Net zero goals and carbon neutrality have hit the mainstream, propelled over the past decade by consumer and investor demands that businesses curb greenhouse gas emissions to counter the climate crisis. In response, companies have increasingly taken measures to voluntarily to curb their greenhouse gas emissions and have advertised their efforts to protect the environment. Companies pledging "carbon neutrality" work to ensure the amount of carbon emitted by their operations equals the amount being absorbed into the atmosphere. This usually means reducing their CO2 emissions as much as possible, coupled with investments in carbon sinks (places that absorb more carbon than they release) to offset the remaining emissions from their operations. Those pledging to achieve "net zero" broaden their efforts to include all greenhouse gases, with the aim of having equivalence across their entire value chain between emissions and greenhouse gases being removed from the atmosphere.

In addition to what they are doing voluntarily (many under the International Sustainability Standards Board and Task Force for Climate-Related Financial Disclosures frameworks), companies will soon berequiredto make climate disclosures pursuant to federal regulation. While the SEC has been slow to act, final reporting rules are expected in 2023. The SEC's proposed rules would require companies to disclose information about their direct greenhouse gas emissions (Scope 1) and indirect emissions from purchased electricity or other forms of energy (Scope 2). There is still a question as to whether and how the rules will include reporting of emissions from upstream and downstream activities in their value chain (Scope 3). As drafted, the proposed rules require Scope 3 reporting if material or if the registrant has set an emissions target or goal that includes Scope 3 emissions. Additionally, almost all US companies that have aspecified nexuswith the European Union (or that contract with any companies with EU nexus) will be required to disclose emissions (Scopes 1, 2, and 3) and climate risk pursuant to the EU's Corporate Sustainability Reporting Directive (CSRD) for the year 2028. CSRD has a detailed methodology for measuring and reporting, which will likely conflict with the sustainability disclosures that companies are making now or will be making under SEC rules.

Financial institutions have also started—and other companies are expected to follow—to disclose emissions on their balance sheet in accordance with the Partnership for Carbon Accounting Financials GHG Accounting and Reporting Standard. Given the integration with financial statements, these emissions disclosures will be subject to close scrutiny.

Still, companies have embraced voluntary carbon-reduction strategies as promoting both good business and corporate social responsibility. But very few businesses are able to achieve net zero or carbon neutrality without seeking to offset emissions by investing in carbon sinks, leading many to rely on the Voluntary Carbon Markets (VCMs) to achieve their climate-related goals. As a central tenet of emission-reduction strategies, VCMs have quickly grown into a multibillion-dollar global enterprise. VCMs are hailed for their potential to preserve and expand important carbon sinks while funneling investment and creating social benefits to developing regions of the world.

Despite the promise and utility of offsets, recent investigative reports into the integrity of some forest offset projects and follow-on consumer class action lawsuits asserting greenwashing claims have created uncertainty in these emerging markets, and plaintiffs lawyers have recently sought to leverage these developments. Earlier this year, The Guardian reported that, according to certain metrics, most rainforest protection credits certified by Verra, the world's leading registry, do not represent genuine carbon reductions. Though Verra rejected the findings and defended its impact on rainforest conservation, the backlash led Verra's long-time CEO, David Antonioli, to resign last month and prompted Verra to highlight its ongoing development of new, standardized rules for generating forest credits, to be implemented in 2025. Following the Verra report, Bloomberg Green reported that South Pole, a Swiss carbon finance consultancy company and the world's leading purveyor of offsets, exaggerated climate claims around its forest-protection projects. While many companies are still trying to make sense of the difference between "net zero" and "carbon neutral," the markets they have come to rely on to meet those goals are experiencing a significant test.

With many companies advertising their efforts to lessen climate impacts, private litigation and regulatory enforcement actions seeking to curb "greenwashing" are already on the rise. Last week, armed with the recent articles critiquing VCM registries, a California consumer filed a class action complaint against Delta,1 alleging the company's carbon neutrality claims were false and misleading because they were based on offsets that overstated their carbon impact. Though airlines have been the target of similar suits in the past couple years, as air travel itself has been subject to criticism for its climate impacts, the intensified scrutiny of VCMs may very well result in further consumer class action suits targeted at other industries that tout climate strides based on carbon offsets.

Companies marketing their net zero and carbon neutrality achievements may likewise find themselves vulnerable to securities litigation. The already rising tide of securities litigation alleging false and misleading statements in connection with ESG claims 2 is a likely harbinger of what's to come with respect to emissions reduction claims. Similarly, investment reports, securities filings, climate disclosures, and financial statements reflecting carbon accounting are sure to be under the microscope of shareholders, the FTC, and the SEC, looking to curb purported greenwashing through litigation and regulatory enforcement in the foreseeable future.

Skepticism of carbon markets is not new; environmental and human rights groups have called for transparency and mechanisms to ensure integrity in VCMs from the outset. The rapid, accelerating market expansion as of late amplified that skepticism and has drawn negative coverage, creating what may be an inflection point for VCMs. Though there is resulting uncertainty about the viability of the carbon markets, the magnified attention to the integrity of offset projects is also a sign that stakeholders are invested in making VCMs live up to their promise. (EvenThe Guardianreport recognized that several projects "have achieved excellent results.")3

In the near term, investment in carbon capture projects may be slowed while companies consider diversifying their carbon-reduction strategies. To mitigate against the risk of litigation and regulatory enforcement, companies should apply a high degree of scrutiny to their own emission reduction strategies before announcing credible greenhouse gas reduction targets, and exercise caution about how they market and report emissions reductions. MoFo's broad-based ESG practitioners regularly advise companies in developing multi-pronged strategies to both set and meet climate goals while mitigating the potential litigation and enforcement risk arising from ESG disclosures, marketing, and advertising.

Footnotes

1 See Berrin v. Delta Airlines, Inc., Case No. 2:23-cv-04150 (CD. Cal.) at pp. 20–21.

2. See, e.g., Fagen v. Enviva Inc., et al., Case No. 8:22-cv-02844 (D. Md., Oct. Nov. 3, 2022) (alleging false and misleading statements regarding sustainability of wood pellet production); Rosencrants v. Danimer Scientific, Inc., Case No. 1:21-cv-02708 (E.D.N.Y., May 14, 2021) (asserting claims under Sections 10(b) arising from alleged greenwashing following a Wall Street Journal article raising questions regarding the biodegradability of plastic substitute).

3. Patrick Greenfield, "Revealed: More Than 90% of Rainforest Carbon Offsets by BiggestProvider Are Worthless, Analysis Shows," The Guardian (Jan. 18, 2023).

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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