This country-specific Q&A provides an overview of Environmental, Social and Governance laws and regulations applicable in United States.
1. Climate – the law governing operations that emit Greenhouse Gases (e.g. carbon trading) is addressed by Environment and Climate Change international guides, in respect of ESG: a. Is there any statutory duty to implement net zero business strategies; b. Is the use of carbon offsets to meet net zero or carbon neutral commitments regulated; c. Have there been any test cases brought against companies for undeliverable net zero strategies; d. Have there been any test cases brought against companies for their proportionate contribution to global levels of greenhouse gases (GHGs)?
a. More than 190 countries, including the United States, adopted the Paris Agreement in 2015, a legally binding international treaty on climate change. The signatories to the Paris Agreement agreed to "pursue efforts" to limit global temperature increases to below 1.5°C and there is general consensus that to have a chance to achieve this target, global greenhouse gas emissions are required to be 'net zero' by 2050. By COP26 in 2021, twelve countries had passed legislation on net zero targets with others making policy commitments.
In the United States, there is no law generally applicable across industries and jurisdictions mandating net zero commitments or the adoption of a transition strategy, and there remains continuing uncertainty surrounding the future enactment of federal climate legislation. The Long Term Strategy published by the Biden Administration, which seeks to achieve net zero carbon emissions by 2050 through reducing emissions across four core sectors (electricity, transportation, buildings, and industry), increasing carbon removal activities, and reducing emissions of non-carbon greenhouse gas emissions, relies on federal leadership, monitoring, technology innovation, state action, and other non-legislative tools. The Inflation Reduction Act, enacted in August 2022, is expected to help facilitate these goals by spurring clean energy investments via tax incentives. Certain states, such as in California and New York, have announced net zero commitments, but state-level action remains a divisive and partisan issue.
Apart from the legislative landscape, however, the fiduciary obligations of directors and officers require consideration of the potential impacts of climate change on a company's financial condition and operations. The fiduciary duties of loyalty and care require directors to act in the best interest of the company and shareholders, to make informed decisions, and exercise proper oversight. In order to carry out these duties, directors and officers must be able to identify and consider risks and opportunities impacting shareholder value, which necessarily includes consideration of steps that could or should be taken to minimize or mitigate material risk, including from climate change.
In addition, companies are at times required to disclose actual or anticipated material impacts on the company. If a company has articulated a net zero strategy, it would need to consider disclosing material changes to that strategy or material changes to progress in implementing the strategy or achieving the goal on the time frame reported. A fact is "material" if there is "a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote," or "a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information made available."
b. Carbon offsets are not regulated in the United States and remain controversial. To the extent companies are making use of carbon offsets in connection with publicly disclosed net zero commitments, they should consider the quality of the offset in terms of meaningful greenhouse gas reduction and disclosing their use as part of an overall net zero plan. On January 23, 2023, the Chairman of the Commodity Futures Trading Commission ("CFTC"), Rostin Behnam, announced in his keynote speech at the Commodity Markets Council's annual conference that the CFTC "can play a role in voluntary [carbon] markets." This is not the first time that the CFTC has publicly stated that it is considering its role vis à vis regulation of voluntary carbon markets ("VCMs") or compliance carbon markets ("CCMs"), but it is the first time that the CFTC Chair has articulated a clear action plan for regulation. According to Chairman Behnam, carbon markets "must have integrity and adhere to basic market regulatory requirements." These statements confirm the CFTC's authority to "play a role" in VCMs because carbon itself, as well as carbon and other environmental offsets, credits and allowances, generally are considered "commodities" as defined in Section 1a(9) of the Commodity Exchange Act of 1936 (CEA) and as explained in CFTC and Securities and Exchange Commission guidance. As a "commodity," transactions involving carbon or carbon offsets on VCMs are subject to CFTC's anti-fraud and anti-manipulation enforcement jurisdiction. Because VCMs and CCMs are commodities markets, the CFTC not only "can" but is bound to police these markets pursuant to the CEA. Commodities originating in VCMs and CCMs are now also traded as listed futures and options contracts on CFTC-regulated designated contract markets – e.g., commodity exchanges.
The CFTC's division of enforcement will likely become more active in prosecuting fraud and manipulation in commodity or cash VCMs and CCMs (e.g., greenwashing, or fraud in claiming reduction in carbon capture or reduction), as well as in related exchange or OTC-traded derivatives markets. The CFTC will also likely become more involved in the regulation of these markets in the United States in coordination with other regulators and global initiatives.
c. In Europe, there have been a number of cases challenging compliance with net zero strategies. For example, three NGOs filed a claim against the British government challenging its net zero strategy as insufficient to meet the requirements of the UK Climate Change Act. The court ruled that the net zero strategy adopted by the government did not provide sufficiently detailed strategies as required by that Act. Similar lawsuits have been filed against oil companies TotalEnergies, Shell, and Santos for failing to adopt sufficient strategies to achieve net zero by 2050.
Litigation in the United States has been less prevalent, although there have been some challenges in states (e.g., California) that have legislation mandating companies to consider and disclose their climate impact and other issues.
d. Claims challenging proportionate contributions of global levels of greenhouse gases have largely been unsuccessful in the United States due to the United States Supreme Court's 2011 decision in American Electric Power Company, Inc. v. Connecticut, et al., 564 U.S. 410 (2011). In American Electric, several state and local governments and land trusts sued five United States energy companies on the grounds that those companies' emissions were contributing to global warming and sought an order to cap and reduce the emissions. The Supreme Court found that plaintiffs' claims were preempted by the Clean Air Act, and that Congress entrusted the Environmental Protection Agency to decide how greenhouse gases should be regulated.
Nonetheless, recently, governments and municipalities have pursued similar claims against oil companies. For example, on November 22, 2022, sixteen municipalities of Puerto Rico filed a lawsuit in federal court claiming that fossil fuel companies were responsible for damages caused by the 2017 hurricane season because they knowingly marketed products causing climate change harms but concealed the dangers associated with those harms. Other lawsuits against oil companies challenging the impact of their GHGs have been brought in state courts, presumably to avoid the federal pre-emption issue discussed above. For example, the City and County of Honolulu sued a number of oil companies alleging their emissions and decades-long efforts to discredit scientific proof of climate change has caused damage to Oahu.
2. Biodiversity – are new projects required to demonstrate biodiversity net gain to receive development consent?
Yes, the EPA considers biodiversity as part of its review under the National Environmental Policy Act ("NEPA"), which requires federal agencies to assess the environmental effects of their proposed actions prior to making decisions." The publication Incorporating Biodiversity Considerations into Environmental Impact Analysis under NEPA "outlines general concepts that underlie biological diversity analysis and management, describes how biodiversity has historically been addressed under NEPA, and discusses methods for considering biodiversity in current and future NEPA analyses." This publication is a reference document to "provide useful information when considering important resource components" as part of the EPA's review to its cumulative impact analysis.
Federal agencies also must commission an Environmental Impact Statement "if a proposed major federal action is determined to significantly affect the quality of the human environment." The EPA's website also describes the agency's three different levels of analysis under NEPA (categorical exclusion determination, environmental assessment/finding of no significant impact, environmental impact statement). As part of the environmental impact statement, the agency must describe the affected environment and the environmental consequences of the proposed action.
There are various agencies that would consider biodiversity in the normal course of their NEPA review and analysis, including :
- Department of the Interior
- USDA – Forest Service
- Department of Homeland Security
- Federal Communications Commission
- Federal Energy Regulatory Commission
- Environmental Protection Agency
- Department of Transportation
- Department of Energy
The Health Resources and Services Administration guidance makes clear that a "NEPA EA [Environmental Assessment] is a comprehensive study that identifies environmental impacts of a land development action and analyzes a broad set of parameters including biodiversity, environmental justice, wetlands, air and water pollution, etc."
States similarly require agencies to provide a report on the environmental effects of activities that could have a potentially negative environmental effect upon natural resources. Here are a few examples:
- State Environmental Quality Review Act (New York)
- California Environmental Quality Act (CEQA) Review
- North Carolina Environmental Policy Act
In Section 207 of the Executive Order on Tackling the Climate Crisis at Home and Abroad (January 27, 2021), President Biden required a review, by the Secretary of the Interior, of the siting and permitting processes on public lands and in offshore waters." The goal is to make these processes more amenable to renewable energy initiatives to "doubl[e] wind by 2030 while ensuring robust protection for our lands, waters, and biodiversity."
In the United Kingdom, the government has set out biodiversity net gain strategy that imposes an obligation on all planning permissions and development consent orders ("DCOs") to improve the environment by at least 10% as a compulsory planning condition. Biodiversity net gain refers to the enhancement of biodiversity resulting from development activities. The idea is to ensure that development activities not only do not have a negative impact on the environment but that they contribute positively to the conservation and enrichment of biodiversity. Details of the government's strategy are set out in the Environment Act 2021, sections 98 and 99. The government aims to develop a market for buying and selling biodiversity land, which means this concept extends beyond planning.
3. Water – are companies required to report on water usage?
There is no current legal requirement for companies to report on their water usage. The SEC proposed a Rule on March 21, 2022 requiring the disclosure of water usage from areas considered "high-water stress risks." According to the SEC press release: "The proposed rule changes that would require registrants to include certain climate-related disclosures in their registration statements and periodic reports, including information about climate-related risks that are reasonably likely to have a material impact on their business, results of operations, or financial condition, and certain climate-related financial statement metrics in a note to their audited financial statements." Under the proposed rule, if a company has set a climate-related target on water usage, the company would be required to disclose information surrounding that target.
In addition, the CEO Water Mandate, established by the UN to address global water challenges, issued Corporate Water Disclosure Guidelines (2014) to "provide guidance to help companies describe their water performance in quantitative, geographically explicit terms that allow disclosure audiences to understand how a company withdraws, consumes, and discharges water resources."
4. Forever chemicals – have there been any test cases brought against companies for product liability or pollution of the environment related to forever chemicals such as Perfluoroalkyl and Polyfluoroalkyl Substances (PFAS)?
USA
The mounting apprehension about PFAS has already resulted
in class actions in the USA, including the DuPont contamination
litigation which became the subject of the 2019 film, Dark Waters,
resulting in multimillion-dollar verdicts and settlements. Cases
have been filed against companies for manufacturing and selling
products containing "forever chemicals" used in, for
example, fire fighter protective gear and cosmetics.
Europe
In April 2021, following a civil claim made by the
residents of Kallinge in South Sweden, a municipal water company
was ordered to pay damages to residents who drank municipal water
from a source contaminated by fire-fighting foam used in a nearby
area for fire drills. The claimants suffered from elevated levels
of PFAS in their blood which they alleged caused increased risks to
their health. While we are not aware of active PFAS litigation in
the United Kingdom, there has been public discussion among
environmental activists, MPs and English claimant law firms which
suggest such litigation is possible in the future. With the
introduction of the EU Representative Actions Directive in 2020
(which ensures that consumers are able to protect their collective
interests in the EU via representative actions), and a growing
appetite for large scale group actions in the United Kingdom,
environmental actions of this nature are most likely to proceed by
way of group litigation given their potential to impact large
numbers of individuals.
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Originally published by The Legal 500.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.