SEC Proposes Two Rules as Cairns to Prevent Misleading ESG Claims

The Securities and Exchange Commission published in the Federal Register last Friday, June 17, 2022, proposed rules for new naming requirements and disclosures for investment funds making ESG claims.

It would be a mistake for the broader business community to ignore these two rules interpreting them narrowly as only regulating asset managers at investment industry firms. These SEC proposals are cairns with the Commission providing clear trail markers both for its future federal public policy on ESG, when most of its priorities will be reduced to future SEC regulations by this Administration when ESG matters do not have enough votes to not pass Congress; and, for the SEC’s contemplated future enforcement actions over ESG greenwashing and misleading claims.

The first proposed rule amends the Investment Company Act of 1940 (the “Names Rule”) to address changes in the mutual fund industry and compliance practices that have developed in the approximately 20 years since the current rule was adopted. A fund’s name is an important marketing tool and can have a significant impact on investors’ decisions when selecting investments, and the Names Rule addresses fund names that are likely to mislead investors about a fund’s investments and risks.

“A lot has happened in our capital markets in the past two decades. As the fund industry has developed, gaps in the current Names Rule may undermine investor protection,” said SEC Chair Gary Gensler in a virtual news conference on the day of the rules release. “In particular, some funds have claimed that the rule does not apply to them – even though their name suggests that investments are selected based on specific criteria or characteristics.”

The Names Rule currently requires registered investment companies whose names suggest a focus in a particular type of investment (among other areas) to adopt a policy to invest at least 80 percent of the value of their assets in those investments (an “80 percent investment policy”). The proposed amendments would enhance the rule’s protections by requiring more funds to adopt an 80 percent investment policy. Specifically, the proposed amendments would extend the requirement to any fund name with terms suggesting that the fund focuses in investments that have (or whose issuers have) particular characteristics. This would include fund names with terms such as “growth” or “value” or terms indicating that the fund’s investment decisions incorporate one or more environmental, social, or governance factors.

The amendments also would limit temporary departures from the 80 percent investment requirement and clarify the rule’s treatment of derivative investments.

The second proposal is significantly more problematic when it amends rules and reporting forms “to promote consistent, comparable, and reliable information for investors” concerning funds’ and advisers’ incorporation of ESG factors. The proposed changes are wide-ranging, applying to certain registered investment advisers, advisers exempt from registration, registered investment companies, and business development companies; a huge expansion beyond those currently regulated.

“I am pleased to support this proposal because, if adopted, it would establish disclosure requirements for funds and advisers that market themselves as having an ESG focus,” said Gensler.

The proposed amendments seek to categorize what is ESG extremely broadly, but artificially without defining the terms or offering any substantive guidance (.. as if a market driven definition of the hugely overarching umbrella of ‘environmental social governance’ leaves anything unsaid?) and require funds and advisers to provide more specific disclosures in fund prospectuses, annual reports, and adviser brochures based on the ESG strategies they claim to pursue.

The proposal would require ESG focused funds that consider environmental factors in their investment strategies to disclose additional information regarding the GHG emissions associated with their investments. These funds would be required to disclose the carbon footprint and the weighted average carbon intensity of their portfolio. The requirements are transparently designed to meet demand from investors seeking environmentally focused fund investments for consistent and comparable quantitative information, but this rule goes too far. The GHG emissions data and weighting process is simply information not available today and what may exist is almost universally not public information and largely not scientifically sound. Funds that disclose that they do not consider GHG emissions as part of their ESG strategy would not be required to report this information. Integration funds that consider GHG emissions would be required to disclose additional information about how the fund considers GHG emissions, including the method.

Additionally, funds claiming to achieve a specific ESG impact would be required to describe the specific impact they seek to achieve and summarize their progress on achieving those impacts. Funds that use proxy voting or other engagement with issuers as a significant means of implementing their ESG strategy would be required to disclose information regarding their voting of proxies on particular ESG related voting matters and information concerning their ESG engagement.

Finally, to complement the proposed ESG disclosures in fund prospectuses, annual reports, and adviser brochures, the proposal would require significant new ESG reporting to the SEC. All of which combines to make compliance with these rules expensive.

While admittedly these two rules are not as far reaching as the pending SEC proposed ESG rule, again, it would be a mistake to ignore these interpreting them narrowly as only regulating investment industry firms. These proposed rules are cairns with the SEC providing clear trail markers both for its future federal public policy on ESG, when most of its priorities will be reduced to future SEC regulations at a time when ESG matters cannot muster enough votes to not pass Congress; and, also significantly for the SEC’s contemplated future enforcement actions over ESG greenwashing and misleading claims or deceptive claims.

The proposed rules were published in the Federal Register on June 17, 2022 and comments should be received on or before August 16, 2022.

Uyghur Forced Labor Prevention Act to be Enforced June 21

Congress passed, and on December 23, 2021 President Biden signed into law, the Uyghur Forced Labor Prevention Act. The new law that will be enforced beginning June 21, 2022 has implications for imported cotton and tomatoes and most significantly for solar panels.

The Act, codified at 22 U.S.C. §6901, establishes a rebuttable presumption that any goods, wares, articles, and merchandise mined, produced, or manufactured wholly or in part in the Xinjiang Uyghur Autonomous Region of the People’s Republic of China, where the U.S. government says China is committing genocide against the Uyghur people, or produced by an entity on a list required by clause (i), (ii), (iv) or (v) of section 2(d)(2)(B) are prohibited under section 307 of the Tariff Act of 1930 are not entitled to entry at any of the ports of the U.S.

Those goods, wares, articles and merchandise include those mined, produced, or manufactured wholly or in part with forced labor by Uyghurs, Kazakhs, Kyrgyz, Tibetans, and members of other persecuted groups in the People’s Republic of China, and especially in the Xinjiang Uyghur Autonomous Region.

Cotton, tomatoes, and polysilicon (a key raw material in the solar photovoltaic supply chain) are among the sectors identified as high priority for enforcement.”

The Act requires U.S. Customs and Border Protection to apply the rebuttable presumption unless the importer can overcome the presumption of forced labor by establishing, by clear and convincing evidence, that the good, ware, article, or merchandise was not mined, produced, or manufactured wholly or in part by forced labor.  This elevated standard will require the importer to not only use due diligence in evaluation of its supply chain, but also to respond completely and substantively to CBP requests for information regarding entries it may review. In a webinar last week (.. admittedly before the later White House statement earlier this week, described below), CBP’s Elva Muneton said, “It’s important to know that the level of evidence that’s going to be required by the Uyghur act is very high.”

While solar panels are perceived by many as de rigueur in reducing carbon in U.S. energy production, there is no doubt, the global solar panel supply chain relies heavily on forced labor from China, but the U.S. solar industry has been all but silent failing to “address the gross violations of human rights in the Xinjiang Uyghur Autonomous Region.”

An authoritative report by a private German research firm providing solar industry market intelligence highlights China’s outsized role in the global solar power industrial complex. China has between 71% and 97% of the world’s capacity for various solar panel components, according to the recent market report. Xinjiang alone produces nearly half of the world’s solar grade polysilicon and is home to factories for some of the industry’s biggest players.

Concomitantly, the U.S. Commerce Department on March 28, 2022 launched an investigation, in response to a complaint from a California solar module manufacturer, to determine if solar companies are circumventing existing antidumping duties on China imposed by the Obama Administration, with tariffs of up to 250%. Rather than boost U.S. domestic solar panel manufacturing, the tariffs drove Chinese companies to move the vast majority of production (.. or shipping) to Southeast Asia. China may now make up a mere 1% of solar imports to the U.S. while Malaysia accounts for 31%, Vietnam 29%,  Thailand 26% and Cambodia 6%. The Biden Administration extended the tariffs for 4 years on February 7, 2022. But, this past Monday, June 6, 2022, the Administration issued a declaration of emergency under the Tariff Act of 1930 (.. last used by the Trump Administration on imported personal protective equipment early in the Covid-19 pandemic), creating a moratorium tariffs on solar cells and modules from the four Southeast Asian nations for 2 years (also effectively making that waiver retroactive) and also invoked the Defense Production Act of 1950 to spur domestic solar panel and other clean energy technology manufacturing.

It is likely that both of these actions will face challenges in the federal courts. In an effort to buttress the actions, it can be anticipated that the Commerce Department will promulgate a regulation, without notice and comment, in a matter of days, possibly in advance of and touching on the Uyghur Forced Labor Prevention Act enforcement commencement on June 21 and almost certainly prior to the expected date of the preliminary determination in the circumvention investigation, August 29.

Of import, the Administration’s moratorium does not impact existing tariffs on imports of solar cells and modules from China, including such modules assembled in countries other than China using cells from China.

That observed, uncertainty remains despite that Chinese companies appear to have effectively dodged solar economic tariffs, including at least for 2 years into the future, but the White House statement was curiously silent on whether those Chinese companies will be able to evade the “very high” human rights bar of the Uyghur Forced Labor Prevention Act when enforcement begins on June 21.

Pendent to possible government action will also be the uncertainty that American businesses will install solar panels associated with forced labor from China in a moral equivalence with reduced carbon, risking their brand reputation in being linked to the gross violations of human rights in Xinjiang? We are positioned to assist your business in navigating these solar system issues.

Glossary of Greenhouse Gas Terms

With proposed federal regulation of greenhouse gas emissions by the Securities and Exchange Commission requiring GHG disclosure and new state statutes, including a new Maryland law that requires not only disclosure, but also a mandated reduction in GHG emissions, a greater appreciation of the subject of GHG appears in order. This short glossary is an alphabetical list of terms relating to GHG with explanations of each; or if you prefer this is a brief dictionary of specialized terms with their meanings.

Albedo   The amount of solar radiation reflected from an object or surface, often expressed as a percentage.

Alternative Energy   Energy derived from nontraditional sources (e.g., compressed natural gas, solar, hydroelectric, wind).

Anthropogenic   Made by people or resulting from human activities. Usually used in the context of emissions that are produced as a result of human activities.

Atmosphere   The gaseous envelope surrounding the Earth. The dry atmosphere consists almost entirely of nitrogen (78.1% volume mixing ratio) and oxygen (20.9% volume mixing ratio), together with a number of trace gases, such as argon (0.93% volume mixing ratio), helium, radiatively active greenhouse gases such as carbon dioxide (0.035% volume mixing ratio), and ozone. In addition, the atmosphere contains water vapor, whose amount is highly variable but typically 1% volume mixing ratio. The atmosphere also contains clouds and aerosols.

Biofuels   Gas or liquid fuel made from plant material. Includes wood, wood waste, wood liquors, peat, railroad ties, wood sludge, spent sulfite liquors, agricultural waste, straw, tires, fish oils, tall oil, sludge waste, waste alcohol, municipal solid waste, landfill gases, other waste, and ethanol blended into motor gasoline.

Biomass   Materials that are biological in origin, including organic material (both living and dead) from above and below ground, for example, trees, crops, grasses, tree litter, roots, and animals and animal waste.

Carbon Dioxide   A naturally occurring gas, and also a byproduct of burning fossil fuels and biomass, as well as land-use changes and other industrial processes. It is the principal human caused greenhouse gas that affects the Earth’s radiative balance. It is the reference gas against which other greenhouse gases are measured and as such has a Global Warming Potential of 1.

Carbon Footprint   The total amount of greenhouse gases that are emitted into the atmosphere each year by a person, family, building, organization, or company. A person’s carbon footprint includes greenhouse gas emissions from fuel that an individual burns directly, such as by heating a home or riding in a car. It also includes greenhouse gases that come from producing the goods or services that the individual uses, including emissions from power plants that make electricity, factories that make products, and landfills where trash gets sent.

Carbon Capture and Sequestration   Carbon capture and sequestration is a set of technologies that can greatly reduce carbon dioxide emissions from new and existing coal- and gas-fired power plants, industrial processes, and other stationary sources of carbon dioxide. It is a three-step process that includes capture of carbon dioxide from power plants or industrial sources; transport of the captured and compressed carbon dioxide (usually in pipelines); and underground injection and geologic sequestration, or permanent storage, of that carbon dioxide in rock formations that contain tiny openings or pores that trap and hold the carbon dioxide.

Climate   Climate in a narrow sense is usually defined as the “average weather,” or more rigorously, as the statistical description in terms of the mean and variability of relevant quantities over a period of time ranging from months to thousands of years. The classical period is 3 decades, as defined by the World Meteorological Organization. These quantities are most often surface variables such as temperature, precipitation, and wind. Climate in a wider sense is the state, including a statistical description, of the climate system. See, Weather.

Climate Change   Climate change refers to any significant change in the measures of climate lasting for an extended period of time. In other words, climate change includes major changes in temperature, precipitation, or wind patterns, among others, that occur over several decades or longer.

Fluorinated Gases   Powerful synthetic greenhouse gases such as hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride that are emitted from a variety of industrial processes. Fluorinated gases are sometimes used as substitutes for stratospheric ozone-depleting substances (e.g., chlorofluorocarbons, hydrochlorofluorocarbons, and halons) and are often used in coolants, foaming agents, fire extinguishers, solvents, pesticides, and aerosol propellants. These gases are emitted in small quantities compared to carbon dioxide (CO2), methane (CH4), or nitrous oxide (N2O), but because they are potent greenhouse gases, they are sometimes referred to as High Global Warming Potential gases (High GWP gases).

Fluorocarbons   Carbon-fluorine compounds that often contain other elements such as hydrogen, chlorine, or bromine. Common fluorocarbons include chlorofluorocarbons (CFCs), hydrochlorofluorocarbons (HCFCs), hydrofluorocarbons (HFCs), and perfluorocarbons (PFCs).

Fossil Fuel   A general term for organic materials formed from decayed plants and animals that have been converted to crude oil, coal, natural gas, or heavy oils by exposure to heat and pressure in the earth’s crust over hundreds of millions of years.

Global Warming Potential   A measure of the total energy that a gas absorbs over a particular period of time (usually 100 years), compared to carbon dioxide (which has a “1” GWP).

Greenhouse Gas (GHG)   Any gas that absorbs infrared radiation in the atmosphere. Greenhouse gases include, carbon dioxide, methane, nitrous oxide, ozone, chlorofluorocarbons, hydrochlorofluorocarbons, hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride. Greenhouse Gas (GHG). ,

Heat Island   An urban area characterized by temperatures higher than those of the surrounding non-urban area. As urban areas develop, buildings, roads, and other infrastructure replace open land and vegetation. These surfaces absorb more solar energy, which can create higher temperatures in urban areas.

Indirect Emissions   Indirect emissions from a building, home or business are those emissions of greenhouse gases that occur as a result of the generation of electricity used in that building. These emissions are called “indirect” because the actual emissions occur at the power plant which generates the electricity, not at the building using the electricity.

Methane (CH4)   A hydrocarbon that is a greenhouse gas with a Global Warming Potential most recently estimated at 25 times that of carbon dioxide (CO2). Methane is produced through anaerobic (without oxygen) decomposition of waste in landfills, animal digestion, decomposition of animal wastes, production and distribution of natural gas and petroleum, coal production, and incomplete fossil fuel combustion.

Mitigation   A human intervention to reduce the human impact on the climate system; it includes strategies to reduce greenhouse gas sources and emissions and enhancing greenhouse gas sinks.

Nitrous Oxide (N2O)   A powerful greenhouse gas with a Global Warming Potential of 298 times that of carbon dioxide (CO2). Major sources of nitrous oxide include soil cultivation practices, especially the use of commercial and organic fertilizers, fossil fuel combustion, nitric acid production, and biomass burning. Natural emissions of N2O are mainly from bacteria breaking down nitrogen in soils and the oceans. Nitrous oxide is mainly removed from the atmosphere through destruction in the stratosphere by ultraviolet radiation and associated chemical reactions, but it can also be consumed by certain types of bacteria in soils.

Ocean Acidification   Increased concentrations of carbon dioxide in sea water causing a measurable increase in acidity (i.e., a reduction in ocean pH). This may lead to reduced calcification rates of calcifying organisms such as corals, mollusks, algae and crustaceans.

Parts Per Billion (ppb)   Number of parts of a chemical found in one billion parts of a particular gas, liquid, or solid mixture.

Parts Per Million by Volume (ppmv)   Number of parts of a chemical found in one million parts of a particular gas, liquid, or solid.

Recycling   Collecting and reprocessing a resource so it can be used again. An example is collecting aluminum cans, melting them down, and using the aluminum to make new cans or other aluminum products.

Relative Sea Level Rise   The increase in ocean water levels at a specific location, taking into account both global sea level rise and local factors, such as local subsidence and uplift. Relative sea level rise is measured with respect to a specified vertical datum relative to the land, which may also be changing elevation over time.

Renewable Energy   Energy resources that are naturally replenishing such as biomass, hydro, geothermal, solar, wind, ocean thermal, wave action, and tidal action.

Scope 1 GHG Emissions   Direct emissions that occur from sources that are controlled or owned by an organization (e.g., emissions associated with fuel combustion in boilers, furnaces, vehicles) and are modest in abundance.

Scope 2 GHG Emissions   Indirect GHG emissions associated with the purchase of electricity, steam, heat, or cooling and generally greater in contribution than Scope 1. Although Scope 2 emissions physically occur at the facility where they are generated, they are accounted for in an organization’s GHG inventory because they are a result of the organization’s energy use.

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

Sink   Any process, activity or mechanism which removes a greenhouse gas, an aerosol or a precursor of a greenhouse gas or aerosol from the atmosphere.

Sulfur Hexafluoride (SF6)   A colorless gas soluble in alcohol and ether, slightly soluble in water. A very powerful greenhouse gas used primarily in electrical transmission and distribution systems and as a dielectric in electronics. The Global Warming Potential of SF6 is 22,800.

Water Vapor   The most abundant greenhouse gas, it is the water present in the atmosphere in gaseous form. Water vapor is an important part of the natural greenhouse effect. While humans are not significantly increasing its concentration through direct emissions, it contributes to the enhanced greenhouse effect because the warming influence of greenhouse gases leads to a positive water vapor feedback. In addition to its role as a natural greenhouse gas, water vapor also affects the temperature of the planet because clouds form when excess water vapor in the atmosphere condenses to form ice and water droplets and precipitation.

Weather   Atmospheric condition at any given time or place. It is measured in terms of such things as wind, temperature, humidity, atmospheric pressure, cloudiness, and precipitation. In most places, weather can change from hour-to-hour, day-to-day, and season-to-season. Climate in a narrow sense is usually defined as the “average weather,” or more rigorously, as the statistical description in terms of the mean and variability of relevant quantities over a period of time ranging from months to thousands or millions of years. The classical period is 30 years, as defined by the World Meteorological Organization. These quantities are most often surface variables such as temperature, precipitation, and wind. Climate in a wider sense is the state, including a statistical description, of the climate system. A simple way of remembering the difference is that climate is what you expect (e.g., cold winters) and weather is what you get (e.g., a blizzard).

For more information, beyond these 34 terms we suggest are needed to understand the new regulation of GHG emissions, see our recent blog post, A Quick Refresher on the Science of Greenhouse Gas, or do not hesitate to give us a call.

SEC Charges Mining Company with Misleading Investors in its ESG Disclosures

The U.S. Securities and Exchange Commission last month charged Vale S.A., a publicly traded Brazilian mining company and one of the world’s largest iron ore producers, with making false and misleading claims about the safety of the Brumadinho dam including through its environmental, social, and governance (ESG) disclosures.

According to the SEC’s complaint, for years, Vale knew that the Brumadinho dam, which was built to contain potentially toxic byproducts from mining operations, did not meet internationally recognized standards for dam safety. However, Vale’s SEC periodic filings, sustainability reports, ESG webinars, presentations, and other public statements fraudulently declared its “commitment to sustainability” and achieving “zero harm” to employees and surrounding communities and assured investors that the company adhered to the “strictest international practices” in evaluating dam safety and that 100 percent of its dams were certified to be in stable condition.

“Many investors rely on ESG disclosures like those contained in Vale’s annual Sustainability Reports and other public filings to make informed investment decisions,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement. “By allegedly manipulating those disclosures, Vale compounded the social and environmental harm caused by the Brumadinho dam’s tragic collapse and undermined investors’ ability to evaluate the risks posed by Vale’s securities.”

Drawing attention to the fact that the SEC is the tip of the spear for the Administration’s much ballyhooed ESG initiatives, the “filing shows that we will aggressively protect our markets from wrongdoers, no matter where they are in the world,” said Melissa Hodgman, Associate Director of the Commission’s Division of Enforcement. “While allegedly concealing the environmental and economic risks posed by its dam, Vale misled investors and raised more than $1 billion in our debt markets while its securities actively traded on the NYSE.”

The SEC’s complaint, filed in U.S. District Court for the Eastern District of New York, charges Vale with violating antifraud and reporting provisions of the federal securities laws and seeks injunctive relief, disgorgement plus prejudgment interest, and civil penalties.

Make no mistake, the allegations are shocking, including a dam collapse that killed 270 people, caused immeasurable environmental and social harm, and led to a loss of more than $4 billion in Vale’s market capitalization, but also telling is that the SEC charged a foreign public company with what the Commission expressly characterized as an ESG disclosure violation (.. it certainly could have charged the securities laws violations without expressly terming this a failure of ESG), and in fact its first alleged ESG focused case demonstrates the import of ESG matters to the SEC.

It should be considered significant that this action was the first brought by the SEC Climate and ESG Task Force that operates in the Division of Enforcement with a mandate to identify material gaps or misstatements in ESG disclosures, like the false and misleading claims made in this instance by Vale. More information about the Task Force can be found here.

We advise when making government filings as well as public statements involving matters of ESG, companies need to strike a balance of mitigating enforcement related risk while making satisfying disclosures in this emergent and fast growing space where the rules are just now being written leaving many businesses to build the plane while flying.

We recommend best practices to our clients cognizant that this SEC enforcement action can only be seen as a harbinger of things to come.

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

SEC Extends Comment Period for Proposed Rules on ESG Related Disclosures

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

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

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

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

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

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

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

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

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

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

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

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

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

A Quick Science Refresher on Greenhouse Gas

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Rooney Rule Revised Provides ESG Opportunity

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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