Green Building Law Update

Environmental Law and Sustainability for Business

ESG is Not Just for Public Companies

By Stuart Kaplow on Posted in Environmental, ESG, Paris Accord

I am excited to be presenting a fast paced and fun one hour virtual program, “Environmental Social Governance (ESG) an Emergent and Fast Growing Area of the Law” for the Maryland State Bar Association, and Not just for lawyers, on December 14, 2021 at noon. Register today for the live virtual program.

The impact of ESG is not limited to public companies.

There are just over 4,000 public companies traded on an exchanges in the U.S., but according to the Census Bureau there are more than 7 million privately held businesses (with employees) across the country. And it is many of those millions of private businesses that will get richer from ESG.

At its simplest, many of those private companies are in the supply chain of larger companies that will demand their suppliers and other stakeholders comply with ESG mandates, such that the upstream business can demonstrate a positive ESG record (e.g., commercial landlords are launching ESG initiatives to compete for tenants that have ESG requirements).

A bit more uncomplicated, is that private companies are usually more nimble reacting more quickly, producing a more efficacious program and do so more economically, than businesses with layers of c suite executives that report to a board of directors; maximizing opportunities with market conditions created by emergent ESG standards.

Smaller businesses, without a deep bench of internal ESG expertise need to be particularly cautious of greenwashing in ESG claims. Many find engaging an attorney with sustainability expertise is a good way to mitigate ESG associated risk.

And with brand reputation as the number one reason businesses currently engage in ESG efforts, as 78% of respondents indicated in a recent survey, that overwhelming response applies equally to public and private businesses. This market driver is, of course, before any real ESG regulation in the U.S.”

And regulation is already here that impacts some small businesses. A Maryland law that became effective on May 30, 2021, requires specified businesses in the State demonstrate diversity in their board or executive leadership and additionally and most significantly, that new law requires each business entity, when it annually renews its charter, to submit diversity data. The Maryland government advises that approximately 430,000 businesses 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 of those entities will be subject to annual state reporting under this new ESG law.

Moreover, government mandates and incentives that have already driven business investment into renewable energy will go wider and deeper with ESG mandates that promise to do more than only Environmental, but also the social engineering that is the Social and Governance. Businesses small and large will take advantage of this artificial demand created by government.

That the Supreme Court just agreed to review the EPA’s authority to regulate greenhouse gas emissions may give the federal government the authority to regulate environmental protection through policies aimed at the electric power generating monopolies, impacting every business that needs electricity, small and large alike. The electric utility monopolies are an industry that doth protest too much, methinks, made wealthy by government regulation, whatever the pendulum swing of that regulation.

And there will be other opportunistic industries. Already the U.S. banking industry is signaling its willingness to consider ESG when underwriting lending. Private lenders banded together at the recent COP26 U.N. climate summit to pledge more than $139 Trillion in private capital (.. that is more than 125% of the planet’s gross domestic product in 2021) they will lend to main street businesses, at a profit, to fund business’ implementation of government climate change policy.

In 1961 President Eisenhower warned the nation about the military industrial complex. But in 2021, some are quietly cautioning about an emergent coterie of environmentalists, government and businesses that are emboldening an “ESG industrial complex.”

There will be winners and losers. Those businesses that do not respond face being a contemporary buggy whip maker. ESG will no doubt make many on Main Street richer. Fortune favors the bold and those businesses that innovate, now, in advance of the all but certain coming government intervention in ESG, will be those enterprises that thrive.

ESG has become such a large component of my law practice that I am now collaborating with a fabulous group of attorneys in ESG Legal Solutions, LLC, a new non-law consulting firm “powering sustainability for tomorrow’s business.” 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.

New SEC Guidance Portends More Stockholder ESG Activism

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

I am excited to be presenting a fast paced and fun one hour virtual program, “Environmental Social Governance (ESG) an Emergent and Fast Growing Area of the Law” for the Maryland State Bar Association Environmental & Energy Section on December 14, 2021 at noon. Registration will be open to all; not just lawyers. Registration for the live virtual program opens soon. Save the Date.

Last week the Securities and Exchange Commission announced a subtle change in internal agency guidance that will have the consequence of more shareholder resolutions on ESG issues during the coming proxy season.

The SEC rescinded three recent (Trump era) staff legal bulletins on shareholder proposals. This guidance is significant in that SEC staff may no longer agree that certain stockholder proposals are excludable from proxy statements and annual meeting agendas.

Notably, the new bulletin singles out as likely no longer excludable stockholder resolutions “squarely raising human capital management issues with a broad societal impact” and proposals that “request companies adopt timeframes or targets to address climate change.”

That these ESG driven topics are highlighted for special treatment is not surprising given current societal priorities, effectuated by the SEC putting proposals in front of shareholders for a vote at an annual meeting that have broad societal impact versus focus on the issue’s relevance to a particular public company.”

The SEC’s two Republican commissioners, Hester Peirce and Elad Roisman, criticized the guidance as being the “flavor of the day regulatory approach” reflecting the politics of the then current Administration, and while that may be correct many business leaders have articulated the larger matter is environmentally conscious stockholders, often owning only a handful of shares, driving corporate action, often action not concerned about the financial interest of stockholders, including that stakeholder ESG will drive much needed increases in wages and also higher energy costs.

Make no mistake, this quietly issued government agency bulletin is a major public policy change. In recent years, hundreds of companies have come to the SEC staff seeking no-action letters with respect to shareholder proposals looking to micromanage the company in violation of the “ordinary business” and “economic relevance” exceptions or unlikely to garner the necessary votes at an annual meeting.

Moreover, in the short term this change comes about just as the 120 day deadlines (before the anniversary date of the company’s proxy statement for the previous year’s annual meeting) for shareholder proposals are approaching and many suggest will portend a very activist year.

Our attorneys have for years worked with public companies on how to respond to shareholder environmental proposals including successfully advising clients on the environmental issue de rigueur in 2019, nurdles (.. you may have thought a nurdle was a cricket term for a score by deflecting the ball rather than striking it, but a nurdle is also a small, lentil size, pellet of plastic that serves as raw material in the manufacture of plastic products).

Not surprisingly, matters of whether failure to bring a particular stockholder proposal to the floor at a company annual meeting will constitute a violation of federal securities laws, swing as a pendulum does back and forth from presidential administration to administration, and with this new guidance ESG concerns can be expected to dominate shareholder submissions this year. But, there remains a legitimate question if this a good way to run a business? And maybe the greater calamity is this almost certainly not a good way to make ESG public policy?

It is beyond dispute that the consequences of this SEC bulletin will be that attorneys have more work this year, not less, for public companies advising how to respond to shareholder ESG proposals.

ESG has become such a large component of my law practice that I am now collaborating with a fabulous group of attorneys in ESG Legal Solutions, LLC, a new non-law consulting firm “powering sustainability for tomorrow’s business.” 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.

Department of Labor Proposes to Remove Barriers to Considering ESG in Plan Management

By Stuart Kaplow on Posted in Climate Change, Codes and Regulations, 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 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.

The U.S. Department of Labor is soliciting public comments on the proposed rule announced last month that would remove barriers to retirement plan fiduciaries’ ability to consider climate change and other environmental, social and governance (ESG) factors when they select investments and exercise shareholder rights.

The proposed rule, “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights,” is an about face from the existing rules of the Department, which were characterized as having a “chilling effect on environmental, social and governance investments” by Acting Assistant Secretary for the Employee Benefits Security Administration Ali Khawar, who went on to say,

A principal idea underlying the proposal is that climate change and other ESG factors can be financially material and when they are, considering them will inevitably lead to better long-term risk-adjusted returns.”

This 180 degree turn to the left from the position of the prior Administration, is consistent with the April announcement by the Department that it would not enforce certain final rules of the prior Administration.

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

The proposed rule acknowledges the “Department has a longstanding position that fiduciaries may not sacrifice investment returns or assume greater investment risks as a means of promoting collateral social policy goals,” which is consistent with decades old federal statutes. But just as the prior Administration did not seek Congressional approval for its edicts, this proposed rule is similarly, “non-regulatory guidance.”

But make no mistake, this proposed action by the Department, including recognizing once again that “fiduciaries can make investment decisions that reflect climate change and other environmental, social, or governance (“ESG”) considerations, including climate-related financial risk” is key to removing existing prohibitions to the current Administration’s efforts in driving matters of ESG.

Moreover, the rule, when enacted, will continue the all but exploding growth opportunities in ESG (even as some caution sustainable investing looks a lot like the dotcom bubble of the late 1990s).

And even before this rule is final, given that the federal government is not enforcing the existing rules, ESG metrics are continuing to pull in lots of money and will be a driver across the economy.

The proposed rule has a comment period that runs through December 13, 2021.

Supreme Court to Hear Climate Change Regulation Case

By Stuart Kaplow on Posted in Climate Change, Codes and Regulations, ESG, Paris Accord

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.

If there was any question that the judiciary was a coequal and political branch of government, last Friday after President Biden was wheels up to attend the COP26 Glasgow climate conference, the Supreme Court agreed to review the Environmental Protections Agency’s authority to regulate greenhouse gas emissions.

This litigation over the EPA’s scope of authority comes to the high court in a quartet of environmental cases on appeal from the U.S. Court of Appeals for the District of Columbia Circuit. In January, the day before President Trump left office, the D.C. Circuit vacated both the Trump Administration’s decision to repeal the 2015 Clean Power Plan, which established guidelines for states to limit carbon dioxide emissions from power plants, and the Affordable Clean Energy Rule that the Trump administration issued in its place.

The Supreme Court never had the opportunity to fully consider the Obama administration rules, the implementation of which had been stayed, and then the complexion of the judicial review swung widely from the Trump administration to the Biden administration.

The precise issue the Supremes granted certiorari on is, “Whether, in 42 U.S.C. § 7411(d), an ancillary provision of the Clean Air Act, Congress constitutionally authorized the Environmental Protection Agency to issue significant rules — including those capable of reshaping the nation’s electricity grids and unilaterally decarbonizing virtually any sector of the economy — without any limits on what the agency can require so long as it considers cost, nonair impacts and energy requirements.”

Urging the justices to take the case, one of the challengers, the North American Coal Corporation, stressed what the Court should resolve, “as soon as possible is who has the authority to decide those issues on an industry-wide scale — Congress or the EPA.” Unless the justices weigh in, the company warned,

these crucial decisions will be made by unelected agency officials without statutory authority, as opposed to our elected legislators.”

The Biden administration told the justices that there was no need for them to step in now, because the Clean Power Plan “is no longer in effect and EPA does not intend to resurrect it.” Instead, the government explained, it intends to issue a new rule that takes recent changes in the electricity sector into account. “Any further judicial clarification of the scope of EPA’s authority,” the government suggested, “would more appropriately occur” after the agency has actually issued the new rule.

After considering the cases at four consecutive conferences, with some political bravado the justices granted review on October 29, 2021, only hours before the opening of the COP26 Glasgow climate conference and ordered the cases to be argued together.

The high court’s decision in the case, which can be expected by summer 2022, could have an impact well beyond climate change law because it could impose new limits on Congress’ ability to delegate authority to all regulatory agencies.

We will follow the proceedings, ..

The lead case is West Virginia v. EPA. It is consolidated with North American Coal Corp. v. EPA, Westmoreland Mining Holdings v. EPA, and North Dakota v. EPA.

A Sea Change in SEC Climate Change Disclosure

By Stuart Kaplow on 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 Posted in Environmental, ESG, 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 strategy and solutions, from policy to project implementation, do not hesitate to reach out to me.

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 Posted in ESG, Green Washing, LEED

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.

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 Posted in Codes and Regulations, ESG, 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 strategy and solutions, from policy to project implementation, do not hesitate to reach out to me.

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.

The S in ESG may be the Most Impactful

By Stuart Kaplow on Posted in Environmental, ESG, Sustainability, Uncategorized

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.

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.

LexBlog