Green Building Law Update

Environmental Law and Sustainability for Business

A Sea Change in SEC Climate Change Disclosure

By Stuart Kaplow on September 26, 2021 Posted in Environmental, ESG

I am pleased to be speaking on “Environmental Social Governance (ESG) an Emergent and Fast Growing Area of the Law” at the Maryland State Bar Association 2021 Legal Excellence Week, Corporate Council Institute on November 16, 2021. You can register to attend in person or online.

While there is much speculation about what the federal government will mandate in the coming days about ESG disclosures, little attention has been paid to existing Securities and Exchange Commission required climate change disclosures and the sea change that has taken place in those disclosures.

We are working with our public company clients, including ghost writing for many of their corporate counsel, auditors and other non law consultants, in a profound and notable transformation over the last year in what they disclose about the impact that “climate change may have on its business.”

Public traded companies are required to disclose material business risks to investors through regular filings with the SEC. In 2010, the SEC issued an interpretive release that provided guidance as to how existing disclosure requirements apply to climate change matters.

That 2010 Climate Change Guidance noted that, “depending on the circumstances, information about climate change related risks and opportunities might be required in a registrant’s disclosures related to its description of business, legal proceedings, risk factors, and management’s discussion and analysis of financial condition and results of operations.” The release outlined ways in which climate change may trigger disclosure obligations under the SEC’s existing rules. It articulated that legislation and regulations governing climate change, international accords, changes in market demand for goods or services, and physical risks associated with climate change, could each trigger a disclosure obligation.

There had been little change in how companies responded each year over the more than a decade since the February 8, 2010 effective date of that Guidance, but the groundswell of interest in matters of ESG, including by the Biden Administration, has resulted in significant changes in how companies will respond this year in annual reports and other disclosure documents.

In the more than 10 years that we have advised companies in this space, irrespective of the facts and circumstances of a particular company, the analysis was almost always: No disclosure required regarding the impact of legislation or regulation on climate change. No disclosure required regarding the impact of international accords on climate change. No disclosure required regarding the impact of indirect consequences of regulation or business trends on climate change. And no disclosure required regarding the physical impacts of climate change. As recent as last year most companies believed that acknowledging that climate change may have a negative impact on its business would be received punished by investors and others.

But in 2021 all of that has changed in nearly every instance. We have been working with companies on updating and making current their proposed annual filings (that admittedly, had all but universally been static for the last decade). In the emergent space of ESG with the change in how most of the public now perceive climate change it is now acceptable if not expected that companies will mimic those views.

At this moment when we are all waiting for the federal government to regulate matters of ESG, this blog post should remind companies of their obligations under existing federal securities laws and regulations to consider climate change and its consequences as they prepare annual disclosure documents to be filed with the SEC and provided to investors because while the law has not changed in 2021, the public sentiment about climate change has, and SEC disclosure is all about helping the public make informed decisions.

ESG has become such a large component of my law practice that I am now collaborating with a fabulous group attorneys in ESG Legal Solutions, LLC, a new non-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.

Brand Reputation is Number One Reason Businesses Engage in ESG

By Stuart Kaplow on September 19, 2021 Posted in Environmental, ESG, Sustainability

Brand name and reputation is the number one reason businesses engage in ESG efforts.

With 78% of respondents in a survey published last Wednesday responding that brand name and reputation topped the list of matters affected by ESG, that 78% response was single highest number in any response to a question in the survey. Of course, even that overwhelming response does not stand alone and is symbiotic with the other top reasons businesses engage in ESG efforts. Customer satisfaction polled at 54%, employee satisfaction polled at 49%, and investor satisfaction polled at 48%; all areas of ESG impact and arguably contributing to brand name and reputation.

The survey conducted by OCEG, a global think tank empowering business to act with integrity, looked at how more than 500 organizations across the globe are addressing Environmental, Social Governance (ESG). Survey respondents, more than half of whom are board members or c-suite executives, reported ..

Stakeholder demand for ESG consideration is quickly expanding and survey participants indicate that they are responding in kind.

Somewhat disconcerting is that fewer than 10% of respondents indicate they are highly confident in the efficacy of their company ESG capabilities, with nearly 28% not at all confident in their efforts. That lack of confidence may reflect that there are, as of yet, no widely accepted ESG metrics.

Approximately 50% of respondents indicate that their businesses publish their ESG results, but only 12% do so as part of an integrated ESG report. A larger number (30%) do so within a sustainability report and the rest use some other format. Notably, most sustainability reports do not address the social and governance aspects of ESG and most only consider environmental aspects. This indicates an area in need of maturation, both in terms of metrics collected and form of reporting. Having clear and complete ESG metrics is important as more and more investors and other stakeholders are considering them in making decisions and to mitigate risk from that reporting.

Interestingly, more respondents indicate that their own businesses use that ESG data when making decisions, including when evaluating vendors and suppliers. More than 50% also indicate that ESG is considered in executive team compensation or such is in the planning stage. Consideration for ESG related employee compensation is also underway.

Now more than ever, a considered approach to ESG is essential for organizations of all sizes. ESG remains at the top of the agenda for an array of interested parties, from shareholders and suppliers to regulators, customers and employees.

As a result of the ongoing global pandemic, continued social justice issues, geopolitical risk, increasing regulatory scrutiny and more, the spotlight on ESG remains bright, and will continue to get brighter. The findings in this survey crystallize the thinking by many large businesses around many of these issues and highlights where progress has been made, and where there is still work to be done.

Access the complete survey here.

Note, we are days away from putting our own survey about ESG penetration into the marketplace in the field. If you receive an email requesting you respond to our survey, please do so.

The OCEG survey concludes, “as ESG moves away from a box checking exercise towards legal requirement, organizations need to be certain they have the structures and processes in place to allow them not only to comply, but to thrive.”

LEED can Mitigate Legal Risks in ESG Disclosures

By Stuart Kaplow on September 12, 2021 Posted in ESG, Green Washing, LEED

Public companies in the U.S. find themselves at a dynamic time in the emergent environmental social governance (“ESG”) space. Socially conscious investors, employees, vendors, suppliers, consumers, not to mention stockholder environmental proxy proposals, and the like are driving companies to make ESG statements.

This is at the same time the U.S. Securities and Exchange Commission is conducting an investigation requiring selected companies to articulate their basis for ESG disclosures. That ongoing government action follows the April SEC release of the results of an earlier agency examination finding that many investment funds identifying themselves as ESG, were not. And today environmental groups are alleging greenwashing and intentional misrepresentation, including claims in contravention of the Federal Trade Commission Green Guides, targeting companies making ESG assertions.

This blog post highlights the legal risk associated with ESG disclosures and proffers that through green building practices, like the U.S. Green Building Council’s LEED certification, companies can mitigate their legal risk while still being responsive to the trend of more environmental ESG disclosure.”

With respect to the risk, make no mistake, today there is no federal law requiring businesses to make ESG statements. Although the Biden Administration has said new federal laws are coming as early as fourth quarter 2021.There are a very limited number of state laws each with a narrow scope. By way of example, we recently penned a blog post about Maryland Enacting A Corporate Diversity Benchmark in ESG. And we wrote in another recent post, the SEC Approved Nasdaq’s Race and Gender Board Disclosure Rules there are private initiatives.

Of course, existing SEC rules do 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 annual reports 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 required ESG disclosures.

Recent U.S. case law underscores 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.

The risks associated with ESG are real and should not be underestimated.

A key problem, of course, is there are no accepted ESG criteria.

And as the SEC seeks to articulate the ESG space with new regulations s, there is not even unanimity among Commission members. SEC Commissioner Hester Peirce has publicly said, “we are seeing a similar scarlet letter phenomenon in today’s modern, but no less flawed world.” 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 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.”

And then there are the practical limitations of the three letter acronym. The broad breadth of issues that get dropped into the ESG bucket are too diverse to be given a number score on any single scale. How does a company determine reducing energy use is more important that gender and racial diversity of a board of directors?

We have for years advised public companies about environmental matters and sustainability including navigating the complexity of the emergent ESG disclosure decision making landscape. Of course, there are steps that companies can take to reduce the potential legal exposure created by ESG. While our most frequent advice is, whenever possible, to use aspirational language in ESG statements, including using words like “should,” “expect,” or “strive,” possibly our most efficacious advice is to obtain third party verification of the accuracy of disclosures.

We can recommend many, including some provided by this firm’s non law efforts, but there may be no better third party verification in the realm of environmental ESG disclosure than a third party certified LEED green building. With no accepted ESG criteria, the widely recognized LEED seal provides some sustainable panache, but most important mitigates risk from claims that the assertion is not really ESG worthy.

Additionally, individual LEED credits can be ideal third party vetted ESG claims. We have suggested for some businesses an ideal ESG averment may be, as described in a blog post, LEED Offers Companies a Response to Declining Bird Populations, through compliance with the LEED v4.1 Bird collision deterrence credit that aims to “reduce bird injury and mortality from in-flight collisions with buildings.” Again, a recognized third party is establishing the criteria, used for ESG purposes, in lieu of a company doing it itself, even if the step of third party certification is not included (as it would be if an entire building were LEED certified after achieving 55 credits or more).

Again, utilizing a third party created criteria, in this instance a LEED credit (actually originally drafted by the American Bird Conservancy for the U.S. Green Building Council) can provide a credible response mitigating risk of criticism for greenwashing, that can be touted in corporate sustainability claims including in ESG reporting (yes, public companies are including bird safe policies in public reporting). Be aware LEED water use reduction credits are frequently used to articulate potable water reduction requirements.

With the use of third party green building practices, like LEED, companies can mitigate their legal risk while still being responsive to the trend of more ESG disclosure.

Gleaning the Direction of ESG Regulation

By Stuart Kaplow on September 5, 2021 Posted in Codes and Regulations, ESG, Sustainability

Many businesses find that responding to today’s ESG demands is like drinking from a fire hose in an unregulated space where, in the U.S., existing laws greatly limit the release and reliance upon ESG data while all are awaiting promised government action.

As attorneys we assist companies capturing opportunities while mitigating risks, including because our ESG efforts can be subject to attorney client privilege and confidential work product, it is our focused long term experience in sustainability law that truly advantages our clients in leveraging ESG risk as a business opportunity.

There is uncertainty in this bleeding edge subject and with new statutes, codes and regulations on the cusp of enactment at the federal level, by states, as well as internationally, we track much of that for our clients. And we advise clients how they can take advantage of the best of existing laws and private sector initiatives, even those that may appear not to have direct application, to boldly tell their ESG stories. For example, we recently posted about Maryland’s new law as a Corporate Diversity Benchmark in ESG providing an ethical and low risk guide for public and non-public companies alike.

We do not need to be a futurist to know that SEC regulation in the ESG space is coming. Much can be gleaned from comments we tracked last week by SEC Chair Gary Gensler testifying by video before the European Parliament,

Today, investors in our markets increasingly want to understand the climate risks, workforces, and cybersecurity risks of the companies whose stock they own or might buy.

Thus, I have asked SEC staff to develop a proposal for climate risk disclosure requirements for the Commission’s consideration.

In considering climate-risk disclosures, I’ve asked staff to learn from other frameworks and standards, including the Task Force on Climate-related Financial Disclosures framework.

On the other side of the equation are funds. Many funds these days brand themselves as “green,” “sustainable,” “low-carbon,” and so on.

I’ve directed staff to review current practices and consider recommendations about whether fund managers should disclose the criteria and underlying data they use to market themselves as such.

I also have asked staff to pursue similar disclosure requirements with respect to human capital and board diversity.”

We regularly utilize The Financial Stability Board created by the Task Force on Climate-related Financial Disclosures, referred to in Chair Gensler’s testimony, to improve and increase our client’s reporting of climate related financial information. It is one of various sources of good information in the ESG space.

Moreover, the Chair’s testimony is significant in that it is at the same time the SEC is conducting an examination requiring some money managers disclose what makes a fund ESG. And that ongoing effort follows the April SEC released the results of an earlier agency examination finding that many funds identifying themselves as ESG were not.

A recent survey reported more than 84% of public company boards of directors sought outside consultants in the area of ESG disclosures. Many utilize law firms with focused experience in sustainability law, not only to aide in separating the wheat from the chaff in all that purported ‘good’ non-financial ESG information and material, but also using attorneys to focus on risk mitigation in that winnowing process. In addition, many utilize law firms to limit claims of greenwashing or making misleading ESG claims, all within a confidential setting reporting to c-suite executives of the board of directors itself.

Businesses can read tea leaves looking for the future in the splotched residue at the bottom of a tea cup or they can seek strategic counsel from attorneys, but either way mandatory green disclosures are coming.

A Corporate Diversity Benchmark in ESG

By Stuart Kaplow on August 29, 2021 Posted in Codes and Regulations, ESG, State, Sustainability

We are regularly asked if there is a checklist for ESG compliance and while there is not, with promised federal regulations not yet promulgated, there is good guidance available. A limited number of companies are Maryland based, but the State’s newly enacted corporate diversity statute is a particularly good benchmark, among otherwise woolly risk factors, when seeking to mitigate risk in addressing the governance component of ESG.

Maryland House Bill 1210 which became law on May 30, 2021 without the Governor’s signature, requires specified businesses in the State to demonstrate either: (1) diversity in their board or executive leadership or (2) support for “underrepresented communities” in their mission, in order to qualify for State capital grants, tax credits, or contracts worth more than $1 Million.

“Underrepresented communities” are defined in the bill as a community whose members self-identify: (1) as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaska Native or (2) with one or more of those racial or ethnic groups.

The bill also requires the State government to prepare an equity report that compiles diversity data relating to corporate boards, leadership, and missions.

Additionally and most significantly, the bill requires each business entity that submits an annual report to the State Department of Assessments and Taxation submit related diversity data. SDAT advises,

.. that approximately 430,000 entities are in good standing within the state, including small, privately owned businesses that do not have corporate boards or leadership structures, so while an accurate determination is not possible, many, but certainly not all of those entities will be subject to annual reporting under this new law.

Some have questioned should this bill be legally challenged, would a reviewing court find it violates the Equal Protection Clause of the U.S. Constitution or Maryland’s Constitution. We suggest not. A number of examples of race neutral measures that promote corporate diversity already exist. For example, the Security and Exchange Commission has available on its website a self assessment tool for assessing the diversity policies and practices of entities regulated by the agency. We are aware many businesses, including public companies and not that use the SEC tool. Another high profile example is “the Rooney Rule” used by the National Football League to address the significant lack of minority head coaches in the League. The rule requires teams to interview at least one minority candidate for a vacant head coach position. At least one analysis showed this Rule increased diversity among coaches in the League.

A recent Wall Street Journal analysis said, “ESG criteria can be woolly, data is often scarce and a variety of raking methodologies makes it hard for investors to know who is spinning a story and who is walking the talk.”

Tracking a benchmark that is state statute, like Maryland’s corporate diversity disclosure law, should allow a company to make an ethical disclosure with confidence.

The S in ESG may be the Most Impactful

By Stuart Kaplow on August 22, 2021 Posted in Environmental, ESG, Sustainability, Uncategorized

The “Social” components of ESG are among least measured factors in corporate sustainability despite being among the most impactful.

Social starts with a company’s value system and a principled approach to doing business.

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

This sounds simple enough, but a January 18, 2021 report by the UK Independent Anti Slavery Commissioner describes there are more than 40 million people in modern slavery worldwide. Modern slavery exists in every industry, in every country in the world. Yet in the Western world there is a low level of awareness of the prevalence of modern slavery.

And business merely saying through a statement on its website that it is concerned about human rights or slavery may sound nice, but in 2021 when so many are talking about ESG, that averment will not resonate and quite frankly falls short of what a private enterprise should be doing to prevent these crimes.

Claims about human rights including that no slaves or indentured servants are involved in a business or its supply chain are not new, and have been prevalent, for example, since the 1660s with the Quakers in England who included those representations in promoting their businesses.

The British government reports there are more enslaved people today than there have been at any time in history!

And that report expressly excludes, deferring for a later day, one of the issues in this space that we are most often asked about: As companies look to their supply chains for violations of human rights and slavery, we are asked how to address solar panels. China manufactures nearly 80% of global production of solar panels relying on a technology using silicon that is mined and processed in China’s Xinjiang region where the government’s repression of the Uyghur minority is such that it amounts to genocide according to the U.S. government and Group of Seven. Use of Chinese solar panels is today a key S factor in ESG disclosures!

There are few laws in the ESG space, but we have worked with businesses in their disclosures required by the California Transparency in Supply Chains Act of 2010 describing their “efforts to eradicate slavery and human trafficking from [their] direct supply chain for tangible goods offered for sale.” And we have advised companies seeking to produce their annual statements required by the UK Modern Slavery Act 2015. To assist in understanding what is meant by modern slavery, Article 1 of defines it as:

“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 voted on March 10, 2021 to adopt mandatory legislation requiring 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 Governance” in the U.S., it does not appear to be too big a leap that matters of slavery should be disclosed. Human rights and ethical labor are 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 purporting to address Social as one of the three component parts of ESG.

Incident to our sustainability law work we have for more than a decade provided a framework enabling a company to examine and assess its own business practices and then if they desire to demonstrate to customers and other stakeholders the business’ commitment to eliminating modern slavery or human trafficking. As an option, we can further assist them with an independent third party certification to mitigate any risk in showcasing their ethical sourcing credentials.

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

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

IPCC Fanning the Flames of ESG

By Stuart Kaplow on August 15, 2021 Posted in Climate Change, Environmental, ESG, GRESB, Sustainability

ESG has become such a large component of my law practice that I am now collaborating with a fabulous group attorneys in ESG Legal Solutions, LLC, a new non-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 matters, do not hesitate to reach out to me.

The release last week of the United Nations Intergovernmental Panel on Climate Change’s sixth climate assessment report ignited the already combustible and quickly spreading wildfire that is ESG.

Few have actually read the much quoted Summary for Policymakers and of course even fewer have read the more than 1,300 page complete report, but nearly every c-suite executive and corporate director knows the denouement of the report that the earth is warmer than it’s been in 125,000 years (.. that is a wild factoid for your dinner table) and that society’s dependence on fossil fuels is driving that warming.

Axios reported on two focus groups after the report’s release, that included 13 participants from key swing states, who when asked “if they had read or seen the IPCC report” only 2 out of 13 swing state participants in the panels answered that they had.

And beyond describing how the IPCC conclusions were failing to resonate with swing state voters (.. likely key if the federal government is going to respond), Axios also described a broader failure to register even on social media where the response to dire IPCC report was muted, at best, when compared to the earlier 2018 IPCC report. Internet stories posted within 3 days of the report’s release generated 985,000 social media interactions (likes, comments, shares, etc.) versus 1.76 million after the 2018 report.

But drilling down on likely reactions to the climate report is fascinating. A Pew Research Center survey in May found just 10% of Republican and Republican leaning independents in swing states were deeply concerned with addressing climate change, while a majority thought President Joe Biden’s ambitious plans to curb climate change would hurt the economy.

So the intrigue here is that we know the typical chief executive officer is a 52 year old White male who is a registered Republican; someone who may not be deeply concerned about addressing climate change.

But in a study cited when the SEC Approves Nasdaq’s Race and Gender Board Disclosure Rules, two weeks ago, more than 80% of public companies are reporting some (.. but, maybe not enough) ESG data.

In a Faustian bargain, whether or not CEOs are personally concerned that climate change will have a material financial impact on their business, and despite that we have assisted public companies with that analysis, annually, for more than a decade to satisfy disclosure requirements under federal securities laws (i.e., almost always determining there was “no” material financial impact), now CEOs know they must report on significantly more and additional ESG data.

It is not lost among many c-suite executives and boards of directors that the idea ESG began in 2004 with a UN initiative to influence capital in non-Western markets; that is, the same UN whose IPCC is now fanning the flames. Also of note, while we have been engaged in sustainability law for more than a decade, most of that was environmental, the “E” in ESG, where now we are increasingly being asked for policies and reportable metrics for social and governance.

In a survey that received much media attention completed in December 2020, just more than half of executives at public companies described that they had only organized a formal ESG program (.. that went beyond mandatory disclosure requirements) within the prior 12 months.

Today, the legal and political institutions in the United States and the EU are demanding ESG ideas be implemented by businesses posthaste. That same December 2020 survey found more than 74% of businesses, including private non-public companies with 500 or more employees, expect to report on ESG by the end of 2022. Nearly all of those responding affirmatively identified as the reasons both “impending new federal ESG disclosure laws” and current “public expectations for the culture of a business they want to be associated with.”

Moreover, investors as well as employees, vendors, suppliers, and a host of other stakeholders are looking for companies to, now, create and implement sustainable policies and practices that respond to environmental social and governance matters. Whereas in the past there might have been a single print story seen by Wall Street Journal subscribers in a day, today, there is viral social media that can attack a company with millions of views in hours if not minutes. So, the pace of all of this is all but explosive.

Businesses are being pulled into or have, increasingly voluntarily dived into the risk and opportunity that is ESG. Our portfolio of law and non-law services can provide companies with assurance that their environmental, social and governance challenges are being best addressed by mitigating risks and taking advantage of opportunities.

SEC Approves Nasdaq’s Race and Gender Board Disclosure Rules

By Stuart Kaplow on August 8, 2021 Posted in ESG, Federal

ESG has become such a large component of my law practice that I am now collaborating with a fabulous group attorneys in ESG Legal Solutions, LLC, a new non-law consulting firm. Nancy Hudes and I will be publishing a new blog beginning Monday, August 9 at www.ESGLegalSolutions.com (.. yes, this blog will continue). If we can assist you or someone you work with in ESG matters, do not hesitate to reach out to me.

Last Friday the U. S. Securities and Exchange Commission voted “to approve Nasdaq’s proposed rule changes requiring issuers to disclose certain information about the diversity of the company’s board.” The first of its kind order by any U.S. government body, the SEC is being heralded by some for a “one giant leap for mankind” moment with environmental social governance (ESG) setting a new standard for corporate governance.

The impact of this “one small step for man” by the SEC is a Neil Armstrong moonshot and advancement of ESG.

The 82 page SEC Order provides,

Under the Board Diversity Proposal, the Exchange proposes to require each Nasdaq listed company, subject to certain exceptions, to publicly disclose in an aggregated form, to the extent permitted by applicable law, information on the voluntary self-identified gender and racial characteristics and LGBTQ+ status (all terms defined below) of the company’s board of directors.”

“The Exchange also proposes to require each Nasdaq-listed company, subject to certain exceptions, to have, or explain why it does not have, at least two members of its board of directors who are Diverse, including at least one director who self-identifies as female and at least one director who self-identifies as an Underrepresented Minority or LGBTQ+.”

Pursuant to the Rule, “Diverse” would be defined to mean an individual who self-identifies in one or more of the following categories: (i) Female, (ii) Underrepresented Minority, or (iii) LGBTQ+;

“Female” would be defined to mean an individual who self-identifies her gender as a woman, without regard to the individual’s designated sex at birth; “Underrepresented Minority” would be defined to mean an individual who self-identifies as one or more of the following: Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander, or Two or More Races or Ethnicities; and “LGBTQ+” would be defined to mean an individual who self identifies as any of the following: lesbian, gay, bisexual, transgender, or as a member of the queer community.

Of note, Nasdaq amended its initial proposal to make it easier for small companies to comply, including by way of example, allowing companies that have five or fewer directors to meet the targets with just one board member from a designated diverse background, rather than two.

SEC Chairman Gary Gensler said in a statement releasing the Order, “These rules will allow investors to gain a better understanding of Nasdaq-listed companies’ approach to board diversity, while ensuring that those companies have the flexibility to make decisions that best serve their shareholders.” In many settings collecting and disclosing this gender and racial data had heretofore been verboten, especially by an authority, such that the magnitude of this earthquake order cannot be overstated.

Nasdaq said in a study conducted in 2020 that more than 75% of its listed companies would not have met these requirements.

The Spencer Stuart Board Index, in its 35th yearly report, described that even after this year when nearly 75% of new independent directors at S&P 500 companies were women or members of a minority, today around 80% of board seats are still held by white directors and about 70% by men.

Nasdaq responded to the SEC’s breakthrough action for the “G” in ESG in a press release, “We look forward to working with our companies to implement this new listing rule and set a new standard for corporate governance.” And we are available to assist Nasdaq listed companies comply with this new rule and to assist the business community generally in addressing the G in ESG.

Bury Your Head in the Sand and ESG will Go Away

By Stuart Kaplow on August 1, 2021 Posted in ESG

ESG has become such a large component of my law practice that I am now collaborating with a fabulous group attorneys in ESG Legal Solutions, LLC, a new non-law consulting firm. Nancy Hudes and I will be publishing a new blog beginning later this month at www.ESGLegalSolutions.com. And if we can assist you or a client of your in ESG matters, do not hesitate to reach out to me.

The origin of this idiom comes from the widespread misconception that ostriches bury their heads in the sand. Despite that this incorrect myth is two thousand years old, originating in ancient Rome, hiding from danger with the thought that if you cannot see an attacker they cannot see you, has never proved a good strategy.

Businesses cannot ignore or refuse to think about the environmental, social and governance (ESG) space; it is not going away.

While the idea of ESG began in 2004 with a United Nations initiative to influence capital in non-Western markets, in 2021 the legal and political institutions in the United States and the EU are demanding those ideas be implemented by businesses posthaste.

Additionally, investors and also employees, vendors, suppliers, and a host of other stakeholders are now looking for companies to create and implement sustainable policies and practices that respond to environmental and social matters. Whereas in the past there might have been a single print story seen by Wall Street Journal subscribers, today, there is viral social media that can attack a company with millions of views in hours if not minutes.

Businesses are being pulled into or have in some cases voluntarily dived into the risk and opportunity that is ESG.

A recent study found only 42% of public companies identified having at least one director with expertise in ESG. Yet companies are under pressure to articulate ESG policies and practices, sometimes on what are controversial matters, while boards of directors and c-suites are struggling to navigate in this new space. This is not surprising given the breadth of the ESG landscape. Many of the ESG topics don’t lend themselves to mathematical reporting of data (.. something companies are good at). The Wall Street Journal recently asked, is there really a balance (not to say a moral equivalency that should have a single spreadsheet) prioritizing an increased number of women employees versus reducing plastic waste? Significantly, many ESG issues lack any clear tie to financial “materiality” such that they have not in the past risen to the bar of an SEC permitted, not to say mandated, disclosure. Other regulations also prohibit ESG disclosures as recently posted about, Labor Department Will Not Enforce Anti ESG Rule.

Some will remember when this topic was characterized as “corporate social responsibility” issues and was treated separate and apart from the business of earning profits. In 1976 when Milton Friedman received the Nobel Prize in economics, matters of climate change and others that now are under the large umbrella of ESG, were topics that could bear on the public good, but were not relevant to maximizing value for shareholders. But, no more.

As public sentiment has changed, public policy is following. Today boards of directors increasingly have oversight obligations including related to climate and other ESG risks, and disclosures of those risks. Those obligations flow from current interpretations of both the federal securities laws and fiduciary duties of loyalty and care rooted in state law.

Under the federal securities laws, the board plays a critical and mandatory role in the existing corporate disclosure process. This increasingly requires directors to think about and consider the impact of climate change and other ESG matters on the financial statements and other corporate disclosures. For example, we have worked with companies for more than a decade reacting to the SEC’s 2010 climate guidance that identifies disclosure obligations.

And since the passage of Sarbanes Oxley in 2002, boards at public companies directly oversee the audit of financial statements which processes must consider and often disclose environmental and other matters.

This is all happening now. This year’s proxy season saw large numbers of environmental and other ESG matters brought to the floor at public company annual meetings. In a much reported example, 65% of shareholders at the United Airlines annual meeting voting in favor of a resolution seeking more information on how the company’s lobbying aligns with the goals of the Paris Agreement. We have worked with public companies and their counsel for years on responding to these matters, but the level of shareholder activism in 2021 is unprecedented.

As we await new federal statutory and regulatory action promised by the Biden Administration, today we provide legal and non-law solutions not only to mitigate ESG risk but also to work with businesses in order to maximize ESG opportunities.

Today, for many of our clients, reputational risk is real in the realm of sustainability, and so is the opportunity for a company to stay relevant by incorporating ESG into management and governance practices. If the organization wants the very best employees (.. think human capital) and to keep its very best customers and attract new customers (.. current and future revenues), in most business sectors, today, actively participating in the ESG space is of import. And yes, much of our work is preparing clients to thrive in the all but certain and fast approaching more prescriptive ESG regulatory framework.

There is no one right answer for each individual company on how to mitigate risks and maximize opportunities with respect to ESG issues. These are complex, evolving and, in some instances, highly charged issues, but businesses must act.

Business leaders cannot bury their heads in the sand because ESG is big and bold and here to stay.

Phase l Environmental Site Assessment Standard Being Revised

By Stuart Kaplow on July 25, 2021 Posted in Codes and Regulations, Environmental, ESG

The Phase l Environmental Site Assessment Standard E1527-13 will sunset in late 2021, eight years from its approval on November 6, 2013.

This is hugely significant because a Phase l Environmental Site Assessment is conducted in the vast majority of the 5.6 million commercial and industrial real estate transactions in the United States each year, so you need to be aware of the revised standard expected to be issued later this year.

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.” Importantly, the ASTM E1527 is recognized by the U.S. Environmental Protection Agency as satisfying its All Appropriate Inquiry rule to obtain protections from liability under CERCLA, the federal Superfund law.

ASTM first published a standard for Phase I Environmental Site Assessments in 1993, with published revisions in 1994, 1997, 2000, 2005, and 2013, so that the standard is being again revised is not surprising, but some of the changes warrant heightened scrutiny.

The ASTM E50.02 Task Group, after more than a year of work, has balloted a draft revised standard and results are expected as early as next week. The initial draft includes:

What purports to be an only modest change to REC definition is proposed, but this modification to that ultimate defined term risks negatively impacting the value of hundreds of millions of dollars of real estate each year. The new definition would read,

“The term recognized environmental condition means (1) the presence of hazardous substances or petroleum products in, on, or at the subject property due to a release to the environment; (2) the likely presence of hazardous substances or petroleum products in, on, or at the subject property due to a release or likely release to the environment; or (3) the presence of hazardous substances or petroleum products in, on, or at the subject property under conditions that pose a material threat of a future release to the environment. A de minimis conditions is not a recognized environmental condition.”

The new definition is explained in an appendix. But that Appendix X4 is not without controversy when it provides guidance that the past closure of a leaking underground storage tank, for example, may not constitute an Historical Recognized Environmental Condition (HREC) unless the environmental professional conducting the Phase l has evaluated the data associated with that closed tank to be sure that the sampling data meets current regulatory standards for unrestricted use and whether there is an open vapor exposure pathway. Some believe this tying the consideration to “current” standards, as opposed to the regulator determination at the time the tank was closed, creates a Faustian bargain for the environmental professional, and will greatly limit the supremely valuable designation of HRECS.

I blogged some weeks ago, PFAS in a Phase l Environmental Site Assessment, and concluded, as does this Task Group, that because PFAS is not a CERCLA nor a RCRA listed hazardous substance, it should not be identified in a Phase l. It is a non-scope matter.

There is also an attempt to clarify by way of examples in Appendix X4, what is a controlled recognized environmental condition (a CREC). There is no doubt that the uninitiated have been confused that a CREC is a subset of a REC, but the examples are problematic in that they stray into the category of HRECs, which are not RECs. CRECs arise from a past release of a hazardous substance that has been address to the satisfaction of regulators, but carry some implementation of controls, like a drinking water restriction. This new text only exacerbates a prior bad word choice.

The proposed change to the shelf life of a Phase l report is curious when currently a report is presumed current when signed and dated as completed and more than 180 days prior to acquisition of a property which may be updated to be valid for up to a year, but what is proposed is 180 days from the day work commences on the Phase l even if that is simply a request for governmental records on a property. It is not clear how this back dating of a dated report is advantageous (to anyone other than environmental professionals who will now have to prepare more reports)?

A potential positive for anyone who has found the word choice in the ultimate conclusion awkward, is the new,

12.7.1 “We have performed a Phase I Environmental Site Assessment in conformance with the scope and limitations of ASTM Practice E1527-21 of [insert address or legal description], the subject property. Any exceptions to, or deletions from, this practice are described in Section [ ] of this report. This assessment has revealed no recognized environmental conditions, controlled recognized environmental conditions, or significant data gaps in connection with the subject property”

Time is short for the 350 member Task Group to finalize a draft, for EPA to act to approve the new E1527-21 and for ASTM to then issue it before the end of the year, but that also means time is also short for purchasers of land, their lenders and others to become familiar with a not yet available standard, so it is incumbent upon all to monitor the new standard, not to mention legal counsel, including me. Last August, I blogged, I just read my 1000th Phase l Environmental Site Assessment this year, so we will not only track the final revisions, but report on them in a future post here.