New Greenwashing Case is Troubling to Future of ESG

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Phase 1 Standard for All Appropriate Inquiries in Limbo

It is hugely significant that the Phase l Environmental Site Assessment standard is in limbo because that assessment is conducted in the vast majority of the 5.6 million commercial real estate transactions each year in the United States (i.e., including for a real estate purchaser to avoid liability under the Superfund law).

The U.S. Environmental Protection Agency had proposed to amend the practice for “All Appropriate Inquiries” to reference the new version of the standard practice made available by ASTM International on November 1, 2021, but ..

Specifically, EPA proposed to amend the All Appropriate Inquiries rule to provide that ASTM International’s E1527-21 “Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process” (a new 2021 version in lieu of the 2016 and 2013 versions of the standard) could be used to satisfy the requirements for conducting All Appropriate Inquiries under the Comprehensive Environmental Response, Compensation, and Liability Act.

EPA proposed amending the All Appropriate Inquiries rule to reference ASTM International’s E1527-21 standard practice as a “direct final” rule without a prior proposed rule. That is, using a procedure EPA has rarely found successful, after publishing in the Federal Register if the Agency received adverse comment before April 13, 2022, the direct final rule would not take effect and EPA would publish a timely withdrawal in the Federal Register.

EPA subsequently received adverse comment on that direct final rule (.. much to anyone’s surprise?) and effective May 2, 2022, it was withdrawn.

There is no announced timeline for further EPA action. As stated in the direct final rule and a parallel proposed rule, EPA will not institute a second comment period at this time.

Of great import, the proposed final rule did not disallow the use of the previously recognized versions of the standard (ASTM E1527-13 or ASTM E2247-16), and it will not alter the requirements of the previously promulgated All Appropriate Inquiries rule. Significantly, that proposal would have increased flexibility for some parties who may make use of the new standard, without placing any additional burden on those parties who prefer to use either the ASTM E1527-13 or the ASTM E2247-16 standard or to otherwise follow the requirements of the All Appropriate Inquiries rule when conducting all appropriate inquiries. This is a big deal having large financial implications.

And that prior versions of the Standard were not being retired or replaced was the subject of several of the 14 public comments that EPA received. More than one commenter expressed concern on how the option of using the old or new standard at the discretion of the parties would create confusion in assessment and transactions [.. but that had been the practice with past standard approvals?].

We blogged last year about some of the key changes in the new version, including that the valuable use of Historic RECs is all but eliminated, in Updated Phase 1 Environmental Site Assessment is Published But .., so the ability to select the 2016 standard has significant financial import.

Some legal commentators have suggested that comments about PFAS not being included in this new standard, as we blogged some months ago, PFAS in a Phase l Environmental Site Assessment, was a reason for withdrawal by EPA, but a review of the 14 comments debunks that.

For the unenlightened, .. this is all significant because a Phase l Environmental Site Assessment is conducted in the vast majority of the 5.6 million commercial real estate transactions in the U.S. each year (including bank loans secured by real estate), and also because Phase l reports are used for a wide variety of other purposes, including as ESG data for a company to demonstrate third party verified compliance with the E in ESG, and also to qualify for credits under the LEED and Green Globes green building rating systems.

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

Again, EPA withdrew the approval of the new ASTM E1527-21. The prior versions of the Phase 1 standard remain available for use and we can assist you in creating value and prospering with your selection of an environmental site assessment standard during this period of regulatory change.

Maryland’s New Corporate Diversity Law Violates the Equal Protection Clause

Corporate diversity is too serious a matter to be left to the politicians.  Maryland has published, for public comment, regulations implementing the corporate diversity law enacted by the legislature in 2021.

But the proposed regulations are unconstitutional on their face, violating the Equal Protection Clause of the U.S. Constitution and Article 24 of the Maryland Constitution.

The new corporate diversity law as proposed to be implemented through the regulations, does Not benefit businesses and does Not benefit “unrepresented communities” whose members self-identify as Black, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaska Native or with one or more of those racial or ethnic groups.

In summary, the statutes enacted last year require certain business entities in the State to demonstrate either: membership of “unrepresented communities” in their board or executive leadership; or support for “underrepresented communities” in their mission to qualify for State capital grants, tax credits, or contracts worth more than $1.0 million. The law also has other requirements, including significant race reporting mandates.

While the statutes as enacted are problematic themselves, these regulations seek to implement the new law by requiring entities to have a certain racial composition on its board or executive leadership in order to receive a State benefit. Such is without dispute an equal protection violation running afoul of the basic tenet of universal human equality. The use of race in a government program must meet the requirements of the Equal Protection Clause of the U.S. Constitution. The Equal Protection Clause provides that no state shall “deny to any person within its jurisdiction the equal protection of the laws.” U.S. Const. amend. XIV. A government program that uses a race classification is constitutional only if it meets the strict scrutiny standard, which requires that the program be narrowly tailored to support a compelling government interest. None of that is even suggested here. And lest there be any question, the government bears the burden of justifying its use of individual racial classifications. Maryland has not in this instance.

“Because a race or gender-conscious program is constitutionally suspect, the Supreme Court has essentially put the burden on a government entity with such a program to justify the program with findings based on evidence.” 91 Opinions of the Attorney General 181, 183 (2006).

These regulations also flout the U.S. Supreme Court’s Regents of the University of California v. Bakke 1978 decision which struck down race exclusive quotas as violative of the U.S. Constitution and the Civil Rights Act of 1964.

Additionally, the Maryland Attorney General commented on the legislation that is being implemented, HB 2021-1210, and raised these very same equal protection concerns, going as far as suggesting how these regulations might be framed to mitigate the risk of a successful Constitutional violation challenge. Lip service, at best, was paid to that advice.

Moreover, the failure to engage the public in the process of promulgating these regulations not only kept the bureaucrats from receiving good input, but was a clear violation of Maryland’s Open Meetings Act. Given that multiple agencies were involved, as the Maryland Register notice admits, none of those meetings were held in public, there was no public notice of those meetings, and the public was not allowed to observe or inspect meetings minutes, all despite inquiries and requests from the public to do so.

That HB 1210 was enacted without the Governor’s signature does not justify misunderstanding or misdirection, and should not result in any less effort by the Executive branch in implementing an enactment that at a minimum passes Constitutional muster, but ideally advances egalitarian aims that date to 1776 and were articulated for American commerce in the Declaration of Independence.

HB 1210 was sent to the Department of Commerce for implementation because it fits squarely within the environmental social governance (ESG) space and was to be a positive for Maryland business, but inexplicably the proposed regulation will not stimulate private investment or create jobs, but rather may cause new businesses to locate outside of the State and discourage expansions of existing businesses.

If there is any question about the legal conclusions in this post, a very similar California statute enacted as Assembly Bill 979 was found unconstitutional earlier this year for the same equal protection flaw, in Robin Crest, et al. v. Alex Padilla (No.20ST-CV-37513) as we blogged in California Racial, Ethnic and LGBT Quotas for Company Boards Ruled Unconstitutional.

We note approvingly that the judge striking down that California law described it as violative of the norms of our society in 2022 which today is based on inclusion and equal opportunity. Additionally, many would agree a homogenous board is vulnerable to stagnant thinking and common assumptions; it is also less flexible in responding to challenges. This results in poorer business practices, less innovation, and ultimately less profit. A heterogeneous board potentially avoids these pitfalls and generally leads to a healthier business that makes more money. So, the California and Maryland legislatures’ enactments may have been intuitively sensical, but ignored that we are a nation with 246 year old constitutional protections of the individual.

So, of greatest dismay is that the very subject matter of this enactment is universal human equality, a key element in modern ESG policy, but the proposed corporate diversity regulations implementing the law violate the U.S. and Maryland Constitutions on their face. It is not irony, it is wrong. Tragically, the Maryland legislature’s egalitarian sympathy will not survive this administrative act of the Executive branch.

As promulgated the proposed regulations put businesses in the State in jeopardy without advancing universal human equality. Misquoting Charles de Gaulle, corporate diversity is too serious a matter to be left to the politicians and would be better left to the emergent ESG marketplace. You can comment on these regulations before July 18, asking that they be rewritten.

Save the date, Tuesday, August 16 from 9 to 10 am EST, when Stuart Kaplow and Nancy Hudes, two of the attorneys at ESG Legal Solutions, present a complimentary live webinar, “Are You Ready to Measure and Report your Building GHG Emissions?” Details will be at www.ESGLegalSolutions.com 

Supreme Court Rules Against EPA Reining in Power of Agencies

In a decision that will rein in agency power across the federal government, the U.S. Supreme Court ruled today that Congress did not clearly authorize the EPA to adopt broad rules to reduce greenhouse gas emissions from electric utility power plants.

Specifically, the high court held, “Congress did not grant EPA in Section 111(d) of the Clean Air Act the authority to devise emissions caps based on the generation shifting approach the Agency took in the Clean Power Plan.”

By a vote of 6 to 3, today, in a 31 page opinion by Chief Justice Roberts, the majority found the U.S. Court of Appeals for the District of Columbia was wrong when it interpreted the Clean Air Act as giving the EPA expansive power over greenhouse gas emissions. The judgment of that lower court was reversed and the case remanded. Justice Gorsuch filed a concurring opinion, in which Justice Alito joined. Justice Kagan filed a dissenting opinion, in which Justices Breyer and Sotomayor joined.

The practical effect of this ruling will be both to hamper the Biden Administration’s efforts to combat climate change without Congressional support and also to bring under control the authority of federal agencies across the executive branch.

The Court’s legal rationale is clear in that Roberts wrote that the EPA’s effort to regulate greenhouse gases by making industry wide changes violated the widely accepted “major questions” doctrine, which holds that if Congress wants to give an administrative agency the power to make “decisions of vast economic and political significance,” it must say so clearly,”.. given both separation of powers principles and a prac­tical understanding of legislative intent, the agency must point to “clear congressional authorization” for the authority it claims in issues of such magnitude.

“Capping carbon dioxide emissions at a level that will force a nationwide transition away from the use of coal to generate electricity may be a sensible ‘solution to the crisis of the day,’” Roberts penned. But only Congress, or a federal government agency with express authority from Congress, can adopt a “decision of such magnitude and consequence.”

The Chief Justice’s loud and powerful embrace of the major questions doctrine will be heard far beyond this one instance of regulatory overreach. His rationale, in order to promote democratic accountability and preserve our constitutional structure including avoiding entangling the judiciary in political questions, applies to any major policymaking effort by federal government agencies.

Buttressing that reasoning, in the concurring opinion that was joined by Justice Samuel Alito, Justice Neil Gorsuch emphasized that the dispute before the court involved “basic questions about self-government, equality, fair notice, federalism, and the separation of powers.” Gorsuch wrote the major questions doctrine “seeks to protect against ‘unintentional, oblique, or otherwise unlikely’ intrusions on these interests” by requiring federal agencies to have “clear congressional authorization” when they address important issues. Whether coal and gas fired power plants “should be allowed to operate is a question on which people today may disagree, but it is a question everyone can agree is vitally important.”

Another legal axiom both in the majority opinion and concurring opinion was that the Court disfavors a government agency finding new authority in old laws, in this instance EPA arguing it found dormant regulatory authority in the 1970 Clean Air Act.

This case is much more than a question about whether EPA had authority to curb greenhouse gas emissions from power plants, few thought there was any chance the Supreme Court would support that agency power grab when Congress would not go there, but this decision will have impact well beyond climate change when it makes clear the limits on the authority of all federal government regulatory agencies when Congress refuses to act, .. consider for example the proposed SEC regulations in ESG mandating greenhouse disclosures.

And for those that might quickly see this as an anti climate change court decision, if they read the opinion they will see that the Supreme Court did not, as some had speculated it might, widely limit EPA’s ability to regulate greenhouse gas emissions, but rather confined this decision to EPA’s power plant regulations under each the Obama and Trump Administrations, neither regulation currently being in effect. Moreover, many might decide that Congress is the bad actor here, for failing to enact greenhouse gas emission legislation, not the Court.

If you have not previously read a Supreme Court decision, this may be a good one. The entire decision is here.

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.

SEC Proposes Two Rules as Cairns to Prevent Misleading ESG Claims

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Uyghur Forced Labor Prevention Act to be Enforced June 21

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

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

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

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

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

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

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

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

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

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

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

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

Glossary of Greenhouse Gas Terms

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

SEC Charges Mining Company with Misleading Investors in its ESG Disclosures

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

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

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

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

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

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

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

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

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

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

SEC Extends Comment Period for Proposed Rules on ESG Related Disclosures

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

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

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

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

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

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

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

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

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

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

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

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

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

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