This is not necessarily the concern it had been in the past about who is paying for the power, but now the entire building will be on an energy diet to meet GHG emission limits.

In many instances the work of reducing GHG emissions will include the “retro-commissioning” of the building and that term must also be defined, including what will be recommissioned (i.e., HVAC, lighting, plug loads, .. but, will it include the roof, windows, etc.), and to what standard, like the appropriate LEED enhanced credit or ASHRAE or the like?

A lease should ideally provide for submetering of the tenant leased premises (and that may not be so easy with existing building utility systems). Electronic submetering software that provides simulated consumption data may have to be substituted for the real thing, but submetering is often regulated by public service commissions and the like. The goal is that the tenant’s consumption of electrical energy is measured (by meters capable of reading demand and KW hours to measure the demand and consumption of electric energy), in an existing building often installed by the landlord at the leased premises at the tenant’s cost and expense.

The definition of operating expenses might now include not only the actual costs of retro-commissioning but also costs to meet the Building Energy Performance Standards, including, but not limited to a prorata share of the costs to undertake the whole building retro-commissioning. And maybe that definition of operating expenses should also include capital expenditures made to comply with Building Energy Performance Standards, providing for some period of amortization of the work (over the lease term or some other reasonable period of time). The tenant should be required to participate in retro-commissioning including providing the necessary occupant data and other information.

Going forward, a lease must include requirements that initial tenant improvements (i.e., build-out) to the leased premises and any subsequent renovation must comply with the Building Energy Performance Standards and not increase the tenant’s utility usage. Such might include design criteria, landlord’s approval of plans and scope of work, etc.

Incentives.  Incentives to tenants may be key to rebalancing the traditional landlord tenant equities. Borrowing from an idea we have seen in some Canadian leases a landlord could pay a tenant a “GHG reduction bonus” equal to __ % upon completion of tenant improvements, based upon an energy model, which GHG reduction bonus could be amortized over the term of the lease payable to Tenant as a credit against monthly rent.

As another incentive, a tenant can be the beneficiary of and receive any available government incentives including tax credits (e.g., the 179D tax deduction) thru assignments of those incentives and other creative drafting in the lease.

If the landlord has installed an onsite renewable energy system at the building that can be used to supply electricity to the building, the tenant should be required by the lease to purchase electricity from that onsite renewable directly from the landlord. The landlord should be required to sell power directly to the tenant at a rate that is at or below the electricity rate offered by local public utilities. And maybe this includes as another incentive, if the landlord participates in a Power Purchase Agreement (PPA) for the building, the tenant is given the opportunity to participate in the PPA.

Penalties.  A provision must now be inserted making clear that the tenant is responsible for the payment of the penalties or excess emissions charges, alternative compliance fees, or the like, incurred by the landlord under the applicable Building Energy Performance Standards law like the Maryland Climate Solutions Now Act of 2022 (or in New York, Local Law 97), not just for a failure to report but also attributable to tenant’s consumption of energy or GHG emissions in excess of the energy consumption limit provided in the lease which tenant action could cause the entire building to be out of compliance. Such is made somewhat complicated to negotiate in that it should take into consideration any and all credits and alternative compliance fees with respect to the limit obtained by the landlord if the cost of the credit is included in operating expenses.

On the other hand, the landlord should be solely responsible for any portion of any penalties or charges levied upon the building under such law due to the failure of the landlord to timely meet reporting obligations under the relevant law, the consumption of utilities by any other tenant of the building, or the landlord’s failure to properly operate and maintain the building.

It is time to act.  While drafting a lease with GHG emission specific provisions is an art in its infancy, these risks and opportunities are not new and in point of fact in 2009 I published a law review article, Does a Green Building Need a Green Lease, which while dated, identifies most of the same risks and opportunities.

This blog post is not intended to be a comprehensive exposition on the subject, including that while many of these same considerations exist in multifamily residential leasing, time and space limit what can be said here except to note that there are opportunities for proactive property management. Our goal here is modestly to assist you in participating in the big hairy audacious goal of disclosing and reducing GHG emissions in real estate.

Today, as a threshold matter leases in Maryland need to be modified, beginning immediately, to at a minimum provide shared data and other information so that building owners can comply with 2025 State GHG emission reporting requirements and tenants can satisfy current and evolving ESG disclosures.

So yes, your lease does need GHG emission specific provisions both to comply with new laws and to repair the planet. It’s time to act. We would be pleased to speak with you about your lease and all things GHG emission reductions.

Live webinar “Does Your Lease Address New GHG Laws?” 30 talking points in 30 minutes, Tues, Jan. 24 at 9 am EST presented by Stuart Kaplow and Nancy Hudes on behalf of ESG Legal Solutions, LLC. Complimentary, but you must register here.

Ban the Light Bulb to Repair the World

Last month the US Department of Energy, proposed stronger efficiency standards for light bulbs that will effectively phase out compact fluorescent light bulbs and what remnants of incandescent bulbs still remain, replacing them with more energy efficient LEDs.

Concomitantly, with that proposed rule making, the Biden Administration has now taken more than 110 actions to reduce greenhouse gas emissions.

While this proposed rule to strengthen lightbulb efficiency standards, in both residential and commercial buildings, would reduce GHG emissions by 131 million metric tons over 30 years, a statement released by the White House said, when (.. if) implemented the 110 actions would in total reduce GHG emissions by more than 2.4 billion metric tons cumulatively over 30 years. All of that in the modern Washington, DC era of executive action and agency regulation, without Congressional action.

It is not lost on students of optics that this proposed light bulb rule was issued 142 years to the day that Thomas Edison received notice of the granting of his patent for the incandescent lamp that paved the way for the universal use of electric light; the most important invention in history.

It is not just the phenomenon that a light bulb produces light from electricity, but as a consequence improves safety in dark places, allows students to study after dark, permits people to work at night, and so much more.

One might think the impetus for this rule was a bad joke: How many human beings does it take to change a light bulb? One to grasp the light bulb and eight billion to screw the planet.

But we all know, having burned our fingers on a hot light bulb, even modern incandescent bulbs (that were phased out beginning in 2007) were not energy efficient with less than 10% of electricity supplied to the bulb being converted into visible light. The remaining energy is lost as heat and a pendant percentage of GHG emissions are squandered.

December’s proposed rule significantly raises the minimum lightbulb efficiency level, from 45 to over 120 lumens per watt for the most common bulbs.

LED bulbs, using a semiconductor to convert electricity to light, can last three to five times longer than a compact fluorescent, and up to 30 times longer than an incandescent bulb, according to DOE. Unlike both incandescent and compact fluorescent bulbs, LEDs release very little heat and thus waste much less energy over their longer useful life.

Lighting accounts for more than 17% of energy used in commercial buildings in the US, and more than 15% in single family residential houses.

Earlier this year, DOE implemented the final phaseout of incandescent bulbs. Last month’s proposed rule will accelerate the transition away from compact fluorescents as well, toward more efficient and long lasting LED bulbs. DOE estimates that the new rule, if adopted within the proposed timeframe, will conserve roughly 4 quadrillion British thermal units of energy in the 30 years after its implementation. 

Importantly, the new rule also advances President Biden’s goal to achieve a Net Zero emissions economy by no later than 2050.

DOE estimates that over 30 years, the proposed standards would result in cumulative emission reductions of 131 million metric tons of carbon dioxide and 903 thousand tons of methane, an amount roughly equal to the electricity use of 29 million homes in one year.

Building related GHG emissions vary greatly from a high of 15.91 tCO2e per capita in North Dakota (.. where it is cold and there is a lot of heating) to a low of 4.07 in Hawaii (.. okay), but even in a tepid state like Maryland emissions are 5.54 tCO2e per capita (.. where the electricity grid fuel mix relies heavily on coal), so green building strategies, including stronger efficiency standards for light bulbs, are key to reducing GHGs, not to mention achieving Maryland’s aggressive 50% emissions reduction target by 2030.

Apparently, the aim is to finalize this new rule by the end of President Joe Biden’s first term. To accomplish that, DOE will host a webinar on February 1, 2023, at 1:00 pm EST to solicit feedback. Visit the general service lamp rulemaking page to find out more information about webinar registration and this rulemaking.

We must not lose sight of the fact that the sole purpose of a light bulb is to produce light from electricity, something that has literally improved the lives of nearly every man, woman, and child by eliminating our dependence on Earth’s rotation for natural light. And in 2023 there is nothing wrong with doing that better than Thomas Edison in 1860, with LEDs, and repairing the planet.

Live webinar “Does Your Lease Address New GHG Laws?” 30 talking points in 30 minutes, Tues, Jan. 24 at 9 am EST presented by Stuart Kaplow and Nancy Hudes on behalf of ESG Legal Solutions, LLC. Complimentary, but you must register here.

First State to Authorize Use of the 2021 IgCC

Maryland is on the cusp of being the first state in the country to authorize use of the new 2021 edition of the International Green Construction Code for public and private building.

Many see this cutting edge enactment as crucial to making possible the State’s ESG goal of reducing greenhouse gas emissions in buildings. Maryland Department of Labor staff say the agency is expected to publish the Notice of Proposed Action on January 27, 2023. 46 days after publication allowing for a comment period, the Department will be free to adopt the 2021 IgCC by regulation. 

The backstory is important. In 2001, Maryland was one of the first states to incentivize green building, to reduce GHG emissions, with an income tax credit. A decade later, in 2011, Maryland was the first state to authorize the use of the IgCC for private and public construction. Since then, there have been 5 editions of the IgCC, and the last adopted for use in Maryland was the 2012 version.

Last year, Maryland enacted SB 528 the Climate Solutions Now Act of 2022, heralded as the most rigorous state law in the country reducing GHG emissions and otherwise addressing ESG stewardship including climate change. The new law recognizes the role that buildings play (.. the built environment generates more than 40% of annual global GHG emissions) mandating commercial buildings achieve a 20% reduction in “net direct” GHG emissions from 2025 GHG emission levels of similar buildings before January 1, 2030, a 40% GHG reduction before January 1, 2035, and be Net Zero before January 1, 2040.

To provide building owners with the means and methods to accomplish the required decarbonizing of buildings toward Net Zero, Senate Bill 528 also amended the Public Safety Article of the Maryland Annotated Code § 12-503, ..

(d) .. the Department [may] SHALL:  

(1) ON OR BEFORE JANUARY 1, 2023, adopt by regulation the 2018 International Green Construction Code; AND  

(2) ADOPT EACH SUBSEQUENT VERSION OF THE CODE WITHIN 18 MONTHS AFTER IT IS ISSUED.

Which is legislative speak for the State now “shall” adopt (.. when it had been “may” adopt) the most recent version of the IgCC.

This brief but elegant change helps close the loop where the express “goal of the IgCC is to decrease energy usage and GHGs ..” aligns with the Maryland mandate to disclose and then reduce GHG emissions from buildings.

It is also significant because as businesses look to make ESG disclosures, third party verified information is key to mitigating risks associated with greenwashing claims, and a building complying with the IgCC, either new construction or renovation provides environmental disclosure information third party verified by a local code official. And while the IgCC has been little adopted across the country, that is almost certain to change as jurisdictions look to reduce GHG emissions as the time is now to evolve from doing less harm, bypassing sustainability only, and to net plus and making things better.

There has been criticism that this latest version of the green code is too stringent or unrealistic (.. this brief blog post cannot detail the code), but those naysayers completely miss the mark when the 2021 IgCC both includes a check the box feature for each enactment selecting “jurisdictional options” germane to that locale and maybe more importantly, a modification provision “where there are practical difficulties involved in carrying out the provisions of this code” the authority having jurisdiction over the green code can grant modifications (there is no modification or variance feature in LEED, Green Globes, NGBS or other green building systems).

It is anticipated that in the coming months the Maryland Green Building Council, a State government panel that makes recommendations on the State’s High Performance Building Program, will consider updates to its Program to advantage use of the 2021 IgCC. It is also expected that local governments throughout the State will adopt local amendments to the 2021 IgCC as they adopt it as part of their usual building code cycle of triennial code adoption process.

Lest devotees are concerned, LEED will remain the predominant system for green buildings in Maryland. There will continue to be a welcoming and expanding place in the State for Green Globes, for the NGBS, and other green building rating systems, but the addition of the current version of the IgCC into the marketplace it is key to decarbonizing the built environment as is legislatively mandated in Maryland and to repairing the planet.

Live webinar “Does Your Lease Address New GHG Laws?” 30 talking points in 30 minutes, Tues, Jan. 24 at 9 am EST presented by @StuartKaplow and @HudesNancy on behalf of #ESG Legal Solutions, LLC. Complimentary, but you must register here.

Reducing GHG Aiming for Net Zero will be the Environmental Issue of 2023

Business owners increasingly understand the need to mitigate climate risk and many companies with forethought are already seizing upon the multi-trillion dollar economic opportunity that accompanies the economy’s transition to Net Zero.

Disclosing greenhouse gas emissions and reducing GHG aiming for Net Zero is not only an issue for businesses, although make no mistake it will be among the biggest business issues of the year, but it will also soon impact ‘people’ who occupy rental apartments, condominiums and the like, and in the not too distant future will impact nearly all of us.

The topic of disclosing and reducing GHG is everywhere. And yes, this is with appreciation that the subject is hierarchically a subset of environmental, the E in ESG, and then below that climate change.

The certainty that GHG reduction is the environmental issue of 2023 is more than a Magic 8 Ball prediction, although we do regularly consult one of the 1960s era plastic spheres I keep on my desk.”

Stuart Kaplow

If you doubt the magnitude of the issue, “net zero” was mentioned by public companies in more than 6,000 filings with the SEC in 2022. This is not irrational exuberance and the reporting in 2022 on planning for decarbonizing the economy has laid the foundation of fundamental valuation for 2023.

And that was in advance of proposed future mandates of government even going into effect. A little more than a month ago, the DOD, GSA, and NASA proposed to amend the Federal Acquisition Regulation to require certain Federal contractors disclose their GHG emissions and set science based targets to reduce their GHG emissions.

And before March when the SEC proposed rule changes that will require public companies to include climate related disclosures in their registration statements and periodic reports, including disclosure of a business’ GHG emissions.

And beyond the Federal regulatory expansion, states are contributing with more and additional government GHG mandates, including by way of example Maryland, which will initially require that commercial including multifamily building owners report GHG emissions to the State annually beginning in 2025, then achieving a 20% reduction in “net direct” GHG emissions from 2025 levels of similar buildings before January 1, 2030, a 40% GHG reduction before January 1, 2035, and be Net Zero before January 1, 2040.

This entirely new subject of government regulation is simply a bellwether for the biggest business opportunity in history, waiting to be unlocked.

As we recently blogged, Net Zero Risks as a Source of Opportunity, currently, in advance of all of the regulation to come, calculating net zero is ill defined, unregulated and complex. Definitions of what “zero” means vary greatly, including among many issues, whether a company can use carbon offsets or not. In a move toward a global standard, last month the UN released the Net Zero Pledge Standards for Business Released at COP27, but most US businesses will not be able to meet those global standards. 

The UN report is premised on the urgent admonition that “to limit warming to 1.5°C, global emissions must peak by 2025 and be cut in half by 2030, on the way to net zero emissions by mid century.”

Calls for action by the UN are not without controversy and may not in and of themselves drive US businesses, but there is no debate that just weeks ago the world’s population exceeded 8 Billion. In 2023 the issue of increasing population in China is “out” and increasing population in India is “in.” The resources to provide light, refrigeration, heating and cooling to serve the growing population in India have global implications for GHG.  Moreover, it is not settled that even a developed nation can attain Net Zero economy wide, or for that matter a state or other political subdivision, or even a business.  

Maryland’s example of mandating that building owners (.. not the business occupants) disclose and reduce GHG emissions, ultimately to net zero by 2040, is a model being looked at approvingly by the environmental industrial complex and this appears the likely direction for the US economy.

Buildings where GHG cannot be disclosed and reduced risk becoming obsolete, as the market shift gathers even greater momentum in the coming years, and non GHG scoring buildings will become the real estate industry’s version of the buggy whip. Recall the rapid obsolescence of commercial buildings without central air conditioning in the early 1960s, and the massive decline in values in those obsolete structures as tenants sought out buildings with that innovation.

However, opportunities now abound as the current dinosaur fossil fuel economies that have existed substantially in their present form since the dawn of the industrial revolution with the coal powered steam engine, are today being transformed to achieve Net Zero emissions by 2050, and trillions of dollars will have to be spent annually on physical assets to accomplish that transition.

We invite you to join us in undertaking this epic business venture, the decarbonizing of the economy – to repair the planet and make your share of the trillions along the way.

Top 10 ESG Blog Posts of 2022

As we look back in this ‘year in review’ at our most read blog posts in 2022, at a time when many have emerged from 2 years of permacrisis to the highs of a future where ESG opportunities are accelerating.

This blog is a microcosm of the issues we assist clients with daily in our own non-law and law practice. We are incredibly excited about the prospects for our clients to maximize the opportunities ESG presents with sustainable growth, many of which have been the subject of blog posts this year.

At a macro level, when we talk with clients and post about the world’s existential crises, we use “climate and inequality” to identify the breadth of interconnected risks that impact our planetary and human health. Climate represents the broader environmental issues, including air and water quality, and biodiversity loss, its own existential crisis; and inequality is a proxy for social conditions or behaviors, such as practices that marginalize people, unequal access to opportunities and resources, systemic racism, and gender discrimination.

That ESG, including the subset of climate change and hierarchically below that, GHG disclosure and reduction, may be the biggest business opportunity in history, waiting to be unlocked, has been the theme that recurs in our posts and will continue to pervade this blog.

ESG law is still new and emergent. The pace of change is breathtaking. Some have characterized this past year in ESG as tumultuous, but a recent poll of corporate leaders found most describe this as just growing pains, maybe better characterized as inflection points, in the huge market shift in the role of business in our society. ESG’s success makes ‘value over values’ business considerations a target in today’s hyper divisive political climate, but with ESG representing more than $35 Trillion in managed investing and growing exponentially, ESG itself is an engine of growth.

We are supremely confident that our business philosophy of “mitigating risk and maximizing opportunity through ESG” is right for this new era.

In 2023 this blog will continue providing strategic intelligence on ESG law, including critical insights into sustainability for the business community, .. NOT just for lawyers. Some of what we will write about does not exist, including, for example, proposed federal regulations. But most of our blog posts mirror ‘real’ issues that we address in our own non-law and law practice.

As we look for what will be the bleeding edge ESG trends of 2023 “with one eye on the past, one eye on the future” here is a Top 10 List, with apologies to David Letterman, of our most read blog posts in 2022, which compilation provides a year in review that is an eclectic mix of ESG matters as self-selected for reading by readers of the blog. In descending order these are the posts that had the most traffic:

Armed with the knowledge of what came before, there is no doubt that 2023 and beyond portend to be a period of both burgeoning ESG efforts and great economic prosperity. We look forward to providing a lawyer’s edge on how you can prosper from this new era in the coming days, weeks, and months.

We know that in 2023 many businesses will for the first time calculate their GHG emissions, in anticipation of reducing GHGs, and we will blog about not only how to go about that (including NET+ our proprietary GHG calculator), but also the risks and opportunities.

We are pleasantly pleased by the over the top response to our blog and the almost geometric number of new readers we have gained each week since our launch some 18 months ago. We know that may have more to do with ESG being such a new field of endeavor, that blogs like ours, are literally the best if not the only source of information on the topic. You can sign up in the right column of the home page of the blog for a once a week email alerting you to the topic of each new post.

Thank you so much for reading. And thank you for the impressive and compelling feedback you provide and your willingness to put up with our poor writing and typos in posts that are often hastily written in our effort to be timely.

While we acknowledge we do not have a crystal ball (.. okay Stuart keeps a Magic 8 ball on his desk), watch for our upcoming blog post on our prediction for “the hottest” ESG trend for 2023.

Again, thank you for reading. Best wishes in 2023!

EPA (Finally) Finalizes Phase I Environmental Site Assessment Rule

On December 15, 2022, EPA took final action to amend the All Appropriate Inquiries Rule to reference ASTM International’s E1527-21 “Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process” and allow for its use to satisfy the requirements for conducting all appropriate inquiries under the Comprehensive Environmental Response, Compensation and Liability Act, and to remove after one year recognition of the previous version of that standard, ASTM E1527-13, as compliant with the All Appropriate Inquiries Rule.

This rule is effective (after 60 days) on February 13, 2023.

We had posted some months ago that it was hugely significant that this Phase l Environmental Site Assessment Standard was in Limbo because that assessment is conducted in the vast majority of the 5.6 million commercial real estate transactions each year in the United States (i.e., including for a real estate purchaser to avoid liability under CERCLA [the Superfund law]). Phase l reports are also used for a wide variety of other purposes, including for a company to demonstrate third party verified compliance with the E in ESG, environmental laws, to qualify for credits under the LEED and Green Globes green building rating systems, etc.

We had earlier posted in November 2021, that ASTM International had revised its Phase l Environmental Site Assessment Standard, in anticipation of adoption for use by the EPA. In that post, we described the significant changes in the 2021 version from the 2013 version.

Also, by way of background, on March 14, 2022, EPA published a direct final rule to amend the All Appropriate Inquiries Rule to reference the updated ASTM E1527-21 and also invited comment on the direct final rule stating that if EPA received adverse comment on the proposal the Agency would withdraw it. EPA received adverse comments on that action and published a notification of withdrawal of the direct final rule on May 2, 2022. Of note, EPA only received 13 comments (.. really, 13) on the proposed rule. After consideration of those comments, EPA is acting, as published in the Federal Register now specifically amending,

2. Section 312.11 is amended by:

a. Redesignating paragraphs (a) and (b) as paragraphs (b) and (c), respectively;

b. Adding a new paragraph (a); and

c. Revising newly redesignated paragraph (c).

The new paragraphs read …

(a) The procedures of ASTM International Standard E1527-21 entitled “Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process.” …

(c) Until February 13, 2024, the procedures of ASTM International Standard E1527-13 entitled “Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process.”

Which is Federal government speak for EPA has, effective February 13, 2023, amended the All Appropriate Inquiries Rule to provide for the use of the recently revised ASTM International Standard ASTM E1527-21 to satisfy the all appropriate inquiries requirements under CERCLA for establishing the bona fide prospective purchaser, contiguous property owner, and innocent landowner liability protections.

EPA has also removed the current reference in the All Appropriate Inquiries Rule to the ASTM version E1527-13 as compliant with all appropriate inquiries. The removal of the reference to the historic standard as compliant with the all appropriate inquiries requirements will take effect one year following the publication of this final rule, that is, February 13, 2024.

Be assured this is a big deal. We can assist you in creating value and prospering with your selection of an environmental site assessment standard during this period of regulatory change and into the future.

FTC Seeks Public Input on Update to Green Guides for Environmental Claims

The Federal Trade Commission announced last Wednesday that it is seeking public comment on updates and changes to the Green Guides for the Use of Environmental Claims. In an era when charges of greenwashing and green hushing are proliferating across social media while at the same time governments are mandating ESG including environmental disclosures by businesses, an update to the Green Guides is a welcome effort toward providing safety bumpers for companies.

At their root, the FTC’s Green Guides help businesses avoid making environmental marketing claims that expose them to the risk of being viewed as unfair or deceptive under Section 5 of the FTC Act.

Compliance with the Green Guides (i.e., literally using them as a checklist) may be the single best act a business can undertake to avoid claims of greenwashing when making environmental disclosures and other statements.

The Green Guides were first issued in 1992 and were revised in 1996, 1998, and 2012. They provide guidance on environmental marketing claims, including how consumers are likely to interpret particular claims and how businesses can substantiate their claims to avoid deceiving consumers. The FTC is updating the Guides at least in part based on increasing societal interest in environmentally friendly business, from purchasing green household products to investing in ESG funds.

“We look forward to this review process and will make any updates necessary to ensure the Green Guides provide current, accurate information about consumer perception of environmental benefit claims. This will both help marketers make truthful claims and consumers find the products they seek,” said Bureau of Consumer Protection Director Samuel Levine.

Somewhat frustrating to many who realize just how out of date the 2012 Green Guides are, exacerbated by the fact that the FTC did not meet its previously announced schedule of updating the Guides during 2022, the FTC did not propose any specific amendments or planned alterations to the Guides for public comment. Instead, the FTC requested generalized comments within a nineteen question framework. The FTC is requesting general comments on the continuing need for the Guides, their economic impact, their effect on the accuracy of various environmental claims, and their interaction with other environmental marketing regulations (e.g., the proposed SEC mandatory GHG emissions disclosures, the Maryland required direct emission disclosures, etc.). The FTC also seeks information on consumer perception evidence of environmental claims, including those not in the Guides currently.

Specific issues on which the FTC expects to receive large numbers of public comments include:

Carbon Offsets and Climate Change: The current Guides provide guidance on carbon offset and renewable energy claims (e.g., a business that generates onsite renewable energy through solar panels on its roof but finances the panels by selling the RECs cannot claim it “uses” renewable energy). The FTC invites comments on whether the revised Guides should provide additional information on related claims and issues.

The Term “Recyclable:” Among other things, the FTC seeks comments on whether it should change the current threshold that guides marketers on when they can make unqualified recyclable claims, as well as whether the Guides should address in more detail claims for products that are collected (picked up curbside) by recycling programs but not ultimately recycled.

The Term “Recycled Content:” Comments are requested on whether unqualified claims about recycled content – particularly claims related to “pre-consumer” and “post industrial” content – are widely understood by consumers, as well as whether alternative methods of substantiating recycled content claims may be appropriate; and

The Need for Additional Guidance: The FTC also seeks comment on the need for additional guidance regarding claims such as “compostable,” “degradable,” ozone-friendly,” “organic,” and “sustainable,” as well as those regarding energy use and energy efficiency. Some have suggested that list appears stale if not already outdated and that the FTC should expand that list to include “net zero,” “carbon neutral,” and other ESG related terms that will be in wide use in 2023.

Of interest, a list of recent cases brought relating to topics covered by the Guides can be found on the FTC’s website.

For those that do business outside of the U.S. there are more than 450 environmental labels worldwide that say something about environmental performance, and among the most widely followed is the EU Green Deal which provides, “companies making ‘green claims’ should substantiate these against a standard methodology to assess their impact on the environment”

The Commission voted 4-0 to approve the publication of a Federal Register notice at an open Commission meeting on December 14, 2022, announcing the opening of the public comment period. The notice will be published in the Federal Register in mid January 2023, after which the FTC will accept comments for 60 days. Information about how to submit comments can be found in the link above to the Federal Register notice.

We regularly provide advice and counsel to businesses on mitigating risk in environmental disclosures and statements and we can assist in drafting comments on proposed revisions to the Green Guides.

Maryland is the First State to Regulate Carbon

Maryland has enacted the most rigorous state law in the country reducing greenhouse gas (GHG) emissions and otherwise addressing ESG stewardship including climate change. Businesses can and should treat this as the greatest responsibility and opportunity of our time.

Literally resetting the trajectory of Maryland’s economy, making sweeping changes to the Old Line State’s already tough climate change laws, among other things, Senate Bill 2022 528 alters existing and establishes new Building Energy Performance Standards, requires the State to achieve net zero statewide GHG emissions by 2045, but covered buildings must be net zero before January 1, 2040, establishes requirements for the purchase of zero emission vehicles in the State fleet, and more than two dozen other initiatives in a more than 100 page bill, much of which took effect June 1, 2022.

The enrolled bill that became law without the Governor’s signature, now a statute known as the Climate Solutions Now Act of 2022, is premised on the idea that “the State has the ingenuity to reduce the threat of global warming and make GHG reductions a part of the State’s future” by, among other things, achieving net zero statewide GHG emissions by 2045.

The statute explicitly requires the State to reduce statewide GHG emissions by 60% from 2006 levels by 2031, a near term target unmatched by any other state.”

To accomplish this the law advances everything from “food residuals” and organic materials diversion, a new environmental justice litmus test, a solar panel “recovery, reuse, and recycling working group,” an electric school bus mandate, recognizes “nuclear power” as a carbon free energy source, and much, much more.

Many regulations will have to be promulgated to make all of this happen. The Maryland Department of the Environment has already begun drafting regulations and proposed regulations will first be circulated for public comment in winter 2023 with final regulations adopted in summer 2023. The law also requires future working groups, including a Building Energy Transition Implementation Task Force. Businesses should actively participate in those processes not only to ‘de-risk’ implementation but also to be trusted partners in helping Maryland thrive as it literally rewrites the rules of the game. By way of example, this new law requires the State to adopt the 2018 International Green Construction Code (.. the legislative branch had previously authorized updating the adopted 2012 IgCC, but the executive branch had in the past balked) before January 1, 2023, and then adopt subsequent triennial versions, but the Department of Labor has again rebuffed legislators.

The first direct contact many businesses will have with this new law will be the new concept of Building Energy Performance Standards, which will initially require that commercial, including multifamily, building owners must report GHG emissions to the State annually beginning in 2025. That is a big deal because most businesses have never calculated and do not know how to calculate their GHG emissions.

To be clear, Maryland has determined “decarbonizing” buildings is an important step toward achieving the State’s bleeding edge greenhouse gas reduction mandates.

That is, the law provides buildings, commercial or multifamily with a gross floor area of 35,000 square feet or more (excluding parking garages), except elementary and secondary school buildings, certain historic buildings, certain manufacturing buildings, and certain agricultural buildings, must achieve a 20% reduction in “net direct” GHG emissions from 2025 GHG emission levels of similar buildings before January 1, 2030, a 40% GHG reduction before January 1, 2035, and be net zero before January 1, 2040.

What has to be reduced is not so clear. Direct GHG emissions are arguably emissions produced on site by covered buildings, typically from equipment that combusts fuel for building heating, water heating, and cooking; but is it the same as Scope 1 emissions? Additionally, “net direct” GHG emissions is not defined in the statute, so MDE is left to define this lodestone term in the regulations. Consider, one factor for defining “net direct” is that as prescribed in the statute GHG emissions from commercial food service facilities are to be excluded or “netted out” of net direct emissions.

From the new law,

To facilitate the development of building emissions standards under this section, the Department [of the Environment] shall require the owners of covered buildings to measure and report direct emissions to the Department annually beginning in 2025.”

The bill’s principal sponsor clarified that it is 2024 GHG emissions that will be first reported to the state on January 1, 2025 (.. and while yet to be established in regulation, apparently the State is leaning toward using EPA’s Energy Star Portfolio Manager for reporting).

Buildings must also meet energy use intensity (EUI) targets, which MDE will set in future regulations that will establish whether a site or source EUI are regulated (.. apparently the State is leaning toward site EUI. Of note, both site and source EUI are available in Portfolio Manager, though EPA relies on source EUI as the basis for the Energy Star score). The law does not establish penalties for failure to meet GHG or EUI targets, but ..

If a building does not meet its GHG reduction targets, then the owner can come into compliance by paying a fee for any emissions that are above target levels. That Alternative Compliance Fee (i.e., the law does not give the authority to assess penalties, but by any name this is a sanction) may not be less than the social cost of GHG adopted by MDE or the federal government (weaponizing the social cost of GHG, a measure intended to be used in cost benefit analysis). Revised estimates of the social cost of GHG were released on November 11, 2022, by EPA.

Hugely important, this Maryland GHG disclosure requirement must be viewed in context including that on March 21, the U.S. Securities and Exchange Commission issued a proposed new rule to mandate Scope 1, 2, and 3 GHG emissions disclosures by public companies and the many other businesses in their supply chains. That disclosure is far deeper than the new Maryland law that arguably tracks “net direct” (i.e., Scope 1 only?) emissions, but Maryland’s mandate while shallower is immensely broader in reach, compelling most businesses to contribute to the cause of protecting the environment.

Further appreciation of the benefits of this enactment can be found in the Federal government proposed Federal Supplier Climate Risks and Resilience Rule, which will require major Federal contractors to publicly disclose their Scope 1,2 and 3 GHG emissions, which will hugely advantage Maryland as the home of the fourth largest number of Federal contractors.

One knock on the law is that it unduly burdens privately owned real estate with GHG emission reductions, ignoring other sectors, when for example cumulatively real estate in Maryland is responsible for about 18% of GHG and transportation is responsible for 40%, but transportation is barely mentioned in the more than 100 pages? Moreover, even with respect to real estate, the government has largely excepted itself when schools, the largest public building type are exempt from this law.

Significantly, what was not in the final bill was a requirement that all newly constructed buildings be electric only; which was amended out, but will no doubt be back after a 15 month study and drafting of an all-electric building code. Make no mistake, natural gas will be out.

Also amended out of the bill was verbiage granting permission to local governments to exceed state law in requiring emission reductions from buildings. Montgomery County has just enacted such an ordinance as a result of that amendment that is all but certainly preempted by this new state law, but?

Of course, this law does not provide a mechanism to pay for the vast majority of this. There is an increased state contribution to local public school construction for net zero schools (.. but schools are exempted from these GHG reductions), and a smattering of grant and aide pots of money that are all very modest in size and will only exist in years to come. For example, in uncodified language, the bill provides, in fiscal 2024 through 2026, the (next) Governor is to include in the annual budget bill an appropriation of $5 Million to provide grants under a new program, the purpose of which is to reduce GHG emissions from multifamily residential buildings (.. but $5 Million could be the cost of retrofitting one existing large multifamily building).

The current Governor called this a “reckless and controversial energy tax bill.” The 30 page Fiscal Note on the bill recognized its sweeping nature including that “the bill’s provisions result in significant costs” and concedes, “a reliable estimate of the bill’s overall effects on electricity rates resulting from the bill’s requirements cannot be reliably estimated at this time.” All of which is true, but ..

Maryland has enacted the most ambitious GHG emission reduction controls in the nation coupled with an assemblage of other climate change and ESG mandates. Rather than treating this as a draconian mandate, businesses should treat this as an opportunity to gain a competitive edge, embracing the behests of tenants, employees, and other stakeholders that businesses be responsible for environmental social and governance stewardship.

If there is a specific action item, beyond reading the new law, in light of the moment of collective awakening about the role of businesses in our society and ESG, businesses that own or occupy real estate in Maryland must immediately begin to understand and quantify their GHG emissions or in the alternative engage someone to assist in the task because they must very soon report GHG emissions to the State; and, public companies and businesses in their supply chains will have even broader GHG disclosure requirements, all as a prelude to the big, hairy, audacious goal of dramatically reducing GHG emissions to repair the planet.

Join us for a live webinar “Maryland is the First State to Regulate Carbon,” 30 talking points in 30 minutes, this Tuesday, December 13 at 9 am EST presented by Stuart Kaplow and Nancy Hudes on behalf of ESG Legal Solutions, LLC. The webinar is complimentary, but you must register here.

Government Proposes Federal Contractors and Their Suppliers Disclose GHG Emissions

The Federal government is proposing the Federal Supplier Climate Risks and Resilience Rule, which will require major Federal contractors publicly disclose their greenhouse gas emissions and climate related financial risks and set emissions reduction targets.

The implications of this reach far beyond only Federal contractors impacting nearly every sector of the US economy, as contractors calculate their Scope 3 greenhouse gas emissions which include upstream and downstream emissions in that business’ activities (.. as an example of downstream emissions, a Federal contractor will need GHG emission data from its landlords to calculate its own Scope 3 GHG emissions).

To appreciate the breadth and scope of this proposed Rule, the US government is the world’s single largest buyer of goods and services, purchasing over $630 billion in the last year alone. And this Rule covers approximately 86% of the emissions associated with that Federal supply chain (which in context, are estimated to be more than twice as large as all the emissions from operating the Federal government’s more than 300,000 buildings and 600,000 vehicles combined).

Specifically, the proposed Rule focuses first on “major” Federal suppliers. Under the Rule, those largest suppliers including Federal contractors receiving more than $50 million in annual contracts will be required to publicly disclose Scope 1, Scope 2, and Scope 3 emissions, disclose climate related financial risks, and set science based emissions reduction targets. Additionally, “significant” Federal contractors with more than $7.5 million but less than $50 million in annual contracts will be required to report Scope 1 and Scope 2 emissions (of course, unless they are in the value chain of a major contractor and then they would have to provide Scope 3 data). Federal contractors with less than $7.5 million in annual contracts will be exempt from the rule (again unless they are in the value chain of a major contractor). Small businesses (which represent more than 25% of Federal contracts), with over $7.5 million in annual contracts would only be required to report Scope 1 and Scope 2 emissions under the proposed Rule.

As proposed, compliance with the proposed Rule will be required as a condition to a contract award. Although interesting (and possibly appreciating just how batshit crazy Scope 3 GHG emission calculations are) a noncompliant contractor would be presumed to be “nonresponsible” for purposes of the Federal Acquisition Regulation, the regulation being amended by this Rule, if the contracting officer determines “the prospective contractor has made a public commitment to comply as soon as possible on a publicly accessible website (within one year).”

The Department of Defense, the National Aeronautics and Space Administration, the General Services Administration through the Office of Management and Budget, jointly issued this proposed rulemaking, which would amend the FAR to implement these changes, when finalized. Some have already questioned the wisdom of this new priority for manufacturers of weapons systems and rockets that carry astronauts (.. is the aim really carbon neutral war and space travel)?

There will be great geographic disparity in the application of the proposed Rule, with Virginia, Texas, California and Maryland having the greatest number of Federal contractors, which states may see the unintended consequences of large companies with established net zero goals.

For public companies, there is overlap between the proposed Rule and the Securities and Exchange Commission’s proposed climate risk disclosure rules with this Rule going further than the SEC.

The comment period for the proposed Rule closes on January 13, 2023.  The compliance requirements phase in beginning one year after publication of a final rule.  And yes, when promulgated it can be anticipated this Rule may be challenged in court before it goes into effect.

When implemented, the United States will become the first national government to regulate its supply chain by requiring government suppliers to disclose and reduce GHG emissions with the goal of achieving net zero emissions by 2050. And doing so, will literally remake the US economy. We look forward to continuing to advise businesses on these matters, including providing both law and nonlaw services to businesses calculating their GHG emissions.

Join us for a live webinar “Maryland is the First State to Regulate Carbon,” 30 talking points in 30 minutes, Tuesday, December 13 at 9 am EST presented by Stuart Kaplow and Nancy Hudes on behalf of ESG Legal Solutions, LLC. The webinar is complimentary, but you must register here.

Net Zero Pledge Standards for Business Released at COP27

Much has been written in the media about the just concluded UN Climate Conference (COP27) in Sharm el-Sheikh, most of it focusing on the agreement to agree on reparations or more correctly stated, on providing “loss and damage” funding in the future for vulnerable countries hit hard by climate disasters. But the biggest takeaway for businesses in the U.S., today and into the future, is the release of standards for Net Zero emission pledges by non-state actors.

The world has seen a ballooning of Net Zero commitments by non-state actors, in particular from the private sector. The growth in pledges has been accompanied by a proliferation of criteria and benchmarks to set Net Zero commitments with varying levels of robustness.

In response to the call for clearer and more robust standards, COP27 saw the launch of standards in a report, “Integrity Matters: Net Zero Commitments by Businesses, Financial Institutions, Cities and Regions” from the hastily assembled United Nations’ High Level Expert Group on the Net Zero Emissions Commitments of Non-State Entities.

“We must have zero tolerance for net zero greenwashing,” said the Secretary-General at the launch of the Group’s report from Sharm el-Sheikh on November 8, 2022, calling the report “a how-to guide to ensure credible, accountable net zero pledges.”

The report is premised on the urgent admonition that “to limit warming to 1.5°C, global emissions must peak by 2025 and be cut in half by 2030, on the way to net zero emissions by mid century.”

What the expert group has provided is a roadmap to prevent Net Zero from being undermined by false claims, ambiguity, and “greenwashing.” The report builds on the existing science and best in category voluntary efforts to create a world wide definition of Net Zero, based on 5 principles and 10 standards to guide the future of Net Zero, and focused on holistic actions that should be taken by companies today.

The 10 standards, detailed in the report, describe what non-state actors need to consider through each stage of their progress towards achieving Net Zero ambitions and addressing the climate crisis:

1. Announcing a Net Zero Pledge 2. Setting Net Zero Targets 3. Using Voluntary Credits 4. Creating a Transition Plan 5. Phasing out of Fossil Fuels and Scaling Up Renewable Energy 6. Aligning Lobbying and Advocacy 7. People and Nature in the Just Transition 8. Increasing Transparency and Accountability 9. Investing in Just Transitions 10. Accelerating the Road to Regulation.

Each of the 10 standards is detailed with particularity. Among the most critiqued aspects of the standards may be mandates that:

  • Non-state actors cannot buy cheap carbon credits that often lack integrity instead of immediately cutting their own emissions across their value chain, (but the UN left Egypt having failed to reach any agreement on rules governing carbon credits).
  • Non-state actors cannot focus on reducing the intensity of their emissions rather than their absolute emissions or tackling only a part of their emissions rather than their full value chain (scopes 1, 2, and 3), (despite that today scope 3 emission calculations are imprecise if not more like voodoo economics).
  • Non-state actors cannot lobby to undermine ambitious government climate policies either directly or through trade associations or other bodies, (despite that among the 193 member states few are true representative democracies).

These just released international standards are a big deal for every business that has made a public announcement or is contemplating making an announcement that it “we will be Net Zero by 2030” or must publicly disclose they are “Net Zero by 2040” by way of example, as mandated for all large building owners by Maryland’s carbon statute.

U.S. businesses must now thread the needle not only with this new UN report, which establishes an international standard for Net Zero claims (.. that does not have the force of law), but also with national laws like those in the U.S., including the FTC Green Guides, soon to be updated, the SEC proposed rule on climate risk disclosure, and for those companies with sales in the EU, the 2006 directive concerning misleading and comparative advertising.

We recognize that the capabilities of businesses vary widely, so we are excited to bring the scale of resources required for non-state actors, from a multinational corporation to a local real estate developer, to first appreciate, then implement, and finally accelerate the pace of positive global change that is upon us in this era of permacrisis.

This voluntary UN initiative notes approvingly that most business leaders understand the need to mitigate climate risk and many companies are already seized with the multi-trillion dollar economic opportunity that accompanies this transition to Net Zero.

We urge non‑state actors, our clients and others, to review their Net Zero commitments against these new standards to see how they stack up with a focus on each business’ interim targets, how they set those environmental targets, and how they report progress toward Net Zero.

A live webinar “Maryland is the First State to Regulate Carbon,” 30 talking points in 30 minutes, Tuesday, December 13 at 9 am EST presented by Stuart Kaplow and Nancy Hudes on behalf of ESG Legal Solutions, LLC. The webinar is complimentary, but you must register here.

LexBlog