Environmental Disclosure Committee Report

 Governmental Action

A. Administrative Developments

1. U.S. Securities and Exchange Commission

On April 11, 2022, the U.S. Securities and Exchange Commission (SEC or Commission) published a long-awaited proposed rule regarding climate change risk disclosure, titled The Enhancement and Standardization of Climate-Related Disclosures for Investors (Proposed Climate Disclosure Rule). Under current securities laws and regulations, including those issued under the Securities Act of 1933 and the Securities Exchange Act of 1934, registrants make a variety of financial and risk disclosures intended to inform investors of material factors impacting those companies. While the SEC addressed how climate-related issues fit into this disclosure scheme in a 2010 interpretive guidance, the Commission has never issued a formal set of rules on the subject. The Proposed Climate Disclosure Rule represents a next step, responding to investors’ calls for “more consistent, comparable, and reliable information about how a registrant has addressed climate-related risks when conducting its operations and developing its business strategy and financial plan.” Accordingly, the Proposed Climate Disclosure Rule, if finalized as proposed, would require registrants “to provide certain climate-related information in their registration statements and annual reports” such as “information about a registrant’s climate-related risks that are reasonably likely to have a material impact on its business, results of operations, or financial condition” as well as “greenhouse gas emissions, which have become a commonly used metric to assess a registrant’s exposure to such risks.” Legal challenges based on the June 30, 2022 United States Supreme Court decision in West Virginia v. EPA and other legal arguments are expected to be filed once the SEC promulgates a final rule, likely in 2023.

On June 17, 2022, the SEC published a proposed rule under the Investment Company Act of 1940 titled Investment Company Names (Proposed Names Rule). The Proposed Names Rule, intended to increase transparency and address greenwashing concerns among investors, would “address certain broad categories of investment company names that in the Commission’s view, are likely to mislead an investor about a company’s investments and risks.” Further, the Proposed Names Rule, if finalized as proposed, would protect investors by “improving and clarifying the requirement for certain funds to adopt a policy to invest at least [80%] of their assets in accordance with the investment focus that the fund’s name suggests. . . .” These modified requirements would apply to, among other companies, funds that consider ESG in connection with their investment practices.

Also on June 17, 2022, the SEC published a proposed rule under the Investment Advisers Act of 1940 and the Investment Company Act of 1940 titled Enhanced Disclosures by Certain Investment Advisers and Investment Companies About Environmental, Social, and Governance Investment Practices (Proposed Adviser Rule). Like the Proposed Names Rule, the Proposed Adviser Rule attempts to increase transparency and address greenwashing concerns in the financial services space. Specifically, the Proposed Adviser Rule, if finalized as proposed, would “require registered investment advisers, certain advisers that are exempt from registration, registered investment companies, and business development companies, to provide additional information regarding their [ESG] investment practices.” Among other things, the Proposed Adviser Rule would amend the registration and reporting forms utilized by these companies related to securities offerings and periodic reporting.On November 15, 2022, the SEC’s Division of Enforcement announced its results for fiscal year 2022. With respect to ESG-related enforcement matters, the SEC reported that due to the increasing importance of ESG to investors, the Commission “has focused attention on these issues with respect to public companies and investment products and strategies.” Furthermore, the SEC uses “time-tested principles concerning materiality, accuracy of disclosures, and fiduciary duty” in analyzing investment-related ESG issues. These efforts resulted in several ESG-related actions, including, for example, the Commission’s May 23, 2022 action against BNY Mellon Investment Adviser, Inc. (BNYMIA). According to the SEC’s Order Instituting Administrative and Cease-and-Desist Proceedings, BNYMIA allegedly made “material misstatements and omissions” in its consideration of ESG principles when making investment decisions for certain mutual funds. The SEC imposed a $1.5 million civil penalty against BNYMIA.

2. U.S. Department of Labor

On February 14, 2022, the U.S. Department of Labor (DOL) published a request for information titled Request for Information on Possible Agency Actions to Protect Life Savings and Pensions from Threats of Climate-Related Financial Risk (DOL RFI). The DOL RFI follows several executive and administrative actions in 2021, including: (1) Executive Order 14030, titled Climate-Related Financial Risk and signed by President Biden on May 20, 2021; (2) a White House report titled A Roadmap to Build a Climate-Resilient Economy, published on October 14, 2021; and (3) the DOL’s proposed rule, also published on October 14, 2021, titled Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights (DOL Proposed Rule). The DOL RFI was intended to assist the DOL’s Employee Benefits Security Administration in ongoing efforts to protect the interests of retirement plan participants and beneficiaries, under the Employee Retirement Income Security Act of 1974 (ERISA), from potential climate-related risks to the broader U.S. financial system.

On December 1, 2022, the DOL published a final rule titled Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights (DOL Final Rule), which largely follows the DOL Proposed Rule. The DOL Final Rule clarifies how ERISA’s duties of prudence and loyalty apply to retirement plan fiduciaries’ selection of investments and investment courses of action. While the DOL Final Rule maintains existing requirements “that a plan fiduciary may not sacrifice investment returns or take on additional investment risks to promote benefits or goals unrelated to the interests of plan participants and beneficiaries,” the DOL Final Rule “may make it easier for such fiduciaries to include investments that consider ESG factors.”

B. Legislative Developments

Several bills were introduced in 2022 targeting the SEC’s Proposed Climate Disclosure Rule or, more generally, climate change-related reporting. None of these bills progressed past committee review, and with the 117th Congress concluding in 2022, any such legislation will have to be reintroduced during the 118th Congress (2023-2024).

Representative Beth Van Duyne (R-TX) sponsored H.R. 7355, the Stopping Excessive Climate Reporting Act. The bill, which was introduced in the U.S. House of Representatives and referred to the House Committee on Financial Services on April 1, 2022, would not require issuers to disclose under the securities laws certain information related to GHG emissions or consumption.

Representative French Hill (R-AR) sponsored H.R. 8589, To prohibit the Securities and Exchange Commission from finalizing the proposed rule titled ‘The Enhancement and Standardization of Climate-Related Disclosures for Investors,’ and for other purposes. The bill, which was introduced in the U.S. House of Representatives and referred to the House Committee on Financial Services on July 29, 2022, would prohibit the SEC from finalizing its Proposed Climate Disclosure Rule or implementing or enforcing “such a finalized rule or any substantially similar rule.”

Following the introduction of a similar bill in the U.S. Senate (S. 5005), Representatives Bill Huizenga (R-MI) and Andy Barr (R-KY) sponsored H.R. 9408, the Mandatory Materiality Requirement Act of 2022. The bill was introduced in the U.S. House of Representatives and referred to the House Committee on Financial Services on December 2, 2022. H.R. 9408 would allow the SEC to impose disclosure requirements on issuers “only if the Commission expressly determines that there is a substantial likelihood that a reasonable investor of the issuer would consider the information disclosed . . . to be important with respect to an investment decision regarding the issuer.”

C. Judicial Developments

A multitude of climate change lawsuits continued to move their way through the court system in 2022, including those filed by states and local government entities. However, at this juncture it is more appropriate to focus on court rulings concerning choice of venue, rather than summarizing each of these actions, because the majority of cases are still in the procedural stage. Perhaps discovery will commence in 2023 and, eventually, the merits of the claims in one or more of these cases will be addressed. What follows is a representative summary of some of the key cases.

The Fourth Circuit held that Baltimore’s climate nuisance case against several fossil fuel energy companies should proceed in state court, and subsequently, on October 2, 2020, the United States Supreme Court granted a writ of certiorari to address questions of the appropriate forum for the dispute. In an opinion dated May 17, 2021, the Supreme Court addressed the jurisdictional underpinning of the Fourth Circuit’s holding and found that the reasoning failed to address certain arguments raised by the defendant companies. As a result, the Fourth Circuit’s decision was vacated and the case was remanded back for further consideration of the companies’ arguments in support of a removal of the litigation to federal court. On remand, on April 7, 2022, the Fourth Circuit again held that the case should be removed to state court. It thereafter denied a petition for a rehearing.

Minnesota filed a state-court complaint against the American Petroleum Institute, as well as ExxonMobil and Koch Industries-affiliated entities, alleging that Minnesotans were misled as to the climate change-related consequences of using fossil fuel products. ExxonMobil removed the case to federal court, claiming that the lawsuit was “the culmination of a multi-year plan concocted by plaintiffs’ attorneys, climate activists, and special interests to force a political and regulatory agenda that has not otherwise materialized through the decisions of the political branches of the federal government.” In response, Minnesota moved for a remand to state court, which was granted in April 2021. The defendants subsequently raised the potential impact of the Supreme Court’s previously mentioned decision in an appeal to the Eighth Circuit. The case was stayed by the District Court pending a decision from the Eight Circuit, which has yet to issue.

Massachusetts filed an Amended Complaint in its climate change lawsuit against ExxonMobil, which deemphasized issues relating to proxy costs for carbon and placed greater focus on the alleged deception of investors and consumers. ExxonMobil previously sought to remove the lawsuit to federal court, but the United States District Court held, by way of an Order of Remand and Memorandum of Decision, that the claims belong in state court. Subsequently, ExxonMobil moved to dismiss the complaint on several grounds, and appealed a denial of that motion. That appeal was denied and an order issued stating that the litigation can proceed.

Delaware filed a lawsuit in state court against thirty fossil fuel companies and the American Petroleum Institute. The defendants are accused of knowing of, and failing to disclose, the risks related to the production and use of fossil fuel products. Delaware also alleged injuries to its departments, agencies, residents, infrastructure, public and private lands, and natural resources. The lawsuit makes claims of negligent failure to warn, trespass, nuisance, and, against certain defendants, violations of the Consumer Fraud Act. The case was removed to federal court by defendant Chevron Corp. on October 23, 2020. Delaware subsequently moved for remand to state court. Although the motion for remand was granted, the defendants appealed to the Third Circuit and, on February 8, 2022, the District Court stayed the remand pending that appeal. Subsequently, the Third Circuit ruled that remand was appropriate and also, on September 30, 2022, denied a petition for a rehearing of that decision.

Connecticut filed a lawsuit in state court against ExxonMobil on September 14, 2020, alleging that the company: (1) knew of climate change risks related to burning fossil fuels; and (2) misrepresented, or omitted, material facts. Plaintiff asserted claims under the Connecticut Unfair Trade Practices Act, which has no statute of limitations. Defendant removed the case to federal court on October 14, 2020, and, on December 2, 2020, Connecticut filed a motion to remand the case back to state court. The motion to remand was granted, at which point the decision was appealed to the Second Circuit. The Second Circuit has stayed the remand order and, at present, the appeal is still pending.

Rhode Island also filed suit against several energy companies, which was removed to federal court by defendants and then remanded back to state court by the First Circuit Court of Appeals.

New Jersey joined the states filing climate-related lawsuits, alleging in an October 2022 complaint that five companies and a trade group made false claims about climate change and in relation to alleged impacts from fossil fuel products upon global warming.

Additional decisions have been rendered by federal circuit courts, in suits brought by county and local governments, concerning remands to state court.

On a separate note, several states sued the federal government over an interim estimate of the social cost of greenhouse gases created by an interagency working group, which estimates would then be used by the federal government when performing cost-benefit analyses in the context of future agency actions. However, both the Fifth Circuit and the Eighth Circuit found that the plaintiff states lacked the requisite standing.

Environmental Shareholder Proposals

During the 2022 proxy season, shareholders submitted nearly 800 proposals for company annual meetings, with more proposals going to a vote than in 2021. Average shareholder support decreased, however, as seen not only in the general pool of proposals, but also in certain subcategories of ESG-based proposals. Specifically, for the 2022 proxy season, there were reported to be ninety-eight proposals submitted on climate issues, versus sixty-two in 2021. Of those climate-based proposals – which included issues related to targets, financing, lobbying, transition planning, and scenario analysis – thirty-nine were voted on (versus fifteen in 2021), 35% received favorable votes (versus 63% in 2021), and nine passed (versus twelve in 2021). Twenty-seven other proposals related to sustainability issues – including packaging, deforestation, pesticides, and water use – were submitted in 2022, versus twenty-one in 2021. Of these sustainability-based proposals, eleven were voted on (versus four in 2021), 41% received favorable votes (versus 43% in 2021), and three passed (versus one in 2021). Other categories of shareholder proposals such as general reporting, environmental justice, board oversight, and miscellaneous environmental issues received varying degrees of favorable votes, although only two, related to miscellaneous environmental issues, passed.

Separately but still relevant to future ESG shareholder proposals, on July 27, 2022, the SEC published a proposed rule titled Substantial Implementation, Duplication, and Resubmission of Shareholder Proposals Under Exchange Act Rule 14a-8, which, if finalized as proposed, would update certain substantive bases for companies seeking to exclude shareholder proposals from company proxy statements.

Nongovernmental Organizations and ESG Disclosure Frameworks

As the global push for expanded and more uniform sustainability reporting continues to gain traction, the International Financial Reporting Standards Foundation (IFRS Foundation) announced in late 2021 the formation of an affiliate organization intended to establish sustainability reporting standards: the International Sustainability Standards Board (ISSB). The ISSB’s mission is to leverage pre-existing disclosure framework standards to further standardize sustainability reporting. To that end, two sustainability standards organizations – the Climate Disclosure Standards Board (CDSB) and the Value Reporting Foundation (VRF) – were consolidated into the ISSB in 2022. (The VRF itself was a consolidation of the Integrated Reporting Framework (IRF) and the Sustainability Accounting Standards Board (SASB)). Throughout 2022, the ISSB worked on two sustainability disclosure standards related to general sustainability disclosures and climate-related disclosures, taking into account, in part, reporting frameworks developed by the Task Force on Climate-related Financial Disclosures (TCFD) and the recently formed Task Force on Nature-related Financial Disclosures (TNFD). The ISSB expects to publish final standards in 2023.

 Environmental Justice

On September 24, 2022, the U.S. Environmental Protection Agency announced the establishment of a new national office dedicated to environmental justice and civil rights issues. Named the “Office of Environmental Justice and External Civil Rights,” the office will utilize 200 staff located in the agency’s headquarters and across ten regions and will be led by a Senate-confirmed Assistant Administrator. The new office “will oversee the implementation and delivery of a $3 billion climate and environmental justice block program . . . [and will ensure that] the implementation of other funding programs provided by the Inflation Reduction Act, Bipartisan Infrastructure Law, and regular appropriations meet or exceed the President’s Justice40 Initiative.”