Green Building Law Update

Environmental Law and Sustainability for Business

Labor Department Will Not Enforce Anti ESG Rule

The U.S. Department of Labor has announced that it will not enforce recently published final rules by the prior Administration on “Financial Factors in Selecting Plan Investments” and “Fiduciary Duties Regarding Proxy Voting and Shareholder Rights.”

This policy statement is in furtherance of the Biden Administration issued Executive Order 13990, entitled “Protecting Public Health and the Environment and Restoring Science to Tackle the Climate Crisis,” directing federal agencies to review existing regulations promulgated, issued, or adopted between January 20, 2017 and January 20, 2021 that are or may be inconsistent with, or present obstacles to, policies .. including, advancing the use of environmental, social and governance (ESG) considerations in investments.

Labor’s Employment Benefits Security Administration released the announcement as an enforcement policy statement under Title I of the Employee Retirement Income Security Act of 1974.

Until the publication of further guidance, Labor announced it will not enforce either final rule or otherwise pursue enforcement actions against any plan fiduciary based on a failure to comply with those final rules with respect to an investment, including a Qualified Default Investment Alternative, or investment course of action or with respect to an exercise of shareholder rights.

As such, today it is like the Wild West as companies are under pressure to take stands on ESG issues, but risk a fast changing regulatory environment.

Principal Deputy Assistant Secretary for the Employee Benefits Security Administration Ali Khawar said,

We intend to conduct significantly more stakeholder outreach to determine how to craft rules that better recognize the important role that environmental, social and governance integration can play in the evaluation and management of plan investments, while continuing to uphold fundamental fiduciary obligations.”

By way of background, on Nov. 13, 2020, Labor published a final rule on “Financial Factors in Selecting Plan Investments,” which adopted amendments to the “Investment Duties” regulation under Title I of ERISA. The amendments generally require plan fiduciaries to select investments and investment courses of action based solely on consideration of “pecuniary factors.” On Dec. 16, 2020, Labor published a final rule on “Fiduciary Duties Regarding Proxy Voting and Shareholder Rights,” which also adopted amendments to the Investment Duties regulation to address obligations of plan fiduciaries under ERISA when voting proxies and exercising other shareholder rights in connection with plan investments in shares of stock.

As President Obama was quoted saying, “elections have consequences.” The Biden Administration has advised that it heard from a wide variety of stakeholders, including asset managers, labor organizations and other plan sponsors, consumer groups, service providers and investment advisers that have questioned whether Labor failed to adequately consider and address the substantial evidence submitted by public commenters on the use of ESG considerations in investing. Labor has also heard from stakeholders that the rules, and investor confusion about them, have already had a chilling effect on integration of ESG factors in investment decisions, including in circumstances that the rules may in fact allow. Accordingly, Labor intends to revisit the rules.

This is consistent with the policies of the new Administration coming on the heels of an announcement I posted about some days ago, SEC to Update Required Climate Related Disclosures. ESG investing has been among the SEC’s priorities in 2021 and just this past Friday the Commission said that some businesses promoting ESG were potentially misleading investors having not adhered to global ESG frameworks or otherwise incorrectly pursuing those strategies from climate change to corporate diversity. It did not name the scofflaws nor describe the misleading statements, but the announcement is seen as step toward justifying a U.S. government regulatory standard for ESG disclosure.

While we all await new rules, this law firm has for years and continues to assist businesses in matters of mitigating risk in ESG disclosures, including providing advice and counsel on climate change and sustainability that may be marketplace driven, as companies seek to position themselves as forces for societal good, as well as in anticipation of impending regulation.

Green Buildings are Subsidizing Conventional Buildings Stymying Climate Progress

By Stuart Kaplow on April 4, 2021 Posted in Climate Change, Green Building, LEED

Green building bonds, which are higher rated and could provide cheaper capital for green building projects, can correct the current market that prices mortgages, green building or nongreen, the same, stimulating the economy and repairing the planet.

The financial value of green buildings is well documented, from commanding higher rents, greater occupancy rates, and increased occupant satisfaction, to lower operating costs for everything from reduced insurance premiums and less energy utilized, easily resulting in an increased return on investment of more than 9% over conventional building. That improved balance sheet for green buildings translates directly into green buildings having over 30% fewer commercial mortgage backed securities defaults.

Green buildings are less risky, more profitable, with higher appraised value than conventional buildings that results in higher company creditworthiness, measuring the reduced likelihood of it defaulting on its debt, but today, green building does not receive a commensurate lower interest rate on its debt.

Net zero building is not only the pinnacle of green building, as a climate neutral edifice, but carries the highest creditworthiness, yet, accepting there are only a few verified net zero commercial buildings in the U.S., they appear to be paying the same mortgage interest rates as similar conventional buildings in those markets. Not to mention there is anecdotal evidence from the first LEED Zero projects that the required integrated process has reduced change orders by a magnitude of up to 90% resulting in dramatic reduced total construction costs.

There is no underwriting justification for lenders charging the same interest rates on mortgages secured by green buildings. It is dinosaur lending practices that force green buildings to subsidize more risky conventional buildings through artificially low interest rates. This unfair capital subsidy stymies climate progress by siphoning investment from profitable green building including net zero projects, for non sustainable carbon polluting projects.

Mike Italiano, a founder of the U.S. Green Building Council and today CEO Capital Markets Partnership, encapsulates the larger issue as,

“We have a narrow window of opportunity defined by IPCC’s 2030 deadline 420+ gigatons / $14 trillion carbon pollution reduction requirement to maintain commerce, national security and a habitable planet. Fortunately, highly repeatable, higher-rated Green Property Bonds can rapidly deploy the available investor capital to timely make the pollution reductions with the highest credit rating for net zero.”

And yes, there are green bonds in the marketplace, but they finance almost any positive environmental impact, not specifically green building, and with no widely recognized standard many have been criticized as greenwash. There are federal government associated multifamily green bonds offering better pricing and higher proceeds, but the federal government is not facile enough to command this space effectively. Today there is a nascent (.. and admittedly uneven) commercial green building mortgage backed securities market; although several offerings were hugely oversubscribed.

New and powerful ways are needed to address the existential environmental problems plaguing the planet. The private sector can seize on that opportunity. What is needed is a mechanism through which owners of buildings and the capital markets deal with the problem of asymmetric information through market signaling about the value of green building. Green building bonds can be a key and very large part of the solution.

Do not underestimate the force that a change in green building can be. Real estate has been and remains the largest sector in the U.S. economy, and a reduction in the cost of capital through mortgages securitized with green building bonds, would not only be a dynamic shift in the economic underpinnings of the real estate industry, but create jobs, invest in existing buildings, and more, with the resultant fixing of the planet. Churchill’s wisdom seems pertinent, “this no time for ease and comfort. It is time to dare and endure.”

The consensus underwriting standard for green building bond finance can be one giant leap for mankind advantaged by owners to issue higher rated green building bonds, opening the door to trillions in private capital for debt on green building, including retrofits to green buildings, that will reduce carbon pollution and repair the planet.

If you are skeptical there is a precedent. In the 1980s, the commercial real estate business in the U.S. faced a credit crisis when hazardous substance cleanup liability lawsuits caused banks to stop lending and the solution was a consensus standard for the Phase 1 environmental site assessment that had the effect of mitigating the risk to banks giving rise to the multi Trillion Dollar commercial mortgage backed security industry.

Domestic green building, from LEED to Green Globes, has been hindered by a lack of capital. The matter is even more acute when seeking financing to green the more than 5 million existing commercial buildings in the U.S.

An effort for cheaper capital for green building is now being driven by building owners. A coalition is coming together and beginning to plan for a NYSE market launch. If you are interested in participating in the Coalition Ending Subsidies Preventing Net Zero Buildings, #cheaper-capital-for-net-zero, contact me at skaplow@stuartkaplow.com.

A robust private sector green building bond market can fund the repair of the planet.

Now We Know What is Killing the Birds

By Stuart Kaplow on March 28, 2021 Posted in Environmental

A cause is now known for bird deaths that eluded scientists for more than 25 years.

It is beyond dispute that there are human activities that have a known negative impact on the natural environment, but sometimes events come together, only in part arising from human activities, to create unknown environmental consequences.

During the winter of 1994, 29 bald eagles died at DeGray Lake in Arkansas, the largest undiagnosed mass mortality of bald eagles in the United States. More than 70 dead eagles were found over the next 2 years. There were no obvious signs that humans had played a role.

By 1998, the emerging cause was a disease that had a name, avian vacuolar myelinopathy (AVM) and had been confirmed at 10 sites across 6 states, a neurological disease, having been implicated in the deaths of more than 100 eagles and thousands of other birds.

But the source of AVM was not identified until a study published last Friday in Science.

After considerable effort, a team of scientists identified the cause of these bird deaths as an insidious combination of factors: An invasive plant introduced into lakes and reservoirs, an opportunistic previously unidentified cyanobacterium, exposed to bromide in those lakes and reservoirs, often (but not always) anthropogenic in origin, resulted in what scientists have now termed “aetokthonotoxin” (AETX), that bioaccumulates to kill bald eagles and other birds.

So, the scientists confirmed that AETX is the causative agent of AVM.

But knowing what killed the birds doesn’t really answer the question? It certainly does not rise to the level of a proximate cause. First, what was the source of the invasive water plant, hydrilla? Was it a discarded aquarium plant from a person emptying a household aquarium, or ..? Second did the cyanobacteria arrive in the leaves and stems of the hydrilla or was it already in the water bodies? Third, and possibly most significant because bromide availability is necessary to promote the toxin production, was the bromide naturally occurring, or could it be coming from human activities (e.g., government water treatment plants)?

So, now we know what is killing the bald eagles and other birds. The study published in Science is fascinating, but the environmental issue is complex and there appears no good solution to forestalling future avian deaths.

Of course the total numbers of AVM deaths pale by comparison to the numbers of birds killed each by housecats, the greatest threat to birds.

Public policy could discourage people from discarding home aquarium plants or for that matter having housecats, but each sound like a solution chasing a problem.

Covid Pandemic Exposes More Children to Toxic Lead

By Stuart Kaplow on March 21, 2021 Posted in Codes and Regulations, Environmental

Covid-19 school closures and lockdowns resulted in thousands of children having increased blood lead levels.

In a study of this consequence of Covid-19, released by the Centers for Disease Control and Prevention, to describe blood lead level testing among young children during the Covid-19 pandemic, the CDC analyzed data reported from 34 state and local health departments about blood lead level testing among children aged 6 years and under.

Approximately 500,000 fewer children in the reporting jurisdictions were tested for lead exposure during the first 5 months of 2020 than during the same period in 2019. Estimating from this finding, approximately 10,000 children with elevated blood lead levels were missed because of decreased testing.

“Exposure to lead, a toxic metal, can result in severe effects in children, including decreased ability to learn, permanent neurologic damage, organ failure, and death.”

No safe blood lead level is known. Routine testing, in particular in young children, can detect elevated lead and drive elimination of lead sources and other interventions.

In the United States, today the most common childhood lead exposures are from lead based paint that was used in pre 1978 housing and from drinking water from old lead pipes and fixtures. The pandemic trapped thousands of children in the more than 24 million American homes with significant lead hazards. As a result of Covid-19 school closures, not only has their education suffered, but children are spending more time in contaminated environments and will have ongoing and increased exposure.

EPA has described lead as the number one environmental public health hazard in the United States. And, again, no amount of lead is safe. Period.

This failure by state and local governments to test for lead exposure in children during the Covid-19 pandemic (i.e., very conservatively, an estimated 2% of children not tested are assumed to have levels exceeding acceptable blood level reference values), will negatively impact a generation, with a disproportionate impact anticipated among children from racial and ethnic minority groups and from families who have been economically or socially marginalized.

It is beyond sad that the children are the victims of this failure of government during a pandemic, if not also more broadly, but their will be larger costs borne by our society caring for theses individuals, and there will also be other implications, including maybe perversely in lead litigation for owners of housing with significant lead hazards.

The study is, Courtney JG, Chuke SO, Dyke K, et al. Decreases in Young Children Who Received Blood Lead Level Testing During COVID-19 – 34 Jurisdictions, January-May 2020. MMWR Morb Mortal Wkly Rep 2021; 70:155–161. DOI: http://dx.doi.org/10.15585/mmwr.mm7005a2external icon.

SEC to Update Required Climate Related Disclosures

By Stuart Kaplow on February 28, 2021 Posted in Climate Change, ESG, Federal

On February 24, acting chair of the U.S. Securities and Exchange Commission Allison Herren Lee, offered insight into the future direction of mandatory climate change disclosures and new ESG regulation, when she directed the Division of Corporation Finance to enhance its focus on climate related disclosure in public company filings.

The Commission provided guidance in 2010 to public companies regarding then existing disclosure requirements as they apply to climate change matters. For more than a decade we have assisted public companies and their advisors in matters of climate change and sustainability, including compliance with that 2010 SEC guidance.

It is anticipated that the new obligation to make disclosures with respect to climate change will expand greatly and that John Coates, who joined the SEC on February 1 as acting director of its Division of Corporation Finance will be at the center of those actions including to expand companies’ environmental, social, and governance disclosures (.. a subject he spoke and wrote on at his prior post at Harvard).

As part of its enhanced focus in this area, the SEC staff has now been directed by the acting chair to review the extent to which public companies address the topics identified in the 2010 guidance, assess compliance with disclosure obligations under the federal securities laws, engage with public companies on these issues, and absorb critical lessons on how the market is currently managing climate related risks. The staff “will use insights from that work to begin updating the 2010 guidance” to take into account developments in the last decade.

We know anecdotally that more than ever, investors are considering ESG including climate related issues when making their investment decisions. It is the SEC’s responsibility to ensure that investors have access to material information when making investment decisions and it is going to do that with a finger on the scale in favor of climate change by ensuring compliance with the rules on the books and updating existing guidance to produce consistent, comparable, and reliable climate related disclosures. Companies will need to adjust their behavior and be cautious to mitigate significant increased risk that will be associated with a new realm of disclosure laws.

While it is premature to speculate on specific enforceable disclosure rules including specific government written metrics or standards for ESG disclosures, it is clear such is the direction of the SEC.

Allison Herren Lee was appointed by President Trump to the SEC, unanimously confirmed by the U.S. Senate, and sworn into office on July 8, 2019. Ms. Lee was designated acting chair of the Commission by President Biden, on January 21, 2021.

All of this will all but certainly move forward promptly when President Biden’s SEC chairman nominee, Gary Gensler (.. whose confirmation hearing in scheduled for March 2, 2021) is seated.

We have and continue to assist public companies in matters of climate change and sustainability, including voluntary environmental reports, as well as the realm of emergent SEC disclosures and financial statement compliance.

Rare Earth Metal Theft by Catalytic Converter

By Stuart Kaplow on February 21, 2021 Posted in Environmental

The theft of catalytic converters to sell for the value of the rare earth metal components is a thing once again.

A catalytic converter is a component part of the exhaust system of a fossil fuel motor vehicle that catalyzes, or accelerates the break down of vehicle emissions making them less harmful. The catalyst of a catalytic converter is usually Platinum (Pt), Palladium (Pd), and Rhodium (Rh). All three of these platinum group metals are rare.

Two of the three are currently worth more per ounce than Gold. Palladium prices earlier this month were over $2,300 per ounce (.. Gold is about $1,900), a 20% increase since January. Rhodium was selling this month at more than $21,000 per ounce, up from less than $6,000 last month.

Rare earth metals are not only used in automobile pollution control devices (and not just in the U.S. but in growing numbers across the globe including in China), but also in smart phones, LEDs, flat screen televisions and a host of tech devices from wind turbines to hybrid car batteries, all for which worldwide demand continues to increase. And while China likely leads the world in production from raw elements, the U.S. may be the largest importer and largest recycler of rare earth metals.

Hence a crime of opportunity.

The precise number of thefts is not known. The National Insurance Crime Bureau, the public source for vehicle theft data reported to insurance companies, stopped tracking catalytic converter thefts in 2015. But there is has been a dramatic increase that we can track anecdotally because within the last month there have been news media accounts in the New York Times and on NPR. Police departments from Wichita to South Bend and Lynchburg to Manchester have all issued statements about increased converter thefts.

Curiously, the largest quantity of rare earth metals in a Toyota Prius hybrid is in the magnets in its electric motor, second are the car’s dashboard electronics and only third, its catalytic converter, which is among the most stolen in the U.S. because the gasoline engine does not run fulltime so the metals in the pollution control device last longer, but also because it is easy to separate from the vehicle.

EPA generally does not permit the installation of used catalytic converters, so it is clear they are being stolen for recycling of the rare earth metals.

Some have asked why is this crime wave happening now? It is not pandemic related. The pollution control devices have been required in the U.S. since 1975 and there was a wave of thefts on the 1980s, but the current crime spree to feed rare earth metal recycling is apparently driven by the skyrocketing prices for those elements.

A Washington DC environmental regulator recently said, the Black market of extracting rare earth metals from stolen catalytic converters may be the most valuable recycling market, and possibly the only profitable recycling market, in the U.S. today.

EPA 2020 Enforcement Offers Insight

By Stuart Kaplow on February 14, 2021 Posted in Codes and Regulations, Environmental, Federal

The Environmental Protection Agency’s has released the results of its 2020 enforcement and compliance efforts and those results offer significant insight that business can benefit from.

In the first 5 months of fiscal year 2020, EPA was on track to significantly exceed traditional numeric metrics in many categories with more compliance monitoring activities in the first 5 months than in any year since 2013, more in assessed penalties the first 5 months than in 7 out of the previous 10 years, more injunctive relief in the first 5 months than in FY 2019, and more concluded cases in the first 5 months than in either FY 2018 or FY 2019.

Then on March 13, 2020, the President declared a national emergency due to SARS-Cov-2 followed by state stay at home orders, federal employees teleworking, many courts closed, and enforcement took a dive. To its credit, like most of us, EPA’s enforcement and compliance assurance program adapted.

Good for the agency, but disappointing for our society, in FY 2020 among the agency’s priority cases were an onslaught of violations of the Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA) by persons hoping to cash in on the fear of the coronavirus by making fraudulent claims that their products or devices kill that virus.

The quick take on EPA’s other FY 2020 enforcement and compliance achievements include:

Commitments to reduce, treat, or eliminate over 426 million pounds of pollution, the most in a single year since 2015.

Proper treatment, minimization, or disposal of 1.6 billion pounds of hazardous and non-hazardous waste, more than all but two of the past eight years.

Clean up of 104 million cubic yards of contaminated soil and water, more than in FY 2019.

Prevention of 18.2 million pounds of air pollutants by preventing, reducing, treating, or eliminating emissions from vehicle and engine air sources through resolution of 31 civil enforcement cases for tampering and aftermarket defeat devices—the most for any one year in the agency’s history.

247 new criminal cases opened, 77 more than in FY 2019 and the most since 2014.

Superfund response and cash-out settlements of over $636 million for cleanup work, $65 million more than FY 2019, as well as $178.4 million for EPA’s costs.

EPA’s FY 2020 Annual Environmental Enforcement Results, offers insights into the thinking of federal regulators, including analysis of specific cases, see, https://www.epa.gov/enforcement/enforcement-annual-results-fiscal-year-2020

However, if one reads between the lines of the agency issued report, enforcement actions were below prior years reported cases. Not a surprise to anyone during a pandemic.

Moreover, anecdotally, EPA had been vocal in the last 4 years about emphasizing compliance assistance over enforcement. Michael Regan, the Biden Administration nominee for EPA Administrator has accentuated matters of climate change and environmental social justice, but on day to day enforcement he may lead the agency otherwise.

Despite the obvious EPA policy differences in a Trump versus a Biden Administration, the professional staff in the enforcement and compliance program may well man a steady keel in terms of priorities, including in the immediate protecting the environment and public from false claims that products or devices kill the coronavirus.

There are More than 40 Million People in Modern Slavery

By Stuart Kaplow on February 7, 2021 Posted in ESG, LEED, Sustainability

A January 18, 2021 report by the UK Independent Anti Slavery Commissioner is both a wake-up call and a useful guide on preventing modern slavery and human trafficking.

In the Western world there are low levels of awareness of the prevalence of modern slavery. Yet today there are more than 40 million people in modern slavery worldwide. Modern slavery exists in every industry, in every country in the world.

It is no longer acceptable to look the other way. Ignorance is not a defense. If businesses, including in the real estate industry look hard enough, they will find it in their supply chains. A business saying though an ESG statement on their website that they are concerned about modern slavery may sound nice, but in 2021 when so many are talking about ESG, that claim will not resonate and quite frankly falls short of what a private enterprise should be doing to prevent these crimes.

Slavery in the construction industry is not new, but this is not about the slaves who built the Egyptian pyramids in the Middle Kingdom period of 2600 BC.

The British government reports there are more enslaved people today than there have been at any time in history! (And that does not include forced prison labor, including for example the widely reported Chinese prison labor-derived nails that entered the United States.)

In a conversation I had with Barry Giles, a true green building pioneer, in 2018, he said, “to truly regard sustainable buildings in a holistic manner, it’s our obligation to start with the supply chain serving the construction industry.”

This law firm has worked with businesses, non real estate and real estate alike, 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.” And we have advised companies seeking to produce their annual statements required by the UK Modern Slavery Act 2015. To assist in context, that Article 1 of that Act defines slavery:

“A person commits an offence if: a) the person holds another person in slavery or servitude and the circumstances are such that the person knows or ought to know that the other person is held in slavery or servitude, or b) the person requires another person to perform forced or compulsory labour and the circumstances are such that the person knows or ought to know that the other person is being required to perform forced or compulsory labour.”

The British and the EU lead the world in these concerns and the EU Parliament has committed that by June 2021 is will require human rights due diligence including for many U.S. companies selling in the EU. They are also far ahead of the U.S. in matters of ESG disclosures and while there is no single or widely accepted definition of “Environmental, Social and Governance,” matters of slavery should be disclosed. Ethical labor is becoming widely considered and articulated in ESG disclosures in 2021 by clients of this firm.

But today’s ESG statements are only a very small step. 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, most would agree humanity has not done enough, including that despite purporting to address social equity as one third of the sustainability triple bottom line, for example, today’s green building standards have failed miserably in responding to issues of modern slavery on construction sites and building material supply chains.

The largest study of the typology of modern slavery in the U.S. found construction as one of the top 25 industries where slavery takes place today.

Green building has only very recently begun to emphasize the social equity component of the triple bottom line. In response to criticism of that deafening silence in the ratings systems, there is a LEED v4 pilot credit available for Social Equity within the Supply Chain, the original draft of which was informed by the BIFMA e3 furniture sustainability standard, although it is rarely pursued, that addresses workers who are involved in the production of materials and products used in the project. Some suggest the pilot credit was an afterthought that attempts to do too much and accomplishes little when it not only requires “no child/ forced/ bonded labor” but also “harassment and grievance procedures” and “anti-corruption and bribery” that are uniquely American values not practical most places in the world.

The BRE Ethical Labour Sourcing Standard enables a company to examine and assess its own business practices and then if it desires to demonstrate to customers and other stakeholders the company’s commitment to eliminating ant possibility of modern slavery or human trafficking. The Standard provides a good framework that is available free of charge. If a company determines, it can then showcase their ethical sourcing credentials after gaining third party Ethical Labour Sourcing verification from BRE Global. I am a fan of this BRE standard and we have utilized it with clients.

And the January 18th Themis International Services, Preventing Modern Slavery and Human Trafficking: An Agenda for Action across the Financial Services Sector, 2021, pulls together research, resources and advice aimed at the financial services sector, but having far greater impact.

Slavery has existed since ancient times and despite having been outlawed in all countries, contemporary slavery exists. At a time when ESG has become synonymous with sustainability and companies are coming to recognize that investors 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 investors 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 new laws.

There is no morally defensible reason for not doing everything in our power to end modern slavery and human trafficing. All companies must examine and assess their business practices now.

PFAS in a Phase I Environmental Site Assessment?

By Stuart Kaplow on January 31, 2021 Posted in Codes and Regulations, Environmental, Uncategorized

The question de riguer in commercial real estate transactions is if PFAS is included in a Phase I Environmental Site Assessment?

As made clear by the January 14, 2021 EPA action, the response is “no” that the standard practice for environmental site assessments in the vast majority of places does not consider PFAS, however, ..

Per and polyfluoroalkyl substances are a group of more than 4,000 man-made chemicals that include PFOA, PFOS, GenX, and many other chemicals. PFAS has been manufactured and used in a variety of industries around the globe, including in the United States since the 1940s and have been the most extensively produced and studied of these chemicals. PFAS is very persistent in the environment and in the human body, meaning these chemicals don’t break down, accumulating over time, and as such have been referred to ‘forever chemicals’ making them an emergent environmental catastrophe.

The EPA reports, “there is evidence that exposure to PFAS can lead to adverse health outcomes .. studies indicate that PFAS can cause reproductive and developmental, liver and kidney, and immunological effects in laboratory animals, .. and have caused tumors in animal studies.”

A peer reviewed study cited approvingly by the EPA describes 99.7% of Americans have a detectable PFAS in their blood!

Against that backdrop, the stated purpose of the ASTM Standard E1527-13 Phase I Environmental Site Assessment process is “to define good commercial and customary practice in the United States of America for conducting an environmental site assessment of a parcel of commercial real estate with respect to the range of contaminants within the scope of the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) (42 U.S.C. §9601) and petroleum products.”

The term “recognized environmental conditions means the presence or likely presence of any hazardous substances or petroleum products in, on, or at a property ..”

“.. a substance defined as a hazardous substance pursuant to CERCLA 42 U.S.C.§9601(14), as interpreted by EPA regulations and the courts: (A) any substance designated pursuant to section 1321(b)(2)(A) of Title 33, (B) any element, compound, mixture, solution, or substance designated pursuant to section 9602 of this title, (C) any hazardous waste having the characteristics identified under or listed pursuant to section 3001 of the Resource Conservation and Recovery Act of 1976 (RCRA), as amended.”

PFAS is not a CERCLA nor RCRA listed hazardous substance.

Such was confirmed on January 14, 2021, when EPA issued an Advance Notice of Proposed Rulemaking to get public comment and data to inform the agency’s ongoing evaluation of PFAS. That public comment may influence additional regulatory steps, if any, maybe even CERCLA listing?

Of course there may be environmental issues or conditions at a property that parties may wish to assess in connection with a commercial real estate transaction that are outside the scope of a Phase I, these are known in ASTM parlance as “non-scope considerations” and may be included in the Phase I report. Such would generally be a bad idea perverting a Phase I, however might be prudent at a property where PFAS was produced or incorporated into manufacturing or other processes. But what would the seller and buyer do if PFAS was detected?

Additionally, there are a limited number of places where PFAS is regulated as state hazardous substance, like Michigan where should likely be included in a Phase I. And there is at least one place where there appears to be a complete disconnect, as I described last year in a post, Maryland the First State to Legislate Permitted Use of PFAS.

The broad consensus of environmental professionals in the know is that there is simply no good reason to consider PFAS in a commercial real estate transaction and only negatives that can flow from these widespread chemicals that are nearly everywhere and are in nearly everyone’s blood.

This law firm has been advising and counseling clients in PFAS related matters since 2009, including in real estate transactions this past year, one of which was adjacent to a commercial airport, another had previously been a fire station and a third was a marina; each a place where one would anticipate PFAS laden fire suppression foam had impacted the environment.

Despite that they will not read about it in a Phase I report, all those with an interest in commercial real estate should be aware of how pervasive PFAS is in the economy and the environment, and the associated risk associated with this forever chemical, including what will no doubt be changing laws and emergent litigation as the legal system catches up to the science.

Companies are Preparing for ESG Disclosure Rules

By Stuart Kaplow on January 24, 2021 Posted in Climate Change, Codes and Regulations

Public companies in the U.S. find themselves at a dynamic time of emergent environmental, social and governance (“ESG”) disclosures. New appointees in the Biden Administration, from the SEC and the Labor Department to the top White House economic advisor, all signal mandatory ESG disclosures.

The idea of ESG began in 2004 with a United Nations initiative to influence capital in non Western markets.

While the federal government has to date stymied the call for ESG disclosures by vocal socially conscious investors, activist stockholder environmental proxy proposals, and the like, companies now anticipate new government edicts commanding ESG statements. In an initial move, the only Department of Labor regulation listed for review by the Biden Administration is the so called ESG Rule published in the Federal Register on November 13, greatly limiting the use of ESG information in certain retirement plans.

I have been pleasantly surprised by the large number of virtual meetings we have had in recent days with representatives of public companies preparing for all but certain new regulation in this space.

There is legal risk associated with ESG disclosures and I have assisted companies for years in mitigating their liability while still being responsive to the trend of investor demands for these disclosures.

Make no mistake, today there is no U.S. law requiring businesses to make ESG statements, and I have posted about failed past attempts to criminalize the matter, ESG Disclosure Simplification Act Passes Committee But Will Fail. But that is all about to change.

Of course, existing SEC rules generally require public companies to disclose, among other things, known trends, events, and uncertainties that are reasonably likely to have a material effect on the company’s financial condition or operating performance in an annual report and other periodic filings, and there are the SEC’s Conflict Minerals Disclosure Rule, and the California Transparency in Supply Chains Act, but none of that equates to ESG disclosures.

Recent U.S. case law underscores some of the risks that ESG disclosures may be actionable if found to be materially false or misleading. There has been relatively little judicial redress arising from ESG claims (largely attributable to a robust stock market in recent years) and much of it involving bad facts in extreme instances (i.e., against BP arising from the Deepwater Horizon incident, against Massey Energy arising from a fire in a coal mine, etc.) and the legal adage that bad facts rise to bad law may certainly have been at play in those instances.

But the risks associated with ESG disclosures are real and should not be underestimated.

It was widely reported in the media in December 2019 (.. yes, obviously pre Biden Administration) that the SEC was scrutinizing whether ESG claims “are at odds with reality.” The SEC sent examination letters to managers of funds touting their ESG bonafides, apparently focusing on criteria for claiming a company to be socially responsible and the methodology for applying those criteria.

The problem, of course, that existed then and still exists today is there are no such accepted criteria for the very big space that is ‘environmental, social, governance’.

Current SEC Commissioner Hester Peirce, famously said, “we are seeing a similar scarlet letter phenomenon in today’s modern, but no less flawed world” but it is not Hester Prynne’s “A” for adultery in Puritan Massachusetts Bay Colony in 1642, but rather ESG in America in 2020. The SEC Commissioner has also questioned “the materiality of ESG” including finding fault with ESG for having no enforceable or common meaning, “while financial reporting benefits from uniform standards developed over centuries, many ESG factors rely on research that is far from settled.”

But there is guidance out there and I have been advising companies to look to Europe and the EU Parliament requirement that by the end of 2020 EU member public companies must have published their policies on integration of sustainability risks. Theirs is a watered down definition of “sustainability risks .. as an ESG event that could cause an actual or potential negative impact on the value of the investment arising from an adverse sustainability impact,” but still offers good guidance for U.S. best practices.

The U.S. Chamber of Commerce released principles on ESG disclosures, but they did so when all of this was voluntary, and the voluntary disclosures many public companies make today bare little if any relationship to what will be required by law; however, these principals are good and offer some guidance as companies get ready for new ESG rules.

Michael Bloomberg funded the Sustainability Accounting Standards Board and more than 100 companies report information according to SASB guidelines, but the disclosures aren’t standardized like corporate financial disclosures including that they sometimes omit proprietary information or damaging data.

But, possibly of greatest concern to company boards of directors and other leaders are the limitations of the three letter acronym. The broad breadth of issues that get dropped into the ESG bucket are awfully large and diverse to be given a numeric score.

I have for years advised public companies about environmental matters and sustainability including navigating the complexity of the emergent ESG disclosure decision making landscape, including companies responding to the EU disclosure codes. And with ESG disclosure regulation in the U.S. in short order all but certain, there are steps that companies should take now to reduce the potential legal exposure that will be created by these disclosures.

Okay, whilst our most frequent advice has been simply to use aspirational language in ESG statements, including using words like “should,” “expect,” or “strive,” possibly our most efficacious advice has been to obtain third party verification of the accuracy of disclosures (e.g., LEED certification for claims about buildings and the like), but the coming regulation of this space by the federal government requires a robust response by companies, beginning now, to mitigate risk from ESG. All of which can be consistent with a core belief of this law firm that we can repair the planet with capitalism.