California Appeals Board Gender Diversity Loss

Last month, the California Secretary of State appealed the decision by a California Superior Court striking down as unconstitutional California’s board diversity law, which required all publicly traded companies headquartered in the State to include a minimum number of female directors.

In 2018, Women on Boards (Senate Bill 826) was signed into law to advance equitable gender representation on California corporate boards, codified as Corporations Code section 301.3. California was the first state in the nation to require all publicly held domestic or foreign corporations whose principal executive offices are located in California to have at least one female director on their boards by December 31, 2019, either by filling an open seat or by adding a seat. By December 31, 2021, those companies were required to have minimum numbers of female directors based on the total size of the corporation’s board of directors (e.g., 3 women directors if the corporation had 6 or more directors). Under the statute, the State could impose fines for violations, from $100,000 to $300,000 per violation.

The law was described as an important step in corporate inclusion not just because California is the fifth largest economy in the world, but also the first state to mandate gender diversity on boards, even in advance of the current advent of ESG. When passed in 2018, one-fourth of California’s publicly held corporations had no women directors on their boards.

On May 13, 2022, Judge Maureen Duffy-Lewis in a case entitled Crest v. Padilla case No. 19STTCV27561, abrogated Section 301.3, which mandated the appointment of a minimum number of females to boards, concluding that the statute violated the Equal Protection Clause of the California Constitution.

Yes, this is the same Crest v. Padilla case name we blogged about with substantially the same subject, in California Racial, Ethnic and LGBT Quotas for Company Boards Ruled Unconstitutional.

Judge Duffy-Lewis reasoned that because the statute afforded disparate treatment to qualified candidates for corporate board positions on the basis of gender, without furthering a compelling government interest, it violated equal protection. Echoing the unconstitutional holding in the first Crest case that came down only 30 days before this ruling, the court here found that the state failed to put forward “strong” evidence to show that including women on boards served a compelling state interest. The court was not persuaded by claims concerning the economic benefits of diversification and found that adding women to boards would not necessarily “boost California’s economy.” The court went on to conclude that the state’s evidence of the economic benefits associated with corporations having more female board members was unpersuasive, stating “the studies [the state] cited failed to sufficiently show a causal connection between women on corporate boards and [improved] corporate governance and did not otherwise provide reliable conclusions.”

Finally, the Court determined, the State failed to show that “the Legislature considered gender-neutral alternatives, that the statute was limited in scope and duration to that which is necessary to remedy specific, unlawful discrimination against women in the selection of board members.” So, possibly this is simply an example of bad legislating and the court opened the door to how the flaws could be remedied in the future?

On August 22, California’s Secretary of State asked the state court judge to pause her order enjoining Section 301.3, allowing enforcement of the law requiring women be appointed to board while appeals are pending. That motion is pending.

Opponents are expected to counter with nationwide, women comprised 45% of all new Fortune 500 board appointments in 2021, a new high, without this law unconstitutionally burdening the vast majority of those corporations. As a positive aside, and with respect to the first Crest case (also on appeal), Black directors were 26% of new board appointees in 2021.

There is little debate that board governance is key to shareholder value. We advise clients how to leverage that good governance is key to ESG, but there is real debate about the proper role of government in mandating behavior by stockholders of private companies (in electing directors and otherwise).

With both Crest cases on appeal, it is not clear how these corporate board diversity laws will fare in the appellate courts? This is also an undercurrent of concern that this gender statute is deaf to the LGBT+ community, which may damn its chances, while the broader protected class of “underrepresented communities” in the first Crest case may fare better.

We continue to monitor both cases and when the appellate courts rule, blog about the fate of these state legislative efforts to address the “G”, governance prong in ESG.

FTC Says Updated Green Guides are Coming

With allegations of greenwashing all but de rigueur, businesses should be on the alert for the soon to be released Federal Trade Commission’s updated Green Guides.

This year companies are being publicly challenged and having their reputations tarnished for greenwashing, in some instances for deceptive misrepresentations, others for unintentionally misleading, and more often than not, just for bad judgment about how consumers might perceive a statement; and all of this heightened by the risk of evolving and emerging government mandated ESG disclosures and enforcement across the globe.

We recently blogged comprehensively about greenwashing in a post describing a European airline sued after action by regulators for greenwashing in its “Fly Responsibly” advertising campaign offering an option to buy carbon offsets, New Greenwashing Case is Troubling to Future of ESG (.. you should read it). Then there is the laundry detergent manufacturer whose televisions ads “tough on stains, kinder to the planet” were banned earlier this year by the UK’s Advertising Standards Agency on greenwashing grounds.

Closer to home, an oil company was all but pilloried on social media when it added solar panels to the canopies of its gas stations and ran mass media campaigns that never mentioned petroleum products. There was a state attorney general who announced an enforcement action when a consumer products company described in a disclosure it had “ambitions” for its packaging to be 100% recyclable or reusable by 2025. Another regulator settled a greenwashing claim against a business with solar panels on their roof when they described the facility as “powered by the sun – a renewal source” because they had sold the RECs.

One of the largest plastic drink bottle users had its “fix up the planet” television ads banned as greenwashing. Then there is the large coffee company that had its reputation tarnished (.. including reportedly its stock price negatively impacted) when it touted its “straw-less lid” as part of its sustainability initiative despite that the new lid contained more plastic than the original lid and straw combination. And there are hundreds if not thousands more claims that are being investigated as possible greenwashing which means business needs to add environmental claims to their list of priorities for risk mitigation.

In an “I’m from the government and I’m here to help” moment, businesses will get some guidance and assistance from the federal government about what they can and cannot say when as part of a regular 10 year review, the FTC releases its updated Green Guides. The Green Guides were first designed to help marketers avoid making environmental claims that mislead consumers, but in the era of mandatory public disclosures about all things ESG and the like, the FTC guidance will have far greater application (i.e., the target audience of the Green Guides is no longer marketers, but now every business making ESG disclosures and the like).

The Commission reiterated last month, in a brief Federal Register announcement, that it will be reviewing and soliciting comments on updated Guides for the Use of Environmental Marketing Claims, 16 CFR Part 260, later this year.

“To ensure its rules and industry guides remain relevant and not unduly burdensome, the Commission reviews them on a ten-year schedule. Each year the Commission publishes its review schedule, with adjustments made in response to public input, changes in the marketplace, and resource demands.”

“When the Commission reviews a rule or guide, it publishes a document in the Federal Register seeking public comment on the continuing need for the rule or guide, as well as the rule’s or guide’s costs and benefits to consumers and businesses. Based on this feedback, the Commission may modify or repeal the rule or guide to address public concerns or changed conditions, or to reduce undue regulatory burden.”

Given the current societal focus on ESG, it is expected the updated Green Guides will provide guardrails for businesses in avoiding unfair and deceptive claims in matters from climate change to net zero (phrases that simply were not in our vernacular in 2012 when Green Guides were last updated). We will incorporate the updated Green Guides into the counsel we offer about ESG disclosures, as soon as the FTC releases more information. And we will blog about it, here ..

EPA Proposes Designating PFAS as Hazardous

The U.S. Environmental Protection Agency is proposing to designate two of the most widely used per- and polyfluoroalkyl substances (PFAS) as hazardous substances under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), also known as the “Superfund” law.

The proposal applies to perfluorooctanoic acid (PFOA) and perfluorooctanesulfonic acid (PFOS), including their salts and structural isomers, actually, a group of more than 4,000 man-made chemicals. The proposed rule was published on September 6, 2022.

PFAS has been manufactured and used in a variety of industries around the globe, including in the United States since the 1940s and until recently in consumer products under brand names ranging from Teflon to Scotchgard and Gore-Tex. PFAS is very persistent in the environment and in the human body, meaning these chemicals don’t break down, they accumulate over time, and as such have been referred to as “forever chemicals” making them a developing environmental catastrophe.

EPA describes evidence from laboratory animal and human epidemiology studies indicate that exposure to PFAS may lead to cancer, reproductive, developmental, cardiovascular, liver, and immunological effects.

A peer reviewed 2020 study cited approvingly by the EPA describes 99.7% of Americans have a detectable PFAS in their blood!

EPA had previously set health advisories for both PFOA and PFOS at 70 parts per trillion (ppt). In June 2022 EPA, citing new science and concern for lifetime exposure, lowered the health advisory levels to 0.004 ppt for PFOA and 0.02 ppt for PFOS. EPA describes those levels as “near zero” and admits they are “below EPA’s ability to detect at this time” (.. translation, current science cannot detect PFAS chemicals at levels below 4 parts per trillion), meaning the safe level of consumption for those two chemicals is practically zero.

But, adding PFAS to the CERCLA list of hazardous substances may not be wise. Some have suggested that the CERCLA designation will delay and increase the costs of cleanup of sites and also without either a widely accepted standard or methods for cleanup, may be Faustian. The unintended consequences on water utilities and fire departments as well as airports and marinas not to mention local and state governments, cannot be overstated.  But of greatest concern to the average business is that the designation of hazardous substance, if the rule is finalized, will result in increased reporting including in Phase I Environmental Site Assessments that are widely used in many if not most commercial transactions in the U.S. today (from the sale of a building to refinancing a bank credit line). Phase l studies seek to identify “recognized environmental conditions .. the presence or likely presence of any hazardous substances or petroleum products in, on, or at a property ..” and with this rule, PFAS will fall within the definition, and become a recognized environmental condition (a REC) requiring further investigation and action.

To be clear, today PFAS is not a REC, but those chemicals would be under the proposed rule, triggering many if not most Phase l assessments to report a REC in, on, or at the property; again, with no accepted means of quantifying it or of cleanup.

PFAS is no doubt a developing environmental catastrophe but this rule is yeeting the matter without regard that this solution may do more harm than good.”

It will not lead to cleanups nor mitigate potential adverse impacts to human health or the environment, but rather put at risk most businesses that will now have a REC in nearly every Phase l, perverting the very purpose of Phase l assessments that drive the environmental industrial complex, but today allow the vast majority of businesses to navigate the risk.

As we described in a blog post on the subject last year, PFAS in a Phase l Environmental Site Assessment? “the broad consensus of environmental professionals in the know is that there is simply no good reason to consider PFAS in a commercial real estate transaction and only negatives that can flow from these widespread chemicals that are nearly everywhere and are in nearly everyone’s blood.”

It is suggested that should this proposed rule be adopted, the ASTM standard for the Phase l environmental site assessment process, which has been incorporated into Federal law, “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” will have to be promptly revised and altered to take into account the all but automatic REC finding for nearly every property.

All those with an interest in real estate should be aware of how pervasive PFAS is in the economy and the environment, and the associated risk associated with these forever chemicals, but they also should vocally react to proposed changing laws and the resultant emergent litigation as the legal system leapfrogs ahead of the science.

EPA is asking for public comment on the proposal for 60 days. Comments must be received on or before November 7, 2022 at docket EPA-HQ-OLEM-2019-0341 on www.regulations.gov  and you may wish to tell EPA this proposed rule is a bad idea. It may be the quintessential example of “if the only tool you have is a hammer everything looks like a nail,” but an after the fact hazardous substance designation will not repair the planet.

UN Human Rights Assessment of Uyghurs by China Drives ESG

We have blogged repeatedly that “the elimination of all forms of forced and compulsory labor” is a key element, if not singularly the most important principle of a business’s practices. That point was driven home with the release last Wednesday, by The United Nations Human Rights Office assessment of human rights concerns in China’s Xinjiang Uyghur Autonomous Region.

Released on her last day at the post, following a May fact finding trip to China, UN High Commissioner of Human Rights, Michelle Bachelet, said immediately after that trip, “allegations of patterns of torture, or ill treatment, including forced medical treatment and adverse conditions of detention, are credible, as are allegations of individual incidents of sexual and gender-based violence.”

In a strongly worded assessment at the end of the report, the UN body said that the extent of arbitrary detentions against Uyghurs and others, in the context of “restrictions and deprivation more generally of fundamental rights, enjoyed individually and collectively, may constitute international crimes, in particular crimes against humanity.” [Emphasis in original]

The report is downright scary, but an important read.

“The lawful rights and interests of workers of all ethnic groups in Xinjiang are protected and there is no such thing as ‘forced labour’,” China said in a rebuttal to the assessment, adding that there had been no “massive violation of rights”.

In the few days since the release of the damning assessment we have had an uptick in inquiries from U.S. businesses seeking to buttress their own anti forced labor and anti slavery policies.

Often when businesses have considered modern slavery they have not included forced labor imposed by state authorities. But as we suggested in a recent post, Do Something about Slavery in Your Business Supply Chain, such no longer passes muster in 2022, and such is not limited to Great Britain and Australia where modern slavery business practice disclosures are regulated by those governments and mandate including forced labor imposed by state authorities in those business practices.

A widely cited report by the Australian Strategic Policy Institute revealed that tens of thousands of ethnic Uyghurs were relocated to work in conditions suggestive of forced labor in factories across China. “Under conditions that strongly suggest forced labor, Uyghurs are working in factories that are in the supply chains of at least 83 well-known global brands in the technology, clothing, and automotive sectors, including Apple, BMW, Gap, Huawei, Nike, Samsung, Sony, and Volkswagen,” the think tank said in the introduction to its online report.

Media reports describe that Tesla was criticized and removed from one ESG index and scored lower on other ESG ratings in part because it opened a showroom on December 31, 2021, in Urumqi the capital of the Xinjiang Uyghur autonomous region.

Among the recommendations in the UN rights report, is for China to take “prompt steps” to release all individuals arbitrarily imprisoned in Xinjiang, whether in camps or any other detention center. And while China is all but certainly not going to conform its behavior in response to the report, government and business reactions will make continued bad behavior costly.

Homeland Security Secretary Alejandro Mayorkas recently made clear, “the United States will not tolerate modern day slavery in our supply chains,” and just last week enforcing the Uyghur Forced Labor Prevention Act U.S. Customs and Border Protection agents again blocked the import of solar panels, detaining a shipment containing silica-based products made by Xinjiang Uyghur autonomous region based Hoshine Silicon Industry Co. Ltd., or its subsidiaries.

Increasingly we are being asked to assist companies in adopting policies and practices that remove modern slavery from their business supply chain, as well as assisting companies that have received a questionnaire from an upstream business they supply. This is much more than simply having an anti slavery policy on a business website, and while the elimination of all forms of forced and compulsory labor is a key element of the S in ESG, the reputational risks for doing business in the Xinjiang Uyghur autonomous region are real, and for many, this moral imperative has become a priority.

179D Tax Deduction made Bigger and Better

The Inflation Reduction Act of 2022 has been much talked about in the 14 days since it was signed by President Biden, but little has been said about the provisions that modified the 179D energy efficient commercial buildings federal tax deduction making it bigger and better.

Section 13303 of HR 5376 – The Inflation Reduction Act of 2022, beginning on page 137 of the bill, expands the maximum dollar amount of the federal tax deduction from $1.80 a square foot (actually adjusted for inflation for properties put into service in 2022, $1.88 a square foot) to $5.00 a square foot. It also adds who is eligible to utilize that deduction available today to commercial building owners and governments (that assign the tax benefit to others) adding tax exempt entities (including non-profits, houses of worship, schools, and more) and also REITs, each that do not pay federal income taxes and will now be able to assign the tax deduction to others (in the way governments currently assign this deduction).

The 179D commercial buildings energy efficiency tax deduction has since 2006 enabled building owners to claim a $1.80 per square foot tax deduction (i.e., this tax incentive has been popular both because it is based on the area of the building not the dollar amount expended and that documentation is very easy) for installing qualifying systems and buildings. Tenants may be eligible if they make the construction expenditures. If the system or building was installed on federal, state, or local government property, the 179D tax deduction could be assigned to the businesses primarily responsible for the system’s design or installation; and now non-profits and REITs (that can now use this deduction directly in calculating profits) will be eligible, significantly benefitting the design and construction industries.

HR 5376 makes clear that the existing provisions remain in effect through December 31, 2022 and the new text will be effective, permanently, from January 1, 2023 forward.

While previous iterations of these IRS Code provisions were fairly straightforward, the new text adds new levels of complexity.

The amended Code provisions set a new minimum qualification, “.. the total annual energy and power costs for the building are certified to be reduced by a percentage greater than 25 percent.”

The dollar value of the deduction is a sliding scale, also found in the amendments, “the applicable dollar value shall be an amount equal to $0.50 [per square foot] increased (but not above $1.00) by $0.02 for each percentage point” by which the total annual energy and power costs for the building are reduced over 25 percent (i.e., the current $.60 partial deductions will be eliminated as will be the “interim lighting” rule).

Those deductions will see an “increased deduction amount” for projects that both meet local prevailing wage and apprenticeship requirements for any laborers and mechanics employed by the taxpayer or contractors associated with the installation, a politicized change in the program driven by the Democrat party [of course no Republican in Congress voted for this bill] benefitting unions, and note today only 32 states have prevailing wage requirements for government building. Again, on a sliding scale this increase is $2.50 a square foot for energy savings of 25 percent up to a resultant bonus deduction equal to $5.00 per square foot for energy savings of 50 percent or more (c.f., without the prevailing wage and apprenticeship requirements being satisfied, the maximum deduction will be $1.00 a square foot).

Significantly, since 2006 there has been a lifetime cap for this deduction of $1.80 a square foot (again, now $1.88 adjusted for inflation), but under these amendments, there is a 3 year cap that allows the new amount in full to be claimed if the previous 179D deduction was utilized by the taxpayer more than 3 years ago. This is a big deal for a program that had been interpreted as an accelerated depreciation program (i.e., from the usual building depreciation over 39 years to 1 year), but now the 179D deduction can be claimed again.

In an interesting quirk, the reference standard for calculating the energy saving percentage will change prospectively. The amendment strikes ‘‘the most recent’’ and inserts ‘‘the more recent of –  “(A) Standard 90.1-2007 published by the American Society of Heating, Refrigerating, and Air Conditioning Engineers and the Illuminating Engineering Society of North America, or “(B) the most recent”.

And then altering time frames again by striking ‘‘2 years’’ and inserting ‘‘4 years’’, and by striking before ‘‘that construction of such property begins’’ and inserting ‘‘such property is placed in service’’.

There is new text relaxing the qualifications for retrofitting existing buildings, such that beginning in January, deductions will be available for buildings that improve their energy efficiency by 25 percent. The text describes this in terms of a decrease in “Energy Use Intensity” to 25 percent, which had been 50 percent, and the removal of the requirement for an energy model, but how those work will have to await regulations or other guidance. Retrofits may be the sweet spot of this Act funding, for example, Maryland’s mandatory 20 percent reduction in direct greenhouse gas emissions for commercial buildings by 2030.

There will be regulations issued to implement the amendments and it can be anticipated they will be extensive.

We have historically supported the “qualified individuals” including licensed contractors that have done the certifications under this program, including to assist in making the modeling and documentation frictionless, and we will continue to do so under the new Act.

Of note, given that other provisions of The Inflation Reduction Act of 2022 give the IRS another $45.6 Billion targeting taxpayer enforcement activities, which could mean as many as 87,00 new agents, taxpayers may be well served to seek advice and counsel before claiming these bigger and better deductions.

179D has, for more than a decade, been the most used government incentive driving energy efficient commercial buildings. It is not clear what impact these modifications will have, but many observers believe the politicization of the program will result in a precipitous drop in the number of buildings advantaged, but those fewer deductions will be in larger dollar amounts, which will not be good for the green building industrial complex and not good for repairing the planet.

New Maryland Regulation all but Shuts Down Phase ll Environmental Site Assessments

The Maryland Department of the Environment has adopted regulations for the first time requiring the person conducting an environmental assessment, even when they are not the owner of the property (e.g., possibly a prospective contract purchaser of land or a consultant engaged in a lending transaction) to report suspected oil to MDE immediately, but not later than 2 hours after the visual detection of free product or within 48 hours of receiving an analytical laboratory report that shows a petroleum constituent.

This is a significant expansion in the breadth and scope of what environmental matters are necessary and proper to report to the Maryland state government, including by what, who and when.

Buried deep, on page 78 of 133 pages of amended and restated oil pollution control and storage regulations are provisions that impose reporting requirements, for the first time, on a prospective purchaser of real estate even if the purchase is never consummated. Moreover, the regulations, also for the first time, impose the new reporting requirements on “the person conducting the environmental assessment” later clarified as “the person performing the environmental assessment” clearly intending to include in the mandate consultants engaged to do the work (apparently including laboratories testing samples) whether by an owner, prospective owner, lender or anyone else.

These regulations are in the oil pollution control and storage program, but evidence of a spill, release, or discharge, the magic words in the regulation that trigger “reporting circumstances” refer to oil, but are far from clear as Maryland has long had an issue of the definition of what is “oil.” Maryland defines “oil” as, in general, petroleum based and excluding edible oils unless those edible oils are incorporated into a petroleum based oil such that the total substance is considered oil, except with respect to, however, the discharge of edible, including plant based oil, required by other Maryland regulations (i.e., the NPDES program) to be reported to MDE. None of which addresses ‘used’ oil nor aligns with federal oil definitions. But the matter of what is oil will have to wait for another blog post.

So, many more people must report oil, but how much oil triggers this reporting requirement? Noting that these regulations largely regulate the oil and gas industry (e.g., deliveries of fuel to gasoline stations), elsewhere a spill of 5 gallons or more for example when filling a gasoline tank, triggers a notice requirement, but there is no similar quantity threshold described in these sections. Presumably, a thimble full of oil triggers this reporting requirement.

Additionally, the spill, release, or discharge can be historic. That is, in the vast majority of site assessments, oil identified on a property is not from current ongoing use, but rather is historic, often decades old, and identified only because modern laboratory testing reveals residue of oil constituents in the soil in such small quantities.

It is not the historical time frame that has brought most of the attention to these regulations, but the time requirement of immediate reporting to MDE. From COMAR 26.10.08.01,

(2)  If evidence of a spill, release, or discharge is discovered during an environmental assessment conducted on a property as part of a due diligence investigation in support of a property transaction or a loan refinancing, the person conducting the environmental assessment and the owner of the property shall report the suspected spill, release, or discharge to the Department:  

(a)  Immediately, but not later than 2 hours after the visual detection of free product; or  

(b)  Within 48 hours of receiving an analytical laboratory report described under § B(1) of this regulation.  

It is suggested by professionals in this space that those very short time frames for reporting are not workable. Be well aware, that many matters that did in the past have to be reported to the State at all, now are required to be reported within 48 hours. In an occurrence since these regulations went into effect, where this firm represents a land seller and the environmental assessment was done by a consultant engaged by a contract purchaser who retained the services of the laboratory, we had great difficulty complying with these time frames.

There appears to be no authority for those very short reporting time frames or for that matter these reporting requirements at all. We are not aware of any statute in Maryland that authorizes these regulations. And in response to a query about that lack of statutory authority, in its Response To Public Comments on the proposed regulations, MDE unresponsively replied, “MDE proposed to formalize a current Department practice for reporting evidence of oil contamination during an environmental assessment conducted on a property as part of a due diligence investigation in support of a property transaction or a loan refinancing ..”

Of course, as our clients know, in the past all of these matters were protected by attorney client privilege and related confidentiality tools when attorneys conducted environmental site assessments including engaging consultants and while the best practices remain important for matters of hazardous waste and constituents other than oil, these regulations make no allowances for the longstanding and accepted practice of mitigating risk through the use of law firms to conduct environmental assessments.

Owners of land, including prospective purchasers, must consider this in the context of other significant disarranging in matters of environmental site assessments, including that EPA has withdrawn its proposed approval of the 2021 Phase I standard and that EPA is expected in the coming days the propose a rule making PFOA and PFOS hazardous substances, resulting in many being reluctant to allow any assessments forcing conversations with attorneys about how to newly navigate this environmental regulatory scheme that has been in place since the 1980s.

News of these requirements to give notice to MDE has been slow to reach the real estate industry in Maryland, but the response among the knowing has been to all but shut down and halt the Phase ll Environmental Site Assessment Process in the state, which results in the opposite of the intended effect with dramatically fewer properties being studied the consequence being less contamination discovered, mitigated and cleaned up. The wisdom of mandatory environmental reporting to government is left for others to philosophize about, but these regulations are not good for the alienation of real estate, nor for business development, and certainly not for the repairing of our planet.

Webinar: Are You Ready to Measure and Report Your Building GHG Emissions?

You are invited to join Stuart Kaplow and Nancy Hudes for a live webinar we are presenting this Tuesday, August 16 from 9 to 10 am EST that will provide you with all the information you need to reply to the question “Are You Ready to Measure and Report Your Building GHG Emissions?

Our webinar is complimentary but you must register at https://us02web.zoom.us/webinar/register/WN_dV2j3h6USSCUJvh64tb0Qg

This is a completely new and emergent area of regulation where businesses across America are for the first time being required to report their greenhouse gases.

In a fast paced and fun live event we will begin by introducing the subject of greenhouse gas emission reporting and conclude with how to meet the required reductions in GHG emissions. While our underlying focus will be Maryland multi family real estate, the vast majority of this virtual program has applications to all types of real estate in Maryland and across the entire U.S.

We will explain the new Supreme Court decision in West Virginia v. EPA. And we will begin to look at the opportunities in the just passed Inflation Reduction Act of 2022.

The format of the webinar will track the blog posts on our ESG Legal Solutions blog at www.esglegalsolutions.com.

The agenda for this one hour virtual program will be (.. and yes, you can click on each blog post for a preview of what is to come on Tuesday):

Glossary of Greenhouse Gas Terms

A Quick Refresher on the Science of Greenhouse Gas

Maryland Resets its Trajectory with SB 528

SEC Climate Risk Rule is Transformative at a Cost

An Opportunity for Commercial Landlords

Reducing Your Greenhouse Gas Emissions

Of course, we will have time for questions and hopefully answers, that those participating can ask as the webinar progresses ..

Again, please join us this Tuesday, August 16, and don’t forget that our webinar is complimentary but you must register at https://us02web.zoom.us/webinar/register/WN_dV2j3h6USSCUJvh64tb0Qg

This is the first in our monthly series, “ESG Talks.” On Tuesday, September 20 at 9:00 am we will talk about “ESG (.. including GHG Calculation) Impacts More than Only Public Companies.”

Reducing Your Greenhouse Gas Emissions

As governments enact mandatory greenhouse gas emission laws and as businesses voluntarily make “net zero” pledges, we are increasingly working with organizations, first to understand and calculate their GHG emissions, then to implement strategies for efficacious yet frictionless reductions.

An example of what businesses are reacting to is Maryland’s new statutory mandate that buildings, commercial, multifamily, and others with a gross floor area of 35,000 square feet or more, must achieve a 20% reduction in net direct GHG emissions (i.e., from Scope 1 sources only?) before January 1, 2030, a 40% GHG reduction before January 1, 2035, and be net zero before January 1, 2040.

The purpose of this post is not to question the relative merit of such a regulatory scheme, especially given that the commercial and residential economic sectors combined are only 13% of total U.S. GHG emissions, but rather to point out strategic responses for business where large first dollar costs will be involved.

As tracked by the U.S. EPA, GHG emissions from the residential and commercial sectors, which includes all homes and commercial businesses (excluding agricultural and industrial activities), come from direct emissions including fossil fuel combustion for heating and cooking needs, management of waste and wastewater, and leaks from refrigerants (all of which is dwarfed by “indirect” emissions that occur offsite but are associated with the use of electricity consumed by homes and businesses).

Direct emissions are produced from residential and commercial activities in a variety of ways:

Combustion of natural gas and petroleum products for heating including water heating and cooking needs emits carbon dioxide (CO2), methane (CH4), and nitrous oxide (N2O). Emissions from natural gas consumption represent 79% of the direct fossil fuel CO2 emissions from the residential and commercial sectors in 2020. Coal consumption is today a minor component of direct energy use.

Organic waste sent to landfills emits CH4.

Wastewater treatment plants emit CH4 and N2O.

Anaerobic digestion at biogas facilities emits CH4.

Fluorinated gases (mainly hydrofluorocarbons, or HFCs) used in air conditioning and refrigeration systems can be released during servicing or from leaking equipment.

Be clear that it is not easy nor inexpensive to achieve a 20% reduction in net direct (only) GHG emissions.

Of note, total residential and commercial greenhouse gas emissions, including direct and indirect emissions, in 2020 have decreased by 5% since 1990. Greenhouse gas emissions from on-site direct emissions in homes and businesses have increased by 2% since 1990. Additionally, indirect emissions from electricity use by homes and businesses increased from 1990 to 2007 but have decreased since then to approximately 10% below 1990 levels in 2020.

We work with clients to identify opportunities to reduce emissions from businesses including multi family housing. Those options often include:

Green building. Homes and commercial buildings use large amounts of energy for heating, cooling, lighting, and otherwise. Green building practices like LEED can allow new and existing buildings to use less energy to accomplish the same functions, leading to fewer greenhouse gas emissions. Techniques to improve building energy efficiency include better insulation; more energy-efficient heating, cooling, ventilation, and refrigeration systems; efficient lighting; passive heating and lighting to take advantage of sunlight; and the purchase of energy-efficient appliances and electronics.

Wastewater treatment. Drinking water and wastewater systems account for more than 2% of energy use in the U.S. By incorporating energy efficiency practices into their water and wastewater plant, municipalities and utilities can save 15 to 30% in energy use and by reducing water use, including lower temperature and less hot water, most businesses can achieve significant reductions at little if any cost.

Waste management. When solid waste decomposes in landfills, it creates landfill gas, which is primarily comprised of CO2 and CH4. There are a number of well established, low-cost methods to reduce greenhouse gases from consumer waste, including recycling programs, waste reduction programs, and landfill methane capture programs.

Air conditioning and refrigeration. Commonly used refrigerants in homes and businesses include ozone-depleting hydrochlorofluorocarbon (HCFC) refrigerants, often HCFC-22, and blends consisting entirely or primarily of hydrofluorocarbons (HFCs), both of which are potent greenhouse gases. In recent years there have been several advancements in air conditioning and refrigeration technology that can help homes and businesses reduce both refrigerant charges and refrigerant emissions. For instance, we have worked in the retail food sector assisting owners in reducing leakage from equipment and that has dramatic costs saving implications while contributing significantly to repairing the planet.

Make no mistake, increasing numbers of local and state governments as well as the federal government are mandating GHG emission reductions. And this does not even consider the self-inflicted “Net Zero by 2030” and similar pledges that many businesses are announcing. Beyond first dollar costs, this is a risk issue for most organizations that occupy a habitable structure. So, it is no surprise we are increasingly working with clients, first to understand and calculate their GHG emissions, then to assist them in implementing strategies for efficacious yet frictionless GHG emission reductions.

Do Something about Slavery in Your Business Supply Chain

Slavery exists in 2022. There is simply no morally defensible reason for not doing everything in our power to end modern slavery.

U.S. Customs and Border Protection describes in a May 17, 2022 update, that at any given time, “an estimated 40.3 million people are in modern slavery.”

That “means there are 5.4 victims of modern slavery for every 1,000 people in the world.”

“1 in 4 victims of modern slavery are children.”

Many businesses haven’t considered the problem or don’t want to believe that modern slavery could be a part of their supply chains. Others have some appreciation of the problem but don’t know how to get started addressing it.

The reality is that modern slavery is found in nearly every part of every economy in the world. Most U.S. businesses are horrified to learn that their supply chain includes products and materials made by slaves someplace in the world. A recent confidential self-assessment at a suburban Maryland construction project found not only slave labor in producing multiple construction materials in the supply chain but also forced labor at the site. And earlier this year U.S. Customs and Border Protection officers seized four shipments of palm oil at the port of Baltimore destined for a local bakery because the palm oil was produced in Malaysia with modern slavery.

We work with our clients to examine their business practices in the fight against this atrocity and to increase awareness in the broader private sector we regularly blog on the efforts by businesses to create a slave-free world, including a post, Modern Slavery a Key ESG Factor.

We believe strongly that all organizations, whether in pursuit of the S in ESG or in striving to repair the world, must examine and assess their business practices now.

And it is clear that in 2022 governments and businesses are responding to modern slavery in ways not before seen. Two good examples may be:

Acknowledging the prevalence of slavery in the construction sector, the State of Maryland recently adopted the following with respect to slavery in the construction of public buildings with state funds, including schools in the state:

3.2.4 Additional Requirements.

H. Be designed and constructed with no goods produced from forced labor in supply chains. The project seeks to address human rights, protecting against social justice abuses (the “S” in ESG) at every stage, from the extraction of raw materials to building erection. For guidance, refer to the current version of LEED BD+C: IPpc 144 Social Equity within the Supply Chain credit.

Maryland Green Building Program, page 11, as required by State Finance and Procurement, Maryland Code Ann. Sec. 3-602.1, effective March 17, 2022

And noting that the global solar panel supply chain relies heavily on government forced labor from China, a contract for the installation of solar panels on a new privately owned building in Washington, DC, where that owner would not accept the moral equivalence of reduced carbon with the gross violations of human rights in Xinjiang, China (where government forced labor is on top of the 40.3 million people in modern slavery) contained the following:

8. Supply Chain.

b. The Subcontractor expressly represents and warrants to the Owner that with respect to the Solar Panels and any component part thereof, the supply chain will comply with the Federal Uyghur Forced Labor Prevention Act, including providing express language overcoming the presumption under the (still being phased in) law that all “products produced in the Xinjiang region [where more than 80% of the world’s solar panels are sourced] are barred from importation into the United States.” For the avoidance of doubt, the Solar Panels are not to have been made, raw materials sources, labor provided or component parts manufactured in the Xinjiang region of China.

An increasing number of clients are adopting express modern slavery statements, including not only those who must comply with the UK and Australian modern slavery acts but others who want to make a difference and make that public.

We have worked in a broad breadth of industries in supplier due diligence providing staff awareness and education, drafting procurement policies including creating supplier codes of conduct and modern slavery questionnaires, all so that our clients do not need to expend internal resources to become expert in assessing and managing the risks of modern slavery.

As businesses consider modern slavery in 2022, a paraphrasing of Rabbi of Tarfon, from the first century seems somehow appropriate, “it is not your responsibility to finish the work of repairing the world, but you are not free to desist from it either.”

All businesses, whether in pursuit of the S in ESG or in striving to repair the world, must assess their business practices now.

New Greenwashing Case is Troubling to Future of ESG

On July 6, FossielVrij NL filed a greenwashing lawsuit in the Amsterdam District Court against Dutch airline KLM.

The overseas litigation is troubling because at its core the theory of the case is apocalyptic environmentalism, the belief that unless humans drastically reduce consumption population growth and affluence will overwhelm our planet. In this instance that an airline advertising campaign describing environmental attributes of the airline, which successfully results in more people flying, is in and of itself “greenwashing” because aviation accounts for a large percentage of greenhouse gas emissions and the advertising results in more emissions, or as William Vogt said in 1930, we must, “Cut back! Cut back” … “otherwise everyone will lose” in devastation on a global scale, perhaps including our extinction.

Specifically, the claim is KLM is making misleading advertising claims in its “Fly Responsibly” advertising campaign when it describes an option to buy carbon offsets, labeled ‘CO2ZERO’ which funds reforestation projects and further when it describes KLM’s experimental purchase of biofuels, all as “creating a more sustainable future” in that the airline is on track to reduce its emissions to net zero by 2050. The claim is not that any of that is not true, but rather that sustainable and ESG advertising claims appeal to consumers who will fly KLM and other airlines when the only current means of airlines to reduce greenhouse gas emissions is to fly less. So, a truthful advertising campaign that succeeds in more customers flying is greenwashing or ‘sustainable washing’ because there is no such thing as ‘flying responsibly’ and that KLM seeks company growth and increased flight sales, whilst it should be reducing emissions by reducing the number of flights “to keep a just, livable world within reach.”

Moreover, KLM’s marketing undermines the urgent action needed to minimize climate catastrophe. “After all, the greenwashing actually promotes flying and the pollution it causes” (quoting from an unofficial translation at page 14 of the 147 page complaint).

Greenwashing has often been described as conveying a false impression or providing misleading information about how a company’s products or services are more environmentally sound, is now a term being applied more broadly to ESG (.. yes, from environmental only to also include social and governance); and, sometimes in the EU termed sustainable washing. This case is that on steroids.

The term greenwashing is a play on “whitewashing,” which means attempting to conceal unpleasant or incriminating facts about something.

The compound word greenwashing was coined by Jay Westerveld in a 1986 essay responding to a card in a hotel room that read, “Save Our Planet: Every day, millions of gallons of water are used to wash towels that have only been used once. You make the choice: A towel on the rack means, I will use again ..” He noted that often little or no effort toward reducing energy waste was made by the hotel, although towel reuse saved them laundry costs. He concluded the real objective was increased profit labeling this and other profitable but ineffective environmentally conscientious acts as greenwashing.

The hotel industry’s “save the towel” campaign was of course not the first modern greenwashing. The Keep America Beautiful anti littering campaign was founded by beverage manufacturers and others in 1953, partly to forestall regulation of disposable containers.

In 1999, the word “greenwash” was added to the Oxford English Dictionary. And today it has a broader definition including not only environmental claims but also matters of ESG.

There have been a few government actions against companies alleged to have overstated ESG matters, but to date most if not all are brought as securities law violations and not greenwashing claims.

Just how sustainable a particular company really is can be a matter of debate. From a scientific perspective, there is no such thing as a truly sustainable company or industry, with or without evidence of a high ESG rating. No business organization will score high in every ESG factor, so a perspective that mitigates risk requires a broader declaration that may include artistic and philosophical perspectives.

We have thought about adopting a Polar Bear as our firm mascot because not only are the beasts charismatic, but they might carry with them a connotation of our firm’s climate bona fides, but some eco-litigator might find someone who was misled about our environmental deeds and see greenwashing.

There may be some cover provided to business, but likely not much from a cause of action like that in the KLM case, when the Federal Trade Commission updates its Green Guides later this year. Today there is a little direction provided by the FTC’s 2012 version of its Green Guides, the current update of the Guides, but that document is at this point more of a historical reference; although it does offer guidance on materials and energy sources that are “renewable,” and “carbon offset” claims. More government regulation would not have forestalled this case and will not protect businesses.

There is a recent World Federation of Advertisers first of its kind global guidance on environmental claims issued earlier this year, but it does not contemplate the nature of claims brought in the KLM case.

All of that observed, with matters of ESG being front and center in 2022, we expect dramatically more greenwashing risk, including government enforcement and private party litigation decrying the consequences of our heedlessness as well as more mainstream misrepresentation claims.

As the case proceeds we will report in a future post whether KLM’s advertising claims on CO2 offsets and alternative fuels are misleading and constitute greenwashing.

We suggest with good legal counsel companies can mitigate risk of greenwashing claims while ensuring their ESG disclosures are efficacious and doing their part to repair the planet and its people.

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