This issue of Saul on ESG: Trends & Updates marks our first update tracking the legal trends and developments around environmental, social and governance (ESG). In recent years, we have been tracking and highlighting changes on the ESG front, but this regular publication will allow us to dive further into trends and analyze developments over time. We welcome your conversations and feedback around our topics, and look forward to keeping you up to date through this publication.
This issue addresses the following topics:
- Trends to Watch: Monetary Awards for ESG Whistleblowers
- Legislative and Regulatory Roundup:
- California Requiring GHG Disclosures
- SEC Climate Change Rule
- FTC Green Guide Updates
- State Anti- and Pro-ESG Legislation
- Continued Scrutiny of Carbon Offset Claims
Trends to Watch: Monetary Awards for ESG Whistleblowers
The United States Securities and Exchange Commission (SEC) and the Commodities Futures Trading Commission (CFTC) have indicated their willingness to use whistleblower programs to advance environmental, social and governance (ESG) enforcement initiatives and award 10 to 30 percent of the monetary sanctions collected to qualified whistleblowers. Although the SEC issued its first Notice of Covered Actions (NCA) for an ESG enforcement action involving Goldman Sachs Asset Management LLP on December 30, 2022, it has awarded more than $1.3 billion to whistleblowers since the inception of its whistleblower program. Both the SEC and the CFTC have expressed a willingness and an intent to utilize whistleblowers for future ESG enforcement actions or in cases of fraud or market manipulation. For example, on June 20, 2023, the CFTC's Whistleblower's office announced the availability of potential whistleblower awards for those who identify potential fraud or market manipulation in the carbon markets.
The Goldman Sachs case is instructive. The SEC asserted that Goldman Sachs failed to have written policies and procedures in place for ESG research from April 2017 until June 2018, and once such policies and procedures were established, the company failed to follow them consistently until February 2020. Goldman Sachs agreed to pay a $4 million penalty.
With increasing regulatory scrutiny placed on ESG issues coupled with whistleblower programs that provide monetary awards for successful enforcement actions, it is important to consider: (1) adopting and complying with internal ESG procedures and policies; (2) promoting the ability for employees to make internal disclosures of concerns or complaints that will allow documentation and investigation; and (3) providing protection from perceived or actual retaliation for whistleblowers as failure to do so could result in increased penalties. See Exchange Act Rule 21F(h)(1) and 12F-17.
Legislative and Regulatory Roundup
California Requiring GHG Disclosures
Recently, California's legislative branch approved novel legislation that would require many large companies operating within the state to disclose direct and indirect greenhouse gas emissions. The Climate Corporate Data Accountability Act, or SB 253, was approved by California's Assembly on September 11, 2023, and by its Senate on September 12, 2023, and is now awaiting final approval from Governor Gavin Newsom, who has announced he intends to sign the bill into law.
The Act would require California's Air Resources Board to develop and adopt emissions disclosure rules for companies that do business in California and whose annual revenues exceed $1 billion. If signed into law, it would require those companies to publicly disclose Scope 1, 2 and 3 emissions in line with the Greenhouse Gas Protocol, which is the same standard identified in the SEC's proposed rule on climate change disclosures.
The Act is noteworthy because it would apply to public and private companies that operate within California. If passed, companies subject to the disclosure requirement would need to begin reporting on Scope 1 and 2 emissions from the previous year in 2026, with reporting on Scope 3 emissions being required the following year.
SEC Climate Change Rule
The SEC's proposed rule on climate change remains on hold. Chairman Gensler reported to the Senate Banking Committee recently that his staff continues to review comments to the proposed rule with a focus on how to handle Scope 3 emissions. He suggested that the portions of the proposed rule relating to Scope 3 emissions could change and stated that the staff is being careful to ensure that the proposed rule would not be indirectly regulating private companies with any Scope 3 emission disclosure requirements. Chairman Gensler declined to provide a timeline on when the proposed rule might be finalized and adopted.
FTC Green Guide Updates
The Federal Trade Commission's (FTC's) anticipated update to its Green Guides likewise remains on hold as the FTC continues to review the thousands of responses on a myriad of issues in response to the FTC's request for comments. Many commenters have called for measurable and objective standards, and formal rulemaking instead of just guidance in some instances, to provide more clarity and even the playing field for claims of sustainability or carbon neutrality, among others. After the comment period ended in April, the FTC held a public workshop at the end of May to gather further opinions on "recyclable" claims and requested additional public comments on those issues. It would not be a surprise if the FTC held additional public workshops focused on other specific issues, such as sustainability and carbon offsets, and sought further comments on those issues as well before taking any further action with respect to updating the Green Guides or commencing a formal rulemaking process. Any update before the end of 2023 seems unlikely as this point.
State Anti- and Pro-ESG Legislation
Meanwhile, ESG considerations in the investment of public funds remains highly politicized across the states. At this point, 20 different states have implemented some form of "anti-ESG" rules – which seek to limit or discourage the consideration of ESG factors in investment decisions – while eight states have enacted "pro-ESG" rules to protect or even incentivize ESG considerations with investments. There are dozens more bills pending in state legislatures relating to ESG investing rules, and more than 40 states have either enacted or proposed such legislation as the landscape on ESG continues to rapidly evolve.
Continued Scrutiny of Carbon Offset Claims
As companies set goals for emission reductions, net-zero and/or carbon neutrality, many will purchase carbon offsets to meet those goals. But environmental and consumer protection groups continue to challenge claims of carbon neutrality that are based on carbon offsets when they believe that those claims are misleading the public or that the offsets themselves are not credible.
For example, on May 30, 2023, a class action lawsuit was filed against Delta Airlines in the U.S. District Court for the Central District of California alleging violations of three California consumer protection statutes based on alleged misrepresentations by Delta Airlines that it was "carbon neutral." The lawsuit alleges that Delta Airlines marketed itself as "the world's first carbon-neutral airline" but was purchasing unreliable carbon offsets to support that claim instead of implementing changes to actually reduce emissions and the environmental impacts of its operations. Delta Airlines has denied the claims on their merits, noting that it has moved away from carbon credits to focus on decarbonizing its operations to meet its goals, and moved to dismiss the claims on preemption grounds. Nonetheless, the lawsuit highlights the lack of regulation and verifiable standards in the carbon offset market, and calls into question the reliability of carbon offsets. Evian is facing a similar class action lawsuit in the Southern District of New York related to claims of carbon neutrality that relied on the purchase of carbon offsets.
But the fact remains that many companies that have set net-zero emission targets will need to purchase or generate carbon credits to offset the emissions that cannot be eliminated from their operations. As a result, businesses and consumers alike are looking for more transparency and clear standards for carbon credits. In an effort to provide that clarity, a global initiative called the Voluntary Carbon Markets Integrity Initiative (VCMI) launched a standard – the Claims Code of Practice – at the end of June to provide companies with a rulebook to follow for making credible climate claims. As part of the VCMI claim process, companies would have to use carbon credits that meet certain quality thresholds, disclose information to support its claim, and conduct independent validation in accordance with a forthcoming standard to be published in November.
Until a formal standard for carbon credits is adopted within the United States, companies may consider looking to international standards like these for guidance in evaluating the credibility of any carbon credits and assessing the risk of greenwashing claims based on the purchase of carbon credits to meet carbon reduction goals.
