Green Building Law Update

Environmental Law and Sustainability for Business

Net Zero Pledge Standards for Business Released at COP27

By Stuart Kaplow on Posted in Climate Change, ESG, GHG

Much has been written in the media about the just concluded UN Climate Conference (COP27) in Sharm el-Sheikh, most of it focusing on the agreement to agree on reparations or more correctly stated, on providing “loss and damage” funding in the future for vulnerable countries hit hard by climate disasters. But the biggest takeaway for businesses in the U.S., today and into the future, is the release of standards for Net Zero emission pledges by non-state actors.

The world has seen a ballooning of Net Zero commitments by non-state actors, in particular from the private sector. The growth in pledges has been accompanied by a proliferation of criteria and benchmarks to set Net Zero commitments with varying levels of robustness.

In response to the call for clearer and more robust standards, COP27 saw the launch of standards in a report, “Integrity Matters: Net Zero Commitments by Businesses, Financial Institutions, Cities and Regions” from the hastily assembled United Nations’ High Level Expert Group on the Net Zero Emissions Commitments of Non-State Entities.

“We must have zero tolerance for net zero greenwashing,” said the Secretary-General at the launch of the Group’s report from Sharm el-Sheikh on November 8, 2022, calling the report “a how-to guide to ensure credible, accountable net zero pledges.”

The report is premised on the urgent admonition that “to limit warming to 1.5°C, global emissions must peak by 2025 and be cut in half by 2030, on the way to net zero emissions by mid century.”

What the expert group has provided is a roadmap to prevent Net Zero from being undermined by false claims, ambiguity, and “greenwashing.” The report builds on the existing science and best in category voluntary efforts to create a world wide definition of Net Zero, based on 5 principles and 10 standards to guide the future of Net Zero, and focused on holistic actions that should be taken by companies today.

The 10 standards, detailed in the report, describe what non-state actors need to consider through each stage of their progress towards achieving Net Zero ambitions and addressing the climate crisis:

1. Announcing a Net Zero Pledge 2. Setting Net Zero Targets 3. Using Voluntary Credits 4. Creating a Transition Plan 5. Phasing out of Fossil Fuels and Scaling Up Renewable Energy 6. Aligning Lobbying and Advocacy 7. People and Nature in the Just Transition 8. Increasing Transparency and Accountability 9. Investing in Just Transitions 10. Accelerating the Road to Regulation.

Each of the 10 standards is detailed with particularity. Among the most critiqued aspects of the standards may be mandates that:

  • Non-state actors cannot buy cheap carbon credits that often lack integrity instead of immediately cutting their own emissions across their value chain, (but the UN left Egypt having failed to reach any agreement on rules governing carbon credits).
  • Non-state actors cannot focus on reducing the intensity of their emissions rather than their absolute emissions or tackling only a part of their emissions rather than their full value chain (scopes 1, 2, and 3), (despite that today scope 3 emission calculations are imprecise if not more like voodoo economics).
  • Non-state actors cannot lobby to undermine ambitious government climate policies either directly or through trade associations or other bodies, (despite that among the 193 member states few are true representative democracies).

These just released international standards are a big deal for every business that has made a public announcement or is contemplating making an announcement that it “we will be Net Zero by 2030” or must publicly disclose they are “Net Zero by 2040” by way of example, as mandated for all large building owners by Maryland’s carbon statute.

U.S. businesses must now thread the needle not only with this new UN report, which establishes an international standard for Net Zero claims (.. that does not have the force of law), but also with national laws like those in the U.S., including the FTC Green Guides, soon to be updated, the SEC proposed rule on climate risk disclosure, and for those companies with sales in the EU, the 2006 directive concerning misleading and comparative advertising.

We recognize that the capabilities of businesses vary widely, so we are excited to bring the scale of resources required for non-state actors, from a multinational corporation to a local real estate developer, to first appreciate, then implement, and finally accelerate the pace of positive global change that is upon us in this era of permacrisis.

This voluntary UN initiative notes approvingly that most business leaders understand the need to mitigate climate risk and many companies are already seized with the multi-trillion dollar economic opportunity that accompanies this transition to Net Zero.

We urge non‑state actors, our clients and others, to review their Net Zero commitments against these new standards to see how they stack up with a focus on each business’ interim targets, how they set those environmental targets, and how they report progress toward Net Zero.

A live webinar “Maryland is the First State to Regulate Carbon,” 30 talking points in 30 minutes, Tuesday, December 13 at 9 am EST presented by Stuart Kaplow and Nancy Hudes on behalf of ESG Legal Solutions, LLC. The webinar is complimentary, but you must register here.

Low Embodied Carbon Concrete is Here

By Stuart Kaplow on Posted in Climate Change, ESG, GHG, State

The golden opportunity in ESG may be in concrete. Embodied carbon refers to the greenhouse gas emissions associated with materials’ manufacturing, transportation, installation, maintenance, and disposal. In a building, there is “upfront” embodied carbon in construction and then operational carbon largely from energy consumption.

Embodied carbon is particularly important because it contributes more climate changing emissions during construction than 30 years of operational carbon from a typical newly constructed LEED certified office building!

It is widely accepted that existing buildings generate nearly 40% of annual global carbon emissions. Of that total, building operations are responsible for 28% annually, while embodied carbon during construction is responsible for an additional 11% annually.

Concrete is the most widely used building material, with over half a billion tons produced in the U.S. each year. Actually, concrete is the most common man made substance on Earth; so it makes sense to repair the Earth with concrete.”

And cement, an ingredient in concrete, is the largest single material source of GHG emissions in building. It is incredibly carbon intensive if one considers only that limestone needs to be heated to ~2700 degrees F to make clinker for portland cement.

Translating all of this into use in the construction of a building is not for the faint of heart even when someone understands that all of this is described in terms of “global warming potential” which is often expressed in metric tons of carbon dioxide equivalent? It is also important that more than one third of concrete manufacturers are small businesses.

However, there is a very good solution that can be a driver to low embodied carbon concrete, the use of EPDs. Environmental product declarations (EPDs) are a method of quantifying the environmental impacts of a product. It is analogous to the nutritional label on a box of cereal. In the context of building, cradle to cradle EPDs can provide a way to describe the environmental impact of a construction material or product. EPDs in building have gained traction with their use in green building standards including LEED.

And this is already beginning to happen in concrete. Since March 17, 2022, the U.S. General Services Administration has included in solicitations for new federal projects a requirement for EPDs and lower carbon concrete (20% lower global warming potential). The State of Maryland is studying the use of cradle to cradle EPDs for concrete and is expected to issue a requirement in 2023.

The use of EPDs is much more desirable than attempts at mandatory code language. We blogged in 2020, Low Carbon Concrete for the First Time Required by Law about Marin County’s prescriptive law, but that path has gotten very little traction in other jurisdictions.

There are potential challenges with a move to low carbon concrete challenges, including workability, especially finishability and pumpability, slower early strength development, and availability of raw materials, which the industry says can be overcome with mixture optimization and admixtures. It is actually reported in early piloting, that often times the results are equal to or better than straight cement mixtures.

Many have said this is not a big change. Since 2015, The GSA standard has been “Concrete ready mix and site mix must have a minimum amount of fly ash equal to or greater than 15%, or ground granulated blast-furnace slag equal to or greater than 25%.” And in a creative promotion of the use of recovered waste materials (.. some previously regulated as hazardous), EPA published guidelines designed to encourage the use of cement and concrete containing coal fly ash in the Federal Register in January 1983. Slag (an iron smelting byproduct) has been used in concrete for over 100 years.

The marketplace, when incentivized, will find ways to reduce concrete’s carbon footprint, including:

Use locally sourced concrete and components such as aggregates to reduce transportation emissions.

Consider the design strength and curing time of concrete mixes to optimize the amount of portland cement needed to meet the design’s specifications. Longer curing times help reduce global warming potential!

Use a whole building approach to “right-size” the design of buildings to use less concrete, and maximize structural efficiency.

Use blended cements, such as “portland limestone cement” (PLC, or “Type 1L” cement) instead of conventional portland cement to reduce concrete’s carbon footprint by about 10%.

Reduce the amount of portland cement in the concrete by using supplementary cementitious materials such as fly ash, slag, and pozzolans from natural sources or recycled glass.

Use admixtures, including carbon nanotube infused concrete mixtures.

Reduce the clinker content of cement, including through “carbon mineralized concrete” that uses impounded carbon to enhance strength and durability.

Select concrete from a plant with an Energy Performance Indicator (EPI) and that meets the ENERGY STAR benchmark for industrial plant energy performance.

New laws will not be the most efficacious method of driving change in concrete, but in an industry with a market value of more than $400 Billion a year, it is capable of being a good steward of the planet, including through the (low hanging fruit) carbon reducing strategies above.

Concrete is not going away. The Romans were the first to erect beautiful concrete buildings, some of which still stand today, including the almost two millennia old Pantheon and Senate Building. (But, with modern rebar inserted concrete is all but disposable with much of it disintegrating in little more than fifty years or so.)

It is indisputable that concrete is a wonderous building material that has made possible the iconic Sydney opera house and the panoramic New River Gorge bridge. And such is why addressing the negative environmental impacts of concrete matter.

There are 40 tons of concrete for every person on the planet and an additional one ton per person is added every year making low embodied concrete a golden opportunity in ESG. Let’s use it now and repair the world.

A live webinar “Maryland is the First State to Regulate Carbon,” 30 talking points in 30 minutes, Tuesday, December 13 at 9 am EST presented by Stuart Kaplow and Nancy Hudes on behalf of ESG Legal Solutions, LLC. The webinar is complimentary, but you must register here.

Green Hushing versus Confidentiality

By Stuart Kaplow on Posted in Environmental, ESG, greenwashing

There is a new answer to the philosophical question, “If a tree falls in a forest and no one is around to hear, does it make a sound?”

The answer has depended upon your definition of sound. If you define sound as our perceptions of vibrations that travel through air (vibrations from a falling tree), sound does not exist if we do not hear it. But today we are being told to define sound as the airwaves themselves and that whether or not they reach a person’s ear, the sound is being produced.

Green Hushing is the new phenomenon of companies with environmental claims and successes choosing to stay quiet and not publicize them.

In a survey released by South Pole last month as widely reported in print media, “We found a surprising trend: nearly a quarter of these surveyed global climate leaders will not be publicizing their achievements and milestones,” according to Renat Heuberger, CEO of the Swiss environmental consulting firm, who concluded it is impossible “to address climate change on the scale that is required .. if progress happens in silence.”

The survey went on to decry,

This is a concerning trend, as less public-facing communication makes targets harder to scrutinize and limits knowledge sharing – which in turn could result in missed opportunities for sectors to work together to decarbonize. It could also give the impression that climate leaders are failing to lead, at least in the public eye.”

This is the first time South Pole surveyed green hushing, so it is not clear that staying quiet is on the rise.

Actually, the term green hushing was coined anecdotally in academia in 2008 to allude to a contrasting concept to “greenwashing” in the tourism industry describing “green hushing as the deliberate managerial undercommunicating of corporate social responsibility (CSR) efforts for fear of negative customer opinions and responses.” That 2008 academic paper found “little justification for green hushing in a hospitality context from the customers’ perspective,” but such may not be the same today in this era of ESG disclosures.

Consider if Dutch airline KLM had chosen to stay quiet given the pending greenwashing lawsuit in the Amsterdam District Court alleging the airline is making misleading advertising claims when among other statements it advertises the airline “is on track to reduce its emissions to net zero by 2050.” As we describe in our post, New Greenwashing Case is Troubling to Future of ESG, the suit challenges KLM’s future net zero goal saying it “undermines the urgent action needed to minimize climate catastrophe.”

And be aware the SEC’s March 21, 2022, proposed ESG rule will require a company that has publicly announced a GHG emissions target or goal (e.g., including committing to be carbon neutral by 2030, or the like) to disclose GHG emissions from upstream and downstream activities in its value chain (i.e., Scope 3 emissions). Accepting how uncertain Scope 3 emissions are, the rule even proposes a safe harbor for liability from the SEC from Scope 3 disclosures (.. but not from state regulators or private actors).

However, hosts of environmental interests, many unsophisticated, are piling on, criticizing ESG sensitive businesses as green hushing for saying too little or in the current vernacular, “going green but going dark.”

That said, there are very good reasons to stay quiet at times. Businesses can avoid charges of greenwashing and resultant litigation simply by saying little or nothing.

For many businesses, environmental claims are simply not part of their value proposition.

And there is existing federal government regulation of green claims by the SEC and FTC with more now proposed by the SEC and to be proposed by the FTC in the coming days.

As a law firm, we have long shielded businesses with confidentiality and attorney client privilege in environmental matters, ranging from ordering Phase 2 Environmental Site Assessments to commissioning scientific studies and engaging academics for research; and those longstanding strategies for mitigating risk remain valid today.

And it is not just our clients, a significant number of LEED projects, the most widely used green building rating system in the world, are registered as private and others are even uber confidential (e.g., a government spy facility that is LEED certified). And dramatically more Arc registered spaces, the largest database of the green built environment, are not public on the platform.

Also appreciate that utility consumption data, including electricity, gas, and water (key to greenhouse gas calculations), is often not available to a landlord when the tenant pays for the utilities and vice versa if the landlord pays. Additionally, utility consumption data (and a host of other information) is at times “classified information” required by the U.S. government to be safeguarded both in civilian and military contexts.

Moreover, proprietary material and information relating to a company’s products, business, or activities, including trade secrets, product research and development, existing and future product designs and performance specifications, know-how, and so much more company information is confidential and not available to the government or to the public, can have a positive effect on society including promoting innovation and driving the development of new products that may even positively impact climate change, when the proprietary information remains undisclosed.

We urge our clients and friends to ignore the naysayers. We disagree with the idea that you are damned if you do and damned if you don’t. We do not need to hear the tree falling to know that it toppled over. There are very real reasons companies keep some matters confidential away from the ears of others.

So, as businesses navigate the turmoil around ESG, we suggest this is not the right time to adjust your marketing. Some business matters are best and properly kept quiet.

Live webinar “Green Hushing vs Confidentiality,” 30 talking points in 30 minutes, this Wednesday, November 16 at 9 am EST presented by Stuart Kaplow and Nancy Hudes on behalf of ESG Legal Solutions, LLC. Webinar is complimentary, but you must register here.

Scope 4 GHG Emissions

By Stuart Kaplow on Posted in Climate Change, ESG, GHG, Green Building, Green Washing

Scope 4 greenhouse gas emissions are not new. They date to 2013 when the Greenhouse Gas Protocol identified “avoided emissions” as emission reductions that occur outside of a product’s lifecycle or value chain, but as a result of the use of that product.

It was actually a decade ago that the GHG Protocol released “a survey to scope out the need for a new standard to help companies quantify and report the ‘avoided emissions’ of goods and services that contribute to a low-carbon economy – such as low temperature detergents, fuel-saving tires, or teleconferencing equipment and services.” And from that survey, Scope 4 GHG emissions were born.

Some context is helpful, especially for those just getting their arms around measuring and reducing GHG emissions:

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

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

Scope 3 GHG emissions are the result of activities from assets not owned or controlled by the reporting organization, but that the organization indirectly impacts in its value chain both upstream and downstream (.. we are doing Scope 3 studies in several business sectors and the calculations are batshit crazy) almost always representing the majority of an organization’s total GHG emissions.

Scope 4 GHG emissions are “avoided emissions” not a required scope to currently report in many contexts (as are Scope 1, 2 and 3). Scope 4 are squishier and do not have broadly accepted standards. They quantify the impact of an organization’s products on reducing emissions outside of their value chain, including avoiding emissions saved by efficiency improvements or reductions in carbon emitting activities. And while they are a decade old, their use is emergent and exploding on the scene.

A good example of Scope 4 emissions may be the GHG emissions avoided by the use of video conferencing. Arguably Zoom Video Communications avoids significant emissions. The communications technology company’s Zoom platform reduces the number of employees commuting to the office, staffers traveling to meet clients, and reductions in other carbon emitting activities, thus causing emissions to be avoided which are quantified as the Scope 4 emissions for the communications technology company.

Another example of Scope 4 emissions may be GHG emissions avoided by the efficiency improvements of low temperature laundry detergent. Unilever ran television ads in the UK for its washing liquid stating that “Persil products remove stains at 30 degrees Celsius and in 60 minutes.”  And the ad concluded, the brand “continually improves their products to be kinder to the planet.” However, the television ad has been banned by the UK Advertising Standards Authority for greenwashing and making misleading environmental claims over the protestations of Unilever which argued it is well documented that reducing the temperature of a wash reduces carbon emissions and that this ad helps promote this.

Companies need good hard facts when making ESG claims including GHG emission claims and specifically cutting edge Scope 4 emission claims. One of our key roles is to caution clients not to make unqualified general environmental claims because ‘‘it is highly unlikely that [businesses] can substantiate all reasonable interpretations of these claims,’’ the Federal Trade Commission standard for challenging environmental claims.

As companies strive to hang meat on the bones of their Net Zero pledges, Scope 4 emissions will be valuable tools for success. Reporting on Scope 4 avoided emissions may allow for a business’ reputation to be enhanced by not only describing the climate positive value of the product or service but promoting the “decarbonizing power” of the product.

We are assisting companies in using avoided emissions to help them reach their climate goals and meet increasing demands from stakeholders including customers, investors, and regulators.

A live webinar “Green Hushing vs Confidentiality,” 30 talking points in 30 minutes, Wednesday, November 16 at 9 am EST presented by Stuart Kaplow and Nancy Hudes on behalf of ESG Legal Solutions, LLC. The webinar is complimentary, but you must register here.

The “Social Cost of Carbon” is Back

By Stuart Kaplow on Posted in Climate Change, Codes and Regulations, ESG, GHG, greenhouse gas

On November 11, 2022, shortly after this blog was posted EPA proposed a rule to regulate emissions of methane. While the proposed rule is itself worthy of discussion, readers of this blog may be particularly interested in a key technical feature of the announcement, that EPA has introduced a new approach to estimating the social cost of carbon, quietly proposing to increase the dollar amount from $51 to as much as $190 per metric ton.

Just last week a U.S. appeals court upheld the use of the “social cost of carbon” in policymaking by federal agencies.

Specifically, the St. Louis based 8th U.S. Circuit Court of Appeals in State of Missouri v. Joseph Biden, Jr., dismissed an appeal, ruling that the plaintiffs, attorneys general from 13 states, cannot rely on “generalized grievances” to challenge the metric [the social cost of carbon] absent a specific action taken by a federal agency. That is, “the District Court did not err in concluding the States lack Article III standing and that the claims were not ripe for review, ..”

With that court decision, the social cost of carbon is back.

There is no single widely accepted definition of the social cost of carbon, but most would accept that it is the present value of the future damages from one additional unit of carbon emissions in a particular year. Viewed in context, to address climate change, the federal government has developed monetary estimates on the cost to reduce carbon dioxide as part of assessing the costs and benefits of government actions.

And yes the term is hard to get your arms around, not to mention calculate, but in a practical example in 2016 a federal appellate court upheld the Department of Energy’s use of the social cost of carbon in a cost benefit analysis for updated refrigerator efficiency standards. More recently, in April 2022, Democrat members of Congress published a letter to the U.S. Postal Service requesting an updated cost benefit analysis of the UPS’s mail truck fleet replacement to include social cost of carbon evaluations.

Today the federal government is even going another step further in proposing to calculate the “social cost of greenhouse gases” carbon dioxide, methane, and nitrous oxide. When the social cost of GHGs is not part of a government agency’s cost benefit analysis, there is arguably less government leverage for reducing GHGs.

The uncertainty in all of this is more like “The Pit and the Pendulum” than federal government policy. In 2010, President Clinton issued Executive Order 12866 for the first time directing the federal government to calculate the social cost of carbon (while the theory had been discussed as far back as the Reagan Administration in 1981). In 2016 the cost was set by the Obama Administration at $36 per ton. The Trump administration slashed the social cost of carbon to $7 per ton. And then in 2021, President Biden directed the use of the social costs of GHGs, expanding from carbon alone in 2016 and adjusting for inflation which by interim estimate is $51 per ton.

Of import, last month a group of academics published an article in Nature arguing that the social cost of carbon should be estimated at $185 per ton, in contrast with the current federal government interim estimate of $51 per ton (but that amount may not be enough for the Administration).

Contrast those theoretical dollar estimates with the dollars actually paid in the Regional Greenhouse Gas Initiative, the first mandatory cap and trade program in the U.S., where over the program’s first 14 quarterly auctions, the clearing price for carbon dioxide allowances ranged between $1.86 and $3.35. That is a far cry from the federal government’s interim estimates of $51 per ton.

Critics have charged that the social cost of GHGs is simply too uncertain to be used in government cost benefit analysis or otherwise, and while currently proposed for use in the U.S., it has been abandoned and is no longer utilized for policy appraisals in the EU or UK.

But the social cost of carbon is also being misused including by the state of Maryland where it is being weaponized as a penalty for the owner of a building that does not meet the net greenhouse gas emission reduction mandates established in law (i.e., a 20% reduction by 2030 and net zero by 2040), when the fine for failure to comply is a “fee that is not less than the social cost of greenhouse gases adopted by the Department [MDE] or the U.S. Environmental Protection Agency.”

We have been working with businesses for more than a decade assisting in calculating their GHGs. With mandatory GHG reporting and reductions, our work is expanding and being accelerated. The addition of consideration of the social cost of carbon is resulting in more obligations and also opportunities for businesses.

The marginal cost of the impacts caused by emitting one extra ton of GHG is something business leaders need to understand. This is no longer some esoteric economic theory limited to aiding policymaking public officials. The social cost of GHGs is back. It is all but certainly here to stay and will impact the cost of doing business in the U.S.

Net Zero Risks as a Source of Opportunity

By Stuart Kaplow on Posted in Energy, Environmental, ESG

Calculating net zero is ill defined, unregulated and complex. Businesses making a net zero pledge like, “we will be net zero by 2030” risk a charge that they are greenwashing and misleading consumers.

It is one thing when government leaders make an ESG claim: In 2009 the King of Bhutan proclaimed his Himalayan country was ‘carbon negative’ because all of its power was hydroelectric or solar buttressed with large forested areas. In 2017 the Speaker of the Swedish Riksdag announced it was the first nation to enshrine a ‘net zero by 2045’ pledge into law, but the law actually only requires 5 year reports on progress. And some months ago, the Crown Prince of Saudi Arabia pledged to reach ‘net zero carbon emissions within its borders’ by 2060, but that calculation will not include oil exports (.. really?).

But it is another thing for a business to risk making an ESG pledge about net zero, which may mislead customers. We fully embrace that risk with a positive impact is an opportunity, however, caution clients not to make unqualified general environmental claims because ‘‘it is highly unlikely that marketers can substantiate all reasonable interpretations of these claims,’’ the Federal Trade Commission standard for environmental claims. As we recently wrote in a blog post, FTC Says Updated Green Guides are Coming, we may see the FTC expressly regulate claims related to carbon which will be important to marketing the subject of net zero.

Federal courts have held it is deceptive to misrepresent, directly or by implication, that a product, package, or service offers a general environmental benefit and ESG claims including net zero can fall within that purview.

And that concern is real without delving into the science of whether net zero is even possible. There will have to be some agreement that does not exist today of what it means to be net zero (e.g., all emissions or only greenhouse gases or just carbon dioxide or?). And while very low carbon emissions are possible, at some dollar cost, the absence of all quantity is not so easy if ever achieved (.. and such may be more philosophy than physics).

If zero is the absence of any measurable quantity does a business not set itself up for failure when those modern laboratories are capable of detecting parts per Trillion?

We view our role in part as articulating, mitigating, and seeking opportunities for a business in what is now termed “carbon asset risk” which often includes that business’ pledge of achieving net zero.”

There has been little litigation to date, but as far back as 2016, we wrote a blog post about “net zero energy” in California, False Advertising Claims over Net Zero and LEED Certified Homes. And we wrote in a blog post in 2019 about another lawsuit some 3,000 miles away on the opposite coast in Maryland, Net Zero Lawsuit filed Against Home Builder.

A pending greenwashing lawsuit in the Amsterdam District Court alleges that Dutch airline KLM is making misleading advertising claims when among other claims it advertises the airline “is on track to reduce its emissions to net zero by 2050.” As we describe in our post, New Greenwashing Case is Troubling to Future of ESG, the suit challenges KLM’s future net zero goal saying it “undermines the urgent action needed to minimize climate catastrophe.”

The more likely and larger risk to most businesses is not a lawsuit but its reputation. Where in the past there might have been a single print story about a charge of greenwashing seen by Wall Street Journal subscribers alone, today, viral social media can attack a company with millions of views within hours if not minutes.

For years, in our sustainability law practice, we have assisted businesses in managing carbon asset risk. Today, we are particularly cognizant of the fast evolving and changing dynamic between law and science driving companies’ decision making processes. And it is not lost on us that calculating net zero emissions is ill defined, unregulated, and complex.

Done correctly, our work in managing risk for each client is also, at an ideological level the defense of capitalism by limiting the need for future broad government regulation.

But be aware the SEC’s March 21, 2022 proposed Rules to Enhance and Standardize Climate Related Disclosures for Investors, is consequential in the consideration of net zero, because the regulation will require a company that has (publicly) announced a GHG emissions target or goal (e.g., including committing to be carbon neutral by 2030, or the like) that company must disclose GHG emissions from upstream and downstream activities in its value chain (i.e., Scope 3 emission). Accepting how uncertain all of this is, the rule proposes a safe harbor for liability from the SEC from Scope 3 emissions disclosures (.. but not from state regulators or private actors)

Additionally, a checkerboard of government regulation creates significantly more risk and opportunity for business when like in the instance of Maryland, it codifies those buildings, commercial or multifamily with a gross floor area of 35,000 square feet or more, must be net zero before January 1, 2040.

Moreover, there is pressure for businesses to join the more than 300 companies that have signed the UN Climate Pledge to “Neutralize any remaining emissions with additional, quantifiable, permanent, and socially beneficial offsets to achieve net-zero annual carbon emissions by 2040.”

One way we assist businesses in mitigating the risks associated with making net zero and other ESG claims that may mislead consumers is by relying on third party verifications of claims. One good example of a third party verified standard for net zero is the USGBC LEED Zero program and its 4 segregated components:  LEED Zero Carbon recognizes net zero carbon emissions from energy consumption; LEED Zero Energy recognizes a source energy use balance of zero; LEED Zero Water recognizes a potable water use balance of zero; and, LEED Zero Waste recognizes buildings that achieve GBCI’s TRUE certification at the Platinum level. The USGBC programs may arbitrarily or conveniently designate zero, but such mitigates risk from a challenge.

Hundreds of companies have made net zero pledges this year, the majority of which expose those businesses to unnecessary risk.

Again, we appreciate the fast evolving and changing dynamic between law and science in this space where calculating net zero remains ill defined, unregulated, and complex. We help businesses manage risk in making ESG, including net zero claims while taking advantage of these new opportunities.

A live webinar “Net Zero Pledges by Businesses,” 30 talking points in 30 minutes, Wednesday, October 26 at 9 am EST presented by Stuart Kaplow and Nancy Hudes on behalf of ESG Legal Solutions, LLC. The webinar is complimentary, but you must register here.

Selling the Sun: Sale of a House with Solar Panels is Fraught with Peril

By Stuart Kaplow on Posted in Environmental, ESG, Green Building, Solar Panel

 

There are more than 3 Million houses in the U.S. with solar panels installed on the roof.  The Inflation Protection Act of 2022 extended the 30% federal tax credit for residential solar panels through 2034 which is predicted to more than triple that number of solar installations.

And as those houses are each year in larger numbers being resold, consumers are learning it can be perilous to fail to properly address rooftop solar panels when entering into a contract for the sale of a house. The issues are different if the solar panels are owned or leased by the homeowner.

A principal difference may be value. An authoritative research paper by the Lawrence Berkeley National Laboratory “found clear evidence that solar systems are correlated with higher selling prices if those systems are owned by the homeowner [but the price premium is only the cost of the solar system and not more]. Alternatively, .. no value or slightly lower values associated with non-owned [leased] panels.”

But it is a little more nuanced than that. If the seller owns the panels, they are valued in the house appraisal allowing greater mortgage borrowing. But leased panels are not appraised (i.e., they are personal property belonging to someone else). Additionally, a buyer’s lender will likely include the monthly solar lease in a debt-to-income calculation resulting in less borrowing capability for a buyer, hence a possible lower offer for that house.

Beyond the value of the solar panels, there are other real issues of concern to a house purchaser, including the condition of the roof (under the panels). And if the solar panels are owned, beyond matters of warranties and their transferability, is there a maintenance agreement for the system that can be transferred, and at what cost?

As this industry matures and panels have been on roofs for numbers of years, what are the useful lives of solar panel systems? If new solar panels are significantly more efficient, how much is a buyer willing to pay for the old system on the roof?

And despite that solar panels are perceived by many as de rigueur in reducing carbon, there is a real risk a house purchaser will be concerned about the supply chain of the panels given that the global solar panel supply chain relies heavily on forced labor from China, even though the U.S. solar industry has been all but silent failing to “address the gross violations of human rights in the Xinjiang Uyghur Autonomous Region.” Panels produced with modern slavery may turn off many house buyers.

But curiously, the problems homebuyers report are those arising from the failure to correctly transfer installed solar panels.

This is an emergent area. Ten years ago it did not even exist. Today, the contracts for the resale of a house are often provided through a multiple listing service usually by a local board of realtors and most of those forms simply do not adequately address rooftop solar panels. A form that may be the most widely utilized in the country only provides,

SOLAR PANELS: Solar panels are devices that convert light into electricity. If solar panels are installed on the property, the Buyer is advised to inquire about the terms under which the solar panels were installed, how to transfer the ownership or lease, and any costs associated with the transfer.

Really? Rather than be helpful, that language only serves to mitigate risk for real estate brokers.

There is of course no one homogeneous solar panel “deal” with contract terms including ‘who owns the panels’ varying from one transaction type to another, and these installations are governed by a checkerboard of state laws.

That observed, many residential solar panel “leases” contain language similar to, ..

You agree that the solar panel system is the Company’s personal property under the Uniform Commercial Code.  You understand and agree that this is a lease and not a sale agreement. The Company owns the solar panel system for all purposes.

Obviously, that language presents an issue when selling a house with solar panels installed on the roof that belong to someone else. But despite that language in a contract, in many states, the so called 20 or 25 year leases are actually not leases of fixtures attached to the land because they are not recorded and a lease of real estate and improvements of 7 years or more (the length of time varies from state to state) that is not recorded is not enforceable.

But it is also common that those residential solar panel leases, really adhesion contracts, contain language similar to, ..

If you sell your home, you can transfer this lease and the monthly payments.

The person buying your home can sign a transfer agreement assuming all of your rights and obligations under this lease by qualifying in one of three ways: (1) the home buyer has a FICO score of 650 or greater; (2) the home buyer is paying cash for your home; or (3) if the home buyer does not qualify under (1) or (2) if the home buyer qualifies for a mortgage to purchase your home and the home buyer pays us a $250 credit exception fee.

Or, if you are moving to a new home in the same utility district, then where permitted by the local utility, the system can be moved to your new home. You will need to pay all costs associated with relocating the system, ..

Some of the companies that engage in this business (.. but not all and maybe not even most) file a UCC-1 financing statement or file in the land records that put third parties on notice of their rights in the system. That fixture filing in most states is a lien or encumbrance against the system. But because in many residential transactions, title companies do not search the UCC-1 indexes (.. that are primarily used for business purposes), solar leases are regularly missed, if they are filed at all.

However, the express language of solar system leases cannot be missed,

EXCEPT AS SET FORTH IN THIS LEASE, YOU WILL NOT SUBLEASE, ASSIGN, SELL, PLEDGE OR IN ANY OTHER WAY TRANSFER YOUR INTEREST IN THE SYSTEM OR THIS LEASE WITHOUT OUR PRIOR WRITTEN CONSENT.

Maybe not surprisingly, this dark underbelly of the solar industry is not only a residential problem. This firm regularly receives inquiries arising from commercial real estate transactions that have not adequately addressed matters of solar panels, PPAs, tax credits, and the like.

And while it might appear there is little litigation in this area, such is deceptive. Most residential real estate contracts contain mediation provisions, if not also mandatory arbitration provisions, so these disputes and differences are often resolved through alternative dispute resolution processes without judicial redress. But those contracts also usually contain fee shifting clauses such that the prevailing party in the mediation is entitled to attorneys’ fees.

The federal government predicts more than 6 million new residential solar panel installations flowing from the 30% tax credit in The Inflation Protection Act of 2022, so concomitantly, the issues related to the sale of houses with those panels on the roof will get much larger, faster.

Selling a house with solar panels is fraught with peril. There can be real legal jeopardy and significant dollar liability for both the seller and buyer, failing to address the issues associated with solar panels. That observed because we know anecdotally that houses with solar panels sell faster than their nonsolar counterparts (.. maybe as much as twice as fast!) so there is an increased opportunity to turn the environmental risk, that is solar panels, into an opportunity.

A live webinar “Net Zero Pledges by Businesses,” 30 talking points in 30 minutes, Wednesday, October 26 at 9 am EST presented by Stuart Kaplow and Nancy Hudes on behalf of ESG Legal Solutions, LLC. The webinar is complimentary but you must register here.

SEC Longstanding Disclosure Related to Climate Change Remains

By Stuart Kaplow on Posted in Climate Change, ESG, Federal

Whilst much of the popular media is all but obsessed with the March 21, 2022, U.S. Securities and Exchange Commission proposed ESG Rules to Enhance and Standardize Climate-Related Disclosures that will among other matters require companies for the first time to disclose greenhouse gas emission data, we continue to work with companies in complying with the SEC’s existing disclosure requirements as they apply to climate change.

Depending upon business specific circumstances, information related to climate change related risks and opportunities may be required in disclosures of a company’s regulatory mandated description of its business, legal proceedings, risk factors, and management’s discussion and analysis of financial condition and results of operations.

We have since its issuance more than a decade ago, assisted companies, including their counsel and auditors, in complying with the SEC’s 2010 Guidance Regarding Disclosure Related to Climate Change, Release No. 33-9106.

Some of the terminology has evolved, but the mandatory disclosures in the 2010 Climate Change Guidance remain the same:

  • the impact of pending or existing climate change related legislation, regulations, and international accords;
  • the indirect consequences of regulation or business trends; and
  • the physical impacts of climate change.

Companies also must disclose, in addition to the information expressly required by SEC regulation, “such further material information, if any, as may be necessary to make the required statements, in light of the circumstances under which they are made, not misleading.”

SEC staff, in reviewing nearly 7,000 annual reports submitted in 2019 and 2020, found that a third included some disclosure related to climate change risk (where presumably after consideration the other two-thirds concluded there was no material climate change risk requiring disclosure). However, we wrote in a blog post last year, how, as a result of climate change becoming a topic of intense public discussion, in the last 2 years, without any change in law or regulation there has been, A Sea Change in SEC Climate Change Disclosure, with larger numbers of companies choosing to articulate matters of climate change.

This year, a new and polemic issue we are addressing with companies is that they have provided more expansive disclosures in ESG related statements, including in corporate social responsibility reporting (..yes, many companies still issue CSR reports) than provided in SEC filings.  Today, a company needs to give consideration to providing the same type of climate related disclosure in their SEC filings as they make in public facing statements about ESG.

The risk from climate change may not have changed dramatically, but we see alterations in how companies disclose the material effects of transition risks related to climate change such as policy and regulatory changes (e.g., Maryland’s statute requiring greenhouse gas emission reductions) that could impose operational and compliance burdens, market trends that may alter business opportunities, credit risks, and technological changes.

Admittedly in the more than 12 years we have done this work we had not in the past spent the amount of effort we now expend assisting companies discuss, and to the extent material, disclose the direct and indirect consequences of climate related regulation or business trends, such as:

  • decreased demand for goods or services that produce significant greenhouse gas emissions or are related to carbon-based energy sources;
  • increased demand for goods that result in lower emissions than competing products;
  • increased competition to develop innovative new products that result in lower emissions;
  • increased demand for generation and transmission of energy from alternative energy sources; and
  • any anticipated reputational risks resulting from operations or products that produce material greenhouse gas emissions.

Moreover, we now work with companies to quantify material increased compliance costs related to climate change. And while that subject can run the gamut, it can include, if material, federal and state laws required disclosures about a company’s purchase or sale of carbon credits or offsets, including RECs from solar panel installations or the commitment to purchase green power and any material effects that may have on business, financial condition, and operations.

This begs the question if companies are already doing most if not all of this analysis under existing SEC regulations and guidance (and just not disclosing it publicly), is the Commission’s March 21, 2022 seemingly sweeping proposed regulation the best way to heighten attention paid to matters of climate change or would further formally issued guidance cause less friction and mitigate risk while clarifying these matters are material information?

In this season when many companies are beginning to finalize annual reports, we are working not only with public companies that are required to publish 10-Ks, that must always take into consideration the ESG disclosures that have been made public, but also by a wide variety of other business (including increasing numbers of non-profits) that make yearly reports to stakeholders.

We, of course, await the final SEC regulations arising from the Commission’s March 21, 2022, proposal, but today we continue to offer comprehensive stakeholder solutions, including as we have for more than a decade offering strategic counsel assisting companies in satisfying their climate change disclosure obligations under the federal and state securities laws and regulations.

California Appeals Board Gender Diversity Loss

By Stuart Kaplow on Posted in ESG, State

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.

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