Recent C-Suite analysis regarding ESG indicated genuine commitment overall, but “least” focus on environmental issues

A report published September 1, 2021  by analytics provider Intelligize (“Report”) revealed that companies were “all over the map” when it came to current disclosure practices on Environmental Social and Governance (“ESG”) issues and that their executives and other professionals showed a “troubling” lack of knowledge about ESG issues.

The survey responses came from hundreds of C-suite executives as well as professionals handling compliance, legal, accounting and other matters at public companies with varying asset sizes, across 14 industries and 15 job functions.

The Report tabulated these responses and concluded that commitment to ESG issues is high and is pushed by internal drivers.  For example, by a substantial margin, most survey respondents indicated that their companies undertook ESG initiatives primarily based on a pure desire to create positive outcomes. By contrast, only a quarter of respondents felt that their employers were driven by external factors like a desire to avoid negative publicity.

Interestingly, of the three topics covered by ESG—environmental, social and governance matters—responses suggest that companies are least focused on environmental issues. This suggests that if a company were interested in making gains in ESG, there may be some low hanging fruit in the environmental arena to capture and capitalize on, given this lack of historic focus.

European Commission publishes new initiatives concerning sustainable transportation

Last month, the European Commission published two new proposals for EU regulations to encourage the use of sustainable fuels in aviation and shipping – namely the ReFuelEU Aviation and FuelEU Maritime initiatives, respectively. Both proposals are subject to public feedback until 5 October.

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Court rejects attempt to scrutinize nonbinding state agency policy under Pennsylvania’s Environmental Rights Amendment

Litigation seeking to broaden the application of Pennsylvania’s Environmental Rights Amendment, Pa. Const. art. I, §27 (“ERA”) was rejected on August 6, 2021, when the Commonwealth Court of Pennsylvania dismissed an amended petition for review filed by the Pennsylvania Environmental Defense Foundation (“PEDF”) challenging the Pennsylvania Department of Conservation and Natural Resources’ (“DCNR”) State Forest Resource Management Plan (“SFRMP”).  Pennsylvania Environmental Defense Foundation (“PEDF”) v. Commonwealth, No. 609 M.D. 2019 (Pa. Cwmlth. 2021).

PEDF sought declaratory relief regarding DCNR’s SFRMP published in 2016.  Specifically, PEDF asked the Commonwealth Court to: (1) declare certain statements made by DCNR in the SFRMP in violation of the ERA, and (2) compel DCNR to amend the SFRMP to make it comport with DCNR’s responsibilities to manage the resources consistent with its duties as a trustee under the ERA.  According to PEDF, in 2016, DCNR amended its SFRMP to support management decisions based on economic principles.  PEDF also raised issues related to DCNR’s mission statement regarding extraction and sale of oil and gas for the benefit of DCNR and the Commonwealth.  Additionally, PEDF asked the Commonwealth Court to require DCNR to include an evaluation of the degradation of resources caused by past and present oil and gas development in the SFRMP, and to implement measures into the SFRMP that remedy the alleged degradation.

The Commonwealth Court granted DCNR’s preliminary objections and dismissed all counts.  With respect to the requests by PEDF to declare DCNR is in violation of the ERA based on specific statements in the SFRMP, the Commonwealth Court held that the SFRMP does not create legal requirements or regulations, meaning DCNR is not mandated to take any actions by the SFRMP.  Therefore, the Commonwealth Court found declaratory judgment would be inappropriate.  Similarly, the SFRMP lacked “concreteness” with respect to whether PEDF’s claims were ripe for review.  As such, PEDF’s claims would bring the court into “the realm of speculation and conjecture.”  Finally, the Commonwealth Court determined that the relief seeking general pronouncements of law with respect to DCNR’s statements runs against the proscription against advisory opinions, because there was no justiciable dispute or controversy within the meaning of the Declaratory Judgments Act.  42 Pa.C.S. §§7531-7541.

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IPCC releases a portion of updated Climate Report

The first installment of the UN’s Intergovernmental Panel on Climate Change  (IPCC) Sixth Assessment Report (AR6), which will be completed in 2022, was released on August 9, 2021.  As it has in the run up to previous important Conferences of the Parties (COPs) under the UNFCCC, the IPCC released an updated report in the middle of the ramp up to COP 26, to be held in Glasgow in November.

The conclusions in previous iterations of this report (or updates thereto) – or more specifically, the conclusion in the accompanying executive summary for policy makers – has proved influential in previous COPs.  These comprehensive scientific assessment reports are published every 6 to 7 years; the prior, the Fifth Assessment Report, was completed in 2014, and provided the main scientific input to the Paris Agreement.

The assessment is the work of more than 200 scientists digesting thousands of studies, and an accompanying “summary for policymakers” was approved by delegates from 195 countries. More than any other forecast or record, this report’s determinations establish the scientific global consensus—less than three months before the UN’s COP26 international climate talks.

NOTE: the full, nearly 4000-page assessment was released in conjunction with the 42-page “summary for policymakers.” While the latter went through a diplomatic approval process in addition to a scientific one, the former comes directly from scientists. This is important to understand in reviewing the summary vis-à-vis the text of the actual report.

ALSO NOTE:  This is not the complete updated assessment from the IPCC.  The IPCC took the unusual step to release this section early, presumably so the information could be available in advance of the COP in Glasgow.  Upcoming IPCC reports to complete AR6 aren’t expected until next year in February and March.  These will address climate impacts, adaptation and mitigation.

Signs of the times: Environmental related ESG offerings

A number of signs point to the fact that public companies should expect increased scrutiny on whether their environmental-related ESG offerings, practices and controls are consistent with their disclosures, claims and marketing material.

SIGN #1: The Securities and Exchange Commission (SEC or Commission) announced that New Jersey Attorney General Gurbir Grewal will become the next director of its Enforcement Division (Division), after resigning his New Jersey’s attorney general position on July 26.

SIGN #2: On July 29, the SEC announced charges against a founder, former CEO and former executive chairman of a publicly traded corporation, for allegedly repeatedly disseminating false and misleading information – typically by speaking directly to investors through social media – about the corporation’s products and technological accomplishment. In a press conference announcing this enforcement action, Grewal stated, “We will hold all those who make materially false and misleading statements accountable…,” announcing his department’s priorities loud and clear.

SIGN #3: As New Jersey Attorney General, Grewal sued major energy and chemical companies as part of an environmental justice initiative. Grewal has an environmental bent.

SIGN #4: As previously reported on this blog, in March, Acting Chair Lee announced the creation of a Climate and ESG Task Force. The task force is composed of 22 members drawn from various Commission offices and specialized units. The Climate and ESG task force is charged with developing initiatives to identify ESG-related misconduct and analyzing data to identify potential violations. Additionally, the task force aims to identify misstatements in issuers’ disclosure of climate risks and to analyze disclosure and compliance issues related to ESG stakeholders and investors. The SEC has also established a website and intake submission form for tips, referrals, and whistleblower complaints for ESG-related issues. Grewal is expected to work closely with this task force and other SEC Divisions and Offices, including the Division of Corporation Finance, Investment Management, and Examinations. Expect Grewal to use this Task Force to push enforcement.

In sum, the signs above all point to increased SEC enforcement scrutiny on policing potentially misleading environmental statements in the ESG arena. Companies should confirm through strong governance that these environmental claims are in line with disclosures, claims and marketing material.

EU Commission proposes to adapt product laws for the modern world

In recent weeks the EU Commission has provided detailed updates on its plans to amend two significant pieces of product law: the General Product Safety Directive (GPSD), and the Civil Liability Rules. A key motivation behind these updates is the EU’s desire to ensure that the law keeps pace with the rapid development of technology, to prevent it from falling behind and becoming unsuitable or unable to regulate products not in consideration at the time the original legislation was drafted. We set out below a brief overview of each of these proposals, with information on where you can go to read more.

General Product Safety Regulation

On 30 June 2021 the EU Commission adopted the draft General Product Safety Regulation (GPSR) which, once enacted, is intended to replace the current GPSD. The GPSR proposes to broaden the GPSD’s scope in a number of ways, including through:

  • new explicit duties for online marketplaces and other distance sellers, including more stringent communication requirements with market surveillance authorities in respect of safety issues;
  • expansion of a number of definitions, in particular:
    • broadening “product” to take account of the interconnection of items;
    • extending “safety” to reflect the ability for products to evolve and upgrade throughout their life;
  • improved harmonisation of market surveillance, consistent with the obligations set down in the newly-implemented Market Surveillance Regulation ((EU) 2019/1020).

The proposal must now make its way through the legislative process, and is unlikely to become law before 2023. Consultation on the draft legislation is currently open to stakeholders until 2 September 2021 (consultation page is available here).

Civil Liability Rules

Also on 30 June 2021, the EU Commission published an inception impact assessment (IIA) setting out a plan to amend current civil liability rules in order to address challenges arising when these rules are applied to new emerging technologies. This initiative is in an earlier stage than the GPSR, with draft legislation not expected until Q3 2022.

The IIA sets out various options to meet the initiative’s objectives, which are to:

  • adapt strict liability rules to the digital age and circular economy; and
  • address unnecessary obstacles to getting compensation, including proof-related challenges posed by AI to national liability rules.

The Commission has identified a number of options for how these objectives might be achieved, including by extending the current strict liability rules to cover intangible products and online marketplaces, and by reversing or amending the burden of proof in some circumstances.

Public consultation on the IIA is planned for Q3 2021. Further information is available here.

EU adoption of new Strategic Framework on Health and Safety at Work: emphasis on change, prevention and preparedness

The European Commission has recently adopted its new, “EU Strategic Framework on Health and Safety at Work 2021-2027” (COM/2021/323, available here), bringing new health and safety priorities and actions for a fast changing post-pandemic workplace.

The post-pandemic working landscape has significantly changed, fuelled recently by green and digital evolution and influenced by economic and demographic challenges, the concept of a “traditional” workplace has changed, and the EU is taking active steps to introduce a new strategic framework that reflects these shifts and to ensure the health and safety of workers in the coming years.

Building on the work of the prior 2014-2020 strategic framework, which made considerable progress on the prevention of occupational diseases, addressing demographic change and the implementation of EU legislation, the new strategic framework aims to continue this work by contributing to the way EU member states and social partners determine national workplace health and safety objectives.

The new strategic framework has introduced the following objectives for 2021-2027:

  • Change: anticipating and managing change in the new working landscape, including through the modernisation and simplification of EU workplace health and safety rules, in the context of the green and digital evolution, and an increased focus on psychosocial and ergonomic risks faced by workers.
  • Prevention: improving the prevention of workplace accidents and illnesses, including through a focus on the causes of work-related deaths (including hazardous substances), the promotion of health at work and the recognition that workplaces are for all.
  • Preparedness: increasing preparedness to potential future health crises and the ability to respond rapidly to threats, the importance of which has been emphasised by the COVID-19 pandemic.

With implementation supported by social dialogue, strengthening the evidence base, strengthening enforcement, awareness raising and funding, the European Commission has called on EU member states to update their national workplace health and safety strategies to reflect this new strategic framework and the health and safety priorities and actions it brings to the new working landscape.

In practice, we are likely to see the review and expansion of certain EU workplace health and safety legislation and rules, and the development of a wide range of initiatives tasked with promoting and encouraging the health and safety of workers in the coming years, with the European Commission committing to a number of initiatives within the strategic framework, including (amongst others):

  • reviewing the Workplaces Directive (89/654/EEC) and the Display Screen Equipment Directive (90/270/EEC) by 2023 to modernise the existing  workplace health and safety legislative framework related to digitalisation;
  • proposing protective limit values on asbestos, lead, diisocyanates and cobalt in the relevant EU legislation;
  • launching an “EU-OSHA healthy workplaces campaign”, in particular covering psychosocial and ergonomic risks;
  • ensuring appropriate follow-up to the European Parliament’s Resolution on the right to disconnect;
  • promoting a “vision zero” approach to work-related deaths;
  • updating the EU rules on hazardous substances to combat cancer, reproductive and respiratory diseases, by consultation on reduced limit values on certain substances under the Carcinogens and Mutagens Directive in 2023 and identifying a priority list of reprotoxicants to be addressed by the end of 2021 through relevant EU legislation;
  • launching an assessment of the effects of the pandemic and efficiency of the EU and national workplace health and safety frameworks to any potential future health crises; and
  • updating the Commission Recommendation on occupational disease to include COVID-19 by 2022.

More detail on what the European Commission intends to do, what is calls on EU member states to do and what it invites social partners to do in light of the new strategic framework can be found here.

Electrifying transportation network companies in CA: Updates to SB 1014’s Clean Miles Standard + Incentive Program

As we reported, the California Legislature passed SB 1014 – the Clean Miles Standard and Incentive Program (the “Clean Miles Program”) – to reduce greenhouse gas emissions from “rideshare” vehicles. This led to the creation of the Clean Miles Standard regulation, which the California Air Resources Board (“CARB”) fully adopted in May 2021 after receiving stakeholder input. In sum, the Clean Miles Program directed CARB and the California Public Utilities Commission (“CPUC”) to develop and implement new requirements for transportation network companies (“TNCs”) like Uber and Lyft.  In this blog post, we discuss the goals and three core requirements of the Clean Miles Program, the new regulations CARB just adopted in furtherance of those core requirements, and other obligations that lie ahead for TNCs.

The Clean Miles Program sets more stringent emissions standards for TNCs over time and encourages TNC drivers to shift to electric vehicles.  The Clean Miles Program has three core requirements:

  • In 2020, CARB established a greenhouse gas (“GHG”) emissions baseline for vehicles used in TNCs on a per-passenger-mile basis using 2018 as the base year;
  • In 2021, CARB and CPUC adopted and implemented, respectively, targets and goals (beginning in 2023) for TNCs to reduce GHG emissions per passenger-mile driven; and
  • By January 1, 2022, and every two years thereafter, each TNC shall develop a GHG emissions reduction plan.

 CARB satisfied the first requirement and determined the baseline emission rate (301 grams of carbon dioxide (“CO2“) for each mile traveled.

In furtherance of the second and third requirements—CARB adopted (in May 2021) a “Clean Miles Standard” regulation that imposes new requirements that require TNCs to provide information including, but not limited to: (i) total miles that TNC drivers complete; (ii) share of miles completed by qualified “zero-emissions” (e.g., zero-emission vehicle); (iii) miles-weighted average of network-wide CO2 to produce an estimate of the GHG emissions; and (iv) total passenger-miles completed using an average passengers-per-trip estimate to account for trips where exact passenger headcount was not captured.  The new regulation also requires TNCs to submit annual reports and a compliance plan every two years starting in January 2022.

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ESG Watch: Carbon Tax vs. Clean Energy Standard

Many public companies are keeping a close watch on potential GHG regulations because the shape of these regulations can significantly affect their regulatory and reporting obligations and thus affect their ESG obligations. There is a significant difference between two recent proposals on that front.

CARBON TAX: The concept of a carbon tax is simple: fossil fuels bear a cost — climate change, as well as air pollution — that is not reflected in their price and thus “hidden”. A carbon tax would increase the price to reflect that hidden cost — by, say for example, $50 per ton of carbon dioxide emitted — and the market would work its magic to move the entire economy away from fossil fuels.

Yet for all their elegance and push for by economists, carbon taxes are politically unpopular.

Opponents of carbon taxes argue that a carbon price affects all of society, and therefore it increases costs for every energy consumer, without providing an immediate alternative. That means a publicly traded company that would not normally worry about – or report regarding – EPA obligations in the abstract turns out would have reporting and compliance obligations under a carbon tax regime and, therefore, a larger ESG burden.

This is likely why Biden’s climate plan leaves out a domestic tax on carbon, which for decades economists have championed as the gold standard of climate change mitigation. Continue Reading

Recent developments with the UK ETS

The past few weeks saw a number of developments in relation to the UK Emissions Trading Scheme (UK ETS), which came into force on 1 January 2021. This short blogpost summarises the key aspects of what is changing.

Consultation on compensation to energy intensive industries for UK ETS is now open

The UK ETS poses increased indirect costs for some energy intensive industries in the short to medium term. Recognising this issue, the Department for Business, Energy and Industrial Strategy (BEIS) published a consultation on compensation to industries deemed to be exposed to a significant risk of carbon leakage due to these costs.
The consultation aims to gather views on:

  1. The risk of carbon leakage due to indirect costs related to the UK ETS; and
    Which sectors are most exposed to such risk.
  2. The consultation is available here. It is open until 9 August.

CCC’s updated advice on the UK ETS cap and its interaction with CORSIA

At the end of June, the sixth UK carbon budget (for 2033-2037) came into force. It aims to cut greenhouse gas (GHG) emissions by 78% by 2030 (compared to 1990 levels); thus being the world’s most ambitious climate change target.

Reflecting on the updated budget, the Climate Change Committee (CCC) updated its advice on the level of the cap on the UK ETS and on its interaction with the CORSIA. While previously the CCC advised carbon emissions reductions to 61 megatonnes of carbon dioxide (CO2) per year by 2030, the new advice entails more ambitious targets. CCC advises that GHG emissions for currently traded UK ETS sectors should be reduced by 53% by 2030 compared to 2019 levels (i.e. to 59 megatonnes of CO2 per year). If emissions removals are included, the number is 54 megatonnes of CO2 per year (i.e. by 57%) by 2030.

These targets reflect the exclusions of Northern Irish emissions from the UK ETS (under the Northern Ireland Protocol, such emissions are still included in the EU ETS).

The full advice is available here.

Please do not hesitate to contact any member of the Reed Smith EHS team if you would like more detailed information on this topic.