Sustainability, Resiliency and Risk Mitigation

May 11, 2021 by Drew D. Salvest

Sustainability-Linked Private Placements

In this post we will be looking at sustainability-linked loan principles and their application to a recent sustainability-linked private placement by Trafigura Funding S.A. (“Trafigura”), a subsidiary of Trafigura Group Pte. Ltd., a market leader in the global commodities industry. Trafigura’s private placement of $203.5 million of Senior Guaranteed Sustainability-Linked Notes is believed to be the largest sustainability-linked financing on record in the US Private Placement market to date. Duane Morris previously represented Trafigura in its 2020 private placement of Senior Guaranteed Notes to institutional investors in the United States.

Industry Principles

The two primary sustainability products in the loan market are green loans and sustainability-linked loans. The Loan Syndications and Trading Association (“LSTA”), Loan Market Association (“LMA”) and Asia Pacific Loan Market Association (“APLMA”) originally established standards for these products (called the “Green Loan Principles” (“GLP”) and “Sustainability Linked Loan Principles” (“SLLP”)) in 2018 and 2019 respectively. On 5 May 2020 the LSTA, LMA and APLMA published guidelines that outline considerations for the market in structuring such transactions, as detailed in our alert here.

The key element of a green loan is that the proceeds are used for “green” purposes. A sustainability-linked loan can be any type of debt financing where a company is economically incentivized to achieve sustainability objectives. Unlike a green loan, the proceeds of a sustainability-linked loan can be used for general corporate purposes. The objectives are measured using sustainability performance targets (“SPTs”) that include key performance indicators (“KPIs”) and other metrics to measure improvement. The SLLP guidelines provide examples of SPTs with categories including energy efficiency, greenhouse gas emissions, renewable energy, water consumption and biodiversity.

The GLP and SLLP guidelines are increasingly being applied more widely than the loan market, with private placement issuers utilizing the guidelines for green or sustainable private placements. These products are not only intended for “green” companies; any company can access the green or sustainability loan market provided the transaction is structured in the right way. This means a broad range of industries can utilize the guidelines in a transaction provided there is an appropriate commitment to green projects or sustainability objectives.

Components of a Sustainability-Linked Private Placement

The SLLP guidelines outline four components of a sustainability-linked transaction that we will illustrate the practical application of with reference to the recent sustainability-linked private placement by Trafigura. These components are:

1. Relationship to the company’s overall sustainability strategy
2. Target Setting
3. Reporting
4. Review

1. Relationship to the Company’s Overall Sustainability Strategy

As sustainability-linked private placements are intended to improve a company’s existing sustainability strategy, there needs to be 1) a sustainability strategy in place and 2) a link between the sustainability strategy and the SPTs the company is seeking to achieve. Trafigura selected three KPIs in relation to its operations: reducing greenhouse gas emissions, developing its renewable energy portfolio and bringing its procurement program in line with international sustainability standards.

The SLLT guidelines also encourage companies to disclose sustainability standards or certifications to which they are seeking to conform. For example, Trafigura outlined its intention for full alignment of the business with the ISO standard 20400:2017, an international standard for sustainable procurement.

2. Target Setting

The SPTs need to be “ambitious and meaningful” to the company’s business. For Trafigura, the KPI for reducing greenhouse gas emissions is the same target as set in the company’s sustainability-linked revolving credit facility that closed earlier this year. This KPI will measure Trafigura’s performance in reducing scope one and two emissions by 30% by 2023 (compared to 2020 levels) as set out in its 2020 Responsibility Report.

The SLLP guidelines suggest SPTs should be determined using internal or external specialists so that they are “fit for purpose” with respect to the company’s business and industry. In order to set the KPI aligning Trafigura’s procurement program with international standards, an independent sustainability verifier, ERM Certification and Verification Services (“ERM CVS”), conducted a gap assessment of Trafigura’s management system framework against the ISO standards.

The SPTs and calculation methodologies are communicated between the company and the investors. Price incentives are linked to the performance of the company in achieving the pre-determined SPTs. These price incentives could be an upwards interest rate adjustment if an SPT is not met, an downward interest rate adjustment if SPTs are met, or a two-way pricing structure utilizing upward and downward interest rate adjustments depending on performance.

The Trafigura sustainability-linked private placement is structured with only an upward interest rate adjustment if an SPT is not met. The interest rate adjustment is structured in this way to work around any potential ERISA Final Rule issue, as a downwards adjustment in interest rate based on meeting the targets could be interpreted as a sacrifice of return on investment for a non-pecuniary goal. Although the Department of Labor has subsequently issued a notice it will not enforce the Final Rule, until further guidance is published an ERISA fiduciary must only consider pecuniary factors when making investments.

3. Reporting

A company will need to report up-to-date data in relation to SPTs. The SLLP guidelines suggest reporting should be on an annual basis at a minimum. Companies and investors may seek external opinions and reports with respect to methodologies and assumptions used in reporting.

In Trafigura, ERM CVS will undertake an assessment of the KPI performance on the relevant assessment date each year. The results will form the basis of the KPI report, produced and verified by ERM CVS which details performance with respect to the SPTs. The report is attached to a compliance certificate signed by Trafigura and delivered to the investors each year, stating whether SPTs have been achieved for that period.

4. Review

The SLLP guidelines suggest external review and verification is to be negotiated on a transaction by transaction basis between the company and the investors. External review is strongly recommended where information regarding SPTs is not publicly available. The SLLP guidelines strongly recommend verification by an auditor, environmental consultant or rating agency. Trafigura engaged ERM CVS to review and report on KPIs and SPT compliance for each relevant period.

Although sustainability-linked products originate in the loan market, particularly among European lenders, interest from issuers and investors in the capital markets is increasing as ESG issues move back up the public agenda as the impact of COVID-19 begins to recede. Moreover, application of the SLLP guidelines allow issuers across a broad range of industries to access capital from investors who are demonstrating growing support for businesses that incorporate sustainability into their business operations. Trafigura’s recent US private placement is an indication that US institutional investors are also supporting issuers committing to sustainability targets.

If you have any questions about this post, please contact Drew D. Salvest, Natalie A. Stewart, Rebecca Green any of the attorneys in our Banking and Finance Industry Group or the attorney in the firm with whom you in regular contact.

May 10, 2021May 10, 2021 by David Amerikaner

Autonomous Vehicle Legislation: State Updates

Note: This post was drafted by Ryan J. Stevens and appears on the Duane Morris Government Strategies blog.

Autonomous vehicles have automated driving systems that allow for self-driving, with little or no human input. While fully automated vehicles are not readily available at this point, lawmakers are already taking action with a myriad of autonomous vehicle legislation. As we have seen with E-Bikes, drones, and personal delivery devices, government regulation is not far behind the new technology.

At least 29 states have already enacted various autonomous vehicle legislation.

Connecticut
One piece of autonomous vehicle legislation introduced by Connecticut lawmakers is H.B. 6486. The bill would require the Connecticut Department of Transportation to develop a program to test and operate vehicles equipped with automated driving systems. It would also eliminate the autonomous vehicle testing pilot program (which never started).

Generally, the bill would require the Department of Transportation to adopt regulations that include both state and federal laws and national best practices on testing. Also, it would set application requirements for owners of ADS-equipped vehicles to seek approval to either test or operate their autonomous vehicles on state roads. Further, the bill would require ADS-equipped vehicles to comply with federal safety standards, be registered, and be adequately insured.

The bill would define a fully autonomous vehicle as an “ADS-equipped vehicle” with an automated driving system designed to function without an operator and classified as level four or level five by SAE. The bill would further define “ADS” (automated driving system) as the hardware and software that are collectively capable of performing the entire dynamic driving task on a sustained basis.

Florida
Florida lawmakers recently passed HB 1289 related to autonomous vehicles. Under the bill, a low-speed autonomous delivery vehicle would be allowed to operate on streets or roads with speed limits under 35 miles-per-hour or less. However, the vehicle may operate between 35 and 45 miles per hour under certain exceptions.

The autonomous vehicle legislation further requires low-speed autonomous delivery vehicles to be equipped with headlamps, stop lamps, turn signal lamps, taillamps, reflex reflectors, and vehicle identification numbers. The bill also requires such vehicles to be covered by an automobile insurance policy. It allows counties and municipalities to prohibit low-speed vehicles on any road under its jurisdiction if necessary in the interest of public safety.

The bill defines a “low-speed autonomous delivery vehicle” as a fully autonomous vehicle not designed for or capable of human occupancy.

Massachusetts
H. 3475, introduced by lawmakers this year, would require autonomous vehicles registered in Massachusetts to register in the state to continue to meet federal standards and regulations for a motor vehicle. The autonomous vehicle legislation stipulates that such vehicles shall not engage in interstate commerce or transport eight or more people or goods for hire unless a human operator is present in the autonomous vehicle. They can monitor the performance of the vehicle and intervene if required.

Nevada
Nevada became the first state to authorize the operation of automated vehicles in 2011 via Assembly Bill 511. In the 2021 legislative session, the Nevada Assembly passed AB 412, which relates to neighborhood occupantless vehicles, defined as low-speed vehicles not designed, intended, or marketed for human occupancy.

Under the bill, neighborhood occupantless vehicles would be allowed to operate on a roadway with a speed limit of greater than 35 miles per hour but no more than 45 miles per hour.

New Jersey
New Jersey lawmakers passed Assembly Joint Resolution 164 in 2019, creating the New Jersey Advanced Autonomous Vehicle Task Force. The Task Force was created to conduct a study of advanced autonomous vehicles and make recommendations for laws and rules.

The resolution called for the Task Force to issue a report to the Governor and the legislature within 180 days of the Task Force’s initial meeting. The report was to include:

an evaluation of existing state laws that may impede the testing and operation of autonomous vehicles on public roads in New Jersey,
an evaluation of existing state and federal laws related to autonomous vehicles as it relates to licensing, registration, insurance, liability, law enforcement, and
accident reporting, land use, road and infrastructure design, public transit, and workforce changes.

The Task Force was also required to make recommendations for implementing pilot programs for autonomous vehicles on public roads and to evaluate existing legislation and regulations in other states concerning the issue.

The Task Force created by AJR 164 issued its report in 2020, which included the recommendation to establish a two-step permitting process to allow companies to test and then employ HAVs (highly autonomous vehicles) on public roadways in the Garden State. The Task Force also recommended the New Jersey Motor Vehicle Commission as the lead agency responsible for approving and overseeing both testing and deploying HAVs in the state and recommended requiring all testing on public roadways be conducted with a safety driver present in all vehicles.

On the legislative side, A1189 would establish a fully autonomous vehicle pilot program. The bill would require the New Jersey Motor Vehicle Commission, in consultation with the state Department of Transportation, to establish the New Jersey Fully Autonomous Vehicle Pilot Program, allowing for autonomous vehicle testers to operate fully autonomous vehicles on New Jersey highways. The pilot program would last one year under the legislation.

Texas
Texas previously enacted autonomous vehicle legislation in 2017, allowing for the testing and deployment of automated vehicles on public roads.

Lawmakers in Texas introduced HB 3026 in the current legislative session. Under the bill, an autonomous vehicle designed to operate exclusively by the automated driving system for all trips is not subject to motor vehicle equipment laws or regulations in Texas that relate to or support motor vehicle operation by a human driver and are not pertinent for an automated driving system.

Further, if a vehicle safety inspection is required to operate an autonomous vehicle, the vehicle must automatically pass inspection with respect to any equipment covered by the bill’s exemption or any equipment not subject to inspection under Texas law.

April 23, 2021 by David Amerikaner

New York City’s Local Law 97: Energy Conservation Requirements That Open Opportunities

On April 20, Duane Morris LLP hosted a webinar on New York City’s Local Law 97, featuring:

Brad A. Molotsky, Partner, Duane Morris LLP, speaking about the legal and policy landscape;
Robert Politzer, President and Founder, GREENSTREETNYC, speaking about turning liability into opportunity with Local Law 97 compliance;
Crystal Smith, New York Market Director, Greenworks Lending at Nuveen, speaking about C-PACE financing;
Dan Egan, Senior Vice President of Energy and Sustainability, Vornado Realty Trust, speaking about the large New York property owner’s perspective; and
David Amerikaner, Special Counsel, Duane Morris LLP, moderating.

Local Law 97 was adopted in 2019 as part of New York City’s Climate Mobilization Act (CMA), a package of legislation designed to reduce greenhouse gas emissions from the City’s buildings by 40% by 2030 and by 80% by 2050, using 2005 as the baseline. The CMA includes bills aimed at encouraging the use of solar panels and green roofs, amending building energy efficiency grades, and authorizing the use of Commercial Property-Assessed Clean Energy (C-PACE) Financing to fund energy efficiency upgrades and building retrofits as well green energy installations.

But the centerpiece of the CMA is Local Law 97, which applies, generally, to buildings over 25,000 square feet in the City, with some exceptions, and establishes carbon emission intensity caps that begin to take effect in 2024 and become more stringent over time. The law will require covered buildings to understand their carbon footprints and to reduce their emissions through several mechanisms, including by implementing efficiency improvements and generating green energy, among others. It is estimated that over 50,000 buildings in New York will fall within the ambit of the CMA (over 60% of the buildings within the City), which results in over 3.15 billion square feet of coverage.

The April 20 webinar produced a lively discussion. Below are some of the takeaways from the discussion:

Timing. The CMA was passed in 2018 but in order to give building owners time to game plan, evaluate and then execute on carbon reduction plans, will become operative in 2024 with required reporting starting in May, 2025.
Failure to comply will be expensive. A covered building must pay $268 for every metric ton that that its carbon emissions exceed the cap established for its building type, beginning with the first compliance period in 2025. There are also fines for filing false emissions reports and failure to file a report.
But compliance can reduce operating expenses and modernize a building at minimal cost. A building energy audit is likely to reveal “low-hanging fruit,” such as efficiency upgrades that can be financed at low cost and can reduce energy operating expenses for the property. In addition, clean energy generation can be incorporated into a building with little or no upfront cost and affordable financing, and on-site generation will improve a building’s bottom line over time.
C-PACE financing is helpful to making improvements pencil out. C-PACE financing, authorized in New York and soon to be launched in NYC, allows building energy efficiency upgrades to be financed at low rates and paid back through an additional assessment on the property tax bill over a 20 to 25 year period. Note that the CMA also allows renewable energy credits and other offsets to count towards a building compliance targets.
New York’s efforts to decarbonize its electric grid will help. The state’s goal is to create all its electricity from carbon-free sources by 2040. As the renewable energy needed to meet this goal continues to be more readily available, NYC buildings will be powered by electrons that were generated using less and less carbon, easing the path to compliance with Local Law 97 over time.
The right thing to do for the planet is increasingly converging with the right thing to do for the bottom line. Vornado Realty Trust, for example, set a goal years ago to decarbonize its buildings by 2030. Vornado is just one of many examples of companies that have continued to embrace sustainability, energy efficiency and carbon reduction as smart business, that just happens to help the rest of society in reducing their tenants’ carbon emissions and helping to fight climate change.

A recording of the conversation is available here.

Duane Morris has an active ESG and Sustainability Team to help organizations and individuals plan, respond to, and execute on Sustainability and ESG planning and initiatives within their own space. We would be happy to discussion your proposed project with you. Contact your Duane Morris attorney for more information. We will continue to track New York’s carbon reduction mandates and are available to advise you and your colleagues on compliance with Local Law 97 and other regulations as they are rolled out.

If you have any questions about this post, please contact David Amerikaner, Brad A. Molotsky, Christiane Schuman Campbell, Darrick Mix, Dominica Anderson, Nanette Heide or the attorney in the firm with whom you are regularly in contact.

April 23, 2021April 23, 2021 by W. Patrick Dinnin

Texas Energy Landscape Changing: New PUCT Commissioners, New Statutes, New Direction

Following the historic Winter Storm Uri that slammed the Texas power grid, leaving over 4 million Texas customers (including the author of this blog post) without power, and the resignation of all three of its commissioners, the Public Utility Commission of Texas (“PUCT” or “Commission”) will have a completely new cast of appointees. With eyes towards addressing the financial and physical wreckage from the storm, Governor Greg Abbott has selected his first two of three nominations for commissioners to be appointed to the state agency that regulates electricity, water, and telecommunications utilities in Texas.

His appointees, if confirmed by the Texas Senate, “will have the responsibility of charting a new and fresh course for the agency,” Abbott said. “Texans deserve to have trust and confidence in the Public Utility Commission, and this action is one of many steps that will be taken to achieve that goal.”

The previous PUCT commissioners made several controversial decisions just before the sportlight was on them for Winter Storm Uri. Chairman Deanne Walker spearheaded the dissolution of the agency’s Oversight and Enforcement Division (“O&E”) and fired its director. This decision made many people question how the agency would go about investigating and addressing violations. Further, the chairman led the agency to drop its contract with the Texas Reliability Entity (“TRE”) – the reliability monitor that researches violations of statutes, rules, and ERCOT protocols – because she did not believe its oversight of the electricity industry was worth the price of the contract.

These decisions did not age well after the winter storms, with many arguing that the industry could have used the foresight of the O&E Division and the TRE. With the importance of ensuring reliability of the Texas grid and oversight of market participants, these past decisions will surely be addressed by the incoming Commissioners.

Abbott’s PUCT Commissioner Selections

Abbott’s first pick is moving quickly through Senate confirmation. On April 1, the governor selected Will McAdams as the first of three selections for PUCT commissioners. McAdams is a long-time legislative staff member and currently the president of the Associated Builders and Contractors of Texas.

At McAdams’ Senate confirmation hearing, he testified that had he been on the commission during the Winter Storm Uri, he would not have kept in place a controversial, $9,000-per-megawatt hour price cap on wholesale power for about 32 hours on Feb. 18-19. However, he admitted that he does not know what all information from the Electric Reliability Council of Texas (“ERCOT”) the PUCT may have had before them during the crisis. Lt. Gov. Dan Patrick has fought with Abbott and the House over the $16 billion in charges that many have argued were wrongfully accrued during the February outages. McAdams’ position is a notable shift from the previous chairman’s view that the high cap was necessary for grid stability.

McAdams was unanimously recommended for appointment, sending the decision to the full Senate floor for final confirmation.

McAdams has spoken of striking a balance between renewable energy and fossil fuels. He has called wind and solar “absolutely valuable resources,” but that to whatever extent those are not available, the PUCT should “firm that up” with “dispatchable forms of generation,” such as gas, coal and nuclear.

McAdams has also suggested providing securitization or low-interest bond financing to rural electric co-ops that are financially insolvent from the enormous wholesale power bills accumulated during the winter storms.

Later, on Monday, April 12, the governor tapped 38-year-old finance expert, Peter Lake, as the next chairman of the Commission, whose term would run through September 1, 2023. Lake currently chairs the Texas Water Development Board, the agency that helps develop water resources in the state. He holds an undergraduate degree from the University of Chicago and a master of business administration degree from Stanford University. He also has experience trading futures and derivatives in the Chicago Mercantile Exchange and financial leadership positions at a small oil company.

“I am confident he will bring a fresh perspective and trustworthy leadership to the PUCT,” Abbott said of Lake. “Peter’s expertise in the Texas energy industry and business management will make him an asset to the agency.”

These new recommended commissioners would, alone, be a huge shift in direction for the PUCT. However, the new commissioners will be inheriting an agency that will undoubtedly be playing by different rules than before Winter Storm Uri, with the 87^th Texas Legislature in full swing.

PUCT-Related Bills Moving Quickly through Texas Legislature

Both houses of the Texas Legislature have been vigorously addressing the failures of the Texas grid during Winter Storm Uri that effected virtually every district in the state. Accordingly, an unprecedented number of electric related bills have been filed (around 400 relating to energy or utility matters).

Taking center stage is Senate Bill 3 (“SB 3”), which has passed through the Texas Senate and onto the House. SB 3, filed by Republican state Sen. Charles, Schwertner of Georgetown, would require all power generators, transmission lines, natural gas facilities and pipelines to winterize their facilities, protecting them from extreme weather.

SB 3 would also ban indexed retail electric plans, which feature rates that wildly fluctuate based on the cost of wholesale electricity. In periods of high demand, such as the heat of summer or the cold of Winter Storm Uri, wholesale electricity can become astronomically more expensive.

SB 3 features an amendment that would give the PUCT and the Texas Railroad Commission – the state agency that regulates the oil and gas industry – six months to draft weatherization rules, protecting energy facilities from extreme weather. SB 3 would also require these agencies to conduct on-site compliance inspections.

Another provision of SB 3 would shift some financial burden of ancillary services to renewable energy producers. This measure is based on the argument that the fluctuation in the availability of renewable resources requires ERCOT to secure more ancillary services than coal, gas, or nuclear‑based generators. Renewable industry groups, such as the Advanced Power Alliance, have battled this proposal, calling it an “unnecessary discriminatory policy.”

Aside from SB 3, there are several other Texas energy-related bills moving through the Texas Legislature this session, outlined below:

SB 2142 would mandate repricing resulting from the 32-hour, $9,000-per-megawatt hour price cap on wholesale power on Feb. 18-19, during Winter Storm Uri.
HB 11 and HB 14 would require winterization of generation facilities and gas pipelines.
HB 12 would create a statewide emergency disaster alert system, informing Texans of severe weather events.
SB 415 and HB 1672 would allow transmission and distribution utilities (“TDUs”) to use battery storage for reliability purposes.

Several bills aim to change the organization of the PUCT and the number of commissioners appointed. SB 2154 would expand the number of Commissioners at the PUC from three to five, all would have to be Texas residents, and three of the five (including the chairman) would have to be “well informed and qualified in the field of public utilities and utility regulation.” The other two would need five years’ experience running a business or government, or practicing as a lawyer, CPA, or professional engineer.

Below is a list of other bills that would affect PUCT appointments and governance are:

House Bills 10, 2434, 2467, 2586, 3062, 3093, 3473, and 3487, and Senate Bill 2.

PUCT Rulemaking Proceedings to Adjust to New Legislation, Subject to Industry Comment

Once the dust settles from the Legislature and new PUCT commissioners are confirmed, the PUCT will have to implement newly enacted legislation and develop conforming Commission rules. Every decision made and new rule proposed will come under heavy scrutiny of the public, which has lost its trust in the agency. Regulated entities and various interest groups will be jockeying for position as they battle out long, contentious rulemaking proceedings and policy debates.

The Triple Bottom Line: While we do not yet know the playing field that the new commissioners will inherit, nor do we know their predispositions, we do know that there will be huge changes to the PUCT and Texas energy regulation. Regardless of your position or concerns, getting involved early and often in PUCT proceedings can help shape the regulatory landscape with your interests in mind.

Duane Morris has an active Energy, ESG, and Sustainability Team to help organizations and individuals plan, respond to, and execute on Energy, Sustainability and ESG planning and initiatives within their own space. Further, we have attorneys with broad and extensive experience before the Public Utility Commission of Texas, including participation in contested matters as well as rulemaking proceedings. We would be happy to discuss your potential energy-related needs with you. Contact your Duane Morris attorney for more information.

If you have any questions about this post, please contact Patrick Dinnin, Brad Thompson, Jacob Arechiga, or the attorney in the firm with whom you are regularly in contact.

April 22, 2021April 23, 2021 by David Amerikaner

Renewable Energy Legislation: Pathways to 100% Clean Energy

Note: This post was drafted by Ryan J. Stevens and appears on the Duane Morris Government Strategies blog.

Renewable portfolio standards (RPSs) are regulatory mandates to increase the production of energy from renewable sources such as wind, solar, biomass and other alternatives to fossil and nuclear electric generation. States have been actively making changes to their RPSs through renewable energy legislation. Generally, RPSs require that a specified percentage of electricity that utilities sell come from renewable energy sources. A report from 2018 found that roughly half of all renewable electricity generation growth and capacity in the last nearly two decades has been associated with state RPS requirements. Some lawmakers are even looking to reach 100% renewable energy in their states.

Twenty-nine states, along with the District of Columbia, and three territories, have an RPS. According to the NRDC, six states, the District of Columbia, and Puerto Rico are committed by state law to achieving 100% carbon-free electricity by 2050 or sooner, with another ten states having non-binding goals of reaching 100% renewable energy.

Massachusetts
Last year, lawmakers introduced H. 2836, which would transition the Commonwealth to 100% clean, renewable energy by 2045, including the energy consumed for electricity, heating and cooling, transportation, agricultural uses, industrial uses, and all other uses by all residents, institutions, businesses, state and municipal agencies, and other entities operating in Massachusetts. Further, the legislation stated the Commonwealth’s goal to obtain 100% of the electricity consumed by all residents, institutions, businesses, state and municipal agencies, and other entities operating in Massachusetts from renewable energy sources by 2035.

The bill defined “renewable energy” as energy produced from sources meeting the following criteria:

virtually pollution-free, producing little to no global warming pollution or health-threatening pollution,
inexhaustible, coming from natural sources that are regenerative or unlimited,
safe, having minimal impacts on the environment, community safety, and public health, and
efficient, wise use of resources.

Massachusetts Governor Charlie Baker issued a formal determination letter last year establishing net-zero greenhouse gas emissions as the Commonwealth’s new legal emissions limit for 2050.

Pennsylvania
Two pieces of legislation are pending introduction in the Pennsylvania legislature to achieve 100% renewable energy. Two cosponsor memos were circulated, one in the House and one in the Senate, which would transition the Commonwealth to 100% renewable energy by 2050. Previous versions of these bills have not made it through the legislature in past sessions.

A previous iteration of these bills called for the energy consumed for electricity, heating and cooling, transportation, agricultural uses, industrial uses, and all other uses by residents, institutions, businesses, state and municipal agencies, and other entities operating in Pennsylvania to reach 100% renewable energy by 2050. That bill also called for 100% of the electricity consumed by residents, institutions, businesses, state and municipal agencies, and other entities in Pennsylvania to come from renewable energy sources by 2035.

Hawaii
Hawaii lawmakers passed House Bill 623 in 2015, updating and extending the state’s clean energy initiative and renewable portfolio standards by setting a goal of 100% renewable energy by 2045. Hawaii was the first state to move towards 100% renewable energy.

The legislation calls for each electric utility company that sells electricity for consumption to establish a renewable portfolio standard of:

15% of its net electricity sales by December 31, 2015;
30% of its net electricity sales by December 31, 2020;
40% of its net electricity sales by December 31, 2030;
70% of its net electricity sales by December 31, 2040; and
100% of its net electricity sales by December 31, 2045.

The Hawaii legislature passed another bill, House Bill 1509, the same year as House Bill 623. House Bill 1509 called for the University of Hawaii to establish a goal of becoming net-zero concerning energy use by January 1, 2035. The bill resulted in the University of Hawaii becoming the first university in the country to set a 100% renewable energy goal.

Maine
In 2019, Maine lawmakers passed L.D. 1494, which Governor Janet Mills approved. The legislation lays out the state’s renewable energy goals: (1) 80% of retail electricity sales by January 1, 2030, and (2) 100% of retail electricity sales by January 1, 2050. The 80% RPS is up from 40% today.

At the same time, Governor Mills also signed L.D. 1679, establishing the Maine Climate Council to help lead the state’s efforts to reduce greenhouse gas emissions as required under L.D. 1494.

Nevada
In 2019, Nevada lawmakers passed SB 358, setting new goals for the state’s energy standards portfolio. Nevada increased its RPS from 25% by 2025 to 50% by 2030. State law now requires each provider to generate, acquire, or save electricity from portfolio energy systems or efficiency measures that are no less than 50% of the total amount of electricity sold to its retail customers.

Nevada currently has a 50% by 2030 requirement, with a non-binding 100% carbon-free goal by 2050.

Federal Efforts
Currently, renewable fuel standards are set state-by-state, creating a patchwork of regulatory schemes with which utilities must contend. Because of this energy providers, many of which have already set ambitious climate goals, have called for a national standard.

In Congress, Rep. Yvette Clarke (D-N.Y.), a member of the Energy and Commerce Committee, reintroduced her legislation with Rep. Peter Welch (D-Vt.) that would create a national renewable energy and efficiency standard “in the coming weeks.” The bill would require electric utilities to get 55% of their supply from renewables by 2030. It also calls for a 22% decrease in electricity use and a 14% reduction in natural gas use in the next 15 years.

In the White House, President Biden has called for a national clean energy standard. That standard would, over time, increase the amounts of electricity generated from fuels that do not emit the greenhouse gases. In addition to wind and solar, this national standard would include things like hydropower and nuclear. However, it remains the legislative path for such a standard remains unresolved.

April 18, 2021April 18, 2021 by Brad A. Molotsky

ESG: Carbon Footprint Labels – Helpful or Green Washing?

Major Fortune 100 and 500 companies and others continue to focus on their ESG efforts in various forms and arenas, including the continued evolution of carbon emissions disclosures on various products.

As noted by Saabira Chaudhuri in her Wall Street Journal column, consumers, investors, Boards and regulators are becoming more and more interested in emission levels in the context of growing concerns over climate change and its impact.

Unilever PLC – intends to introduce carbon footprint details on 70,000 of its products, given that sales of sustainable products are growing faster than their lines of non-sustainable products. They are currently working on obtaining direct information about their carbon footprint for each ingredient supplier that provides products that are used in Unilever products.

Colgate- Palmolive – continues to work with their supply chain providers of various ingredients that are inputting into their products in an effort to avoid allowing estimates of amounts of impact in favor or real numbers. Colgate continues to work on ways to measure and verify their footprint, and to require that their supply chain actually measure and verify these impacts.

Quorn/Monde Nissin Corp – began displaying carbon-dioxide/kilogram on-package carbon footprint details in 2020 for certain of their meatless products.

Oatly AB, Upfield Holdings BV and Just Salad brands have also started listing carbon emissions figures on both their packaging and menus.

Logitech International began listing carbon emissions figures on their computer keyboard products.

Having labelled and provided on line environmental impact numbers for its Garnier hair products already, L’Oréal SA announced it will be adding carbon labels for all of its “rinse off” products, including shampoos, in 2022.

To date, there is no market based, agreed upon, uniform way to report or measure these various GhG impacts but, each of the above mentioned companies, have attempted to outline their methodologies and have given their rationales on how they measure and report – an excellent first step. As others either desire to join them or feel the pressure from consumers, their Board and/or stakeholders to measure and report as well, one can only hope that a quasi uniform methodology for monitoring, measuring and reporting is agreed upon and utilized so that consumers can measure apples to apples rather than apples to oranges or kilograms to pounds.

The Triple Bottom Line: While personally I am a big fan of labeling (whether this be nutrition or calories on a menu or ingredients in a chemical mixture to enable the consumer to review the information and make an informed decision), and, in my view, the growing use of “carbon labeling” represents a good step in the right direction to enable better, more informed consumer choices, I am just not so sure that everyone’s motivation and nomenclature is the same when using phrases like “net-zero”, “carbon emissions” and “greenhouse gas impact”. As such, the reported results will not be comparable as between products, at least not yet. Again, I am very much in favor of solid attempts by various organizations to self report their impacts, I just look forward to the day when everyone is measuring outcome in a similar fashion so that real comparisons by brand and product will be possible, rather than merely smart marketing by some with a lack of a verifiable real methodology for measuring and reporting. As such, I will put “carbon labeling” in the “growing in interest” category, likely to become more and more real and relevant as time and measurement systems are put in place during 2021 and 2022 and, very likely that regulators like the EU, the SEC or trade associations like the SASB continue to push for more required and verifiable disclosure. As such, an area to continue to pay attention to and keep attuned to the market dynamics that continue to push for more and better information.

Duane Morris has an active ESG and Sustainability Team to help organizations and individuals plan, respond to, and execute on Sustainability and ESG planning and initiatives within their own space. We would be happy to discussion your proposed project with you. Contact your Duane Morris attorney for more information.

If you have any questions about this post, please contact Brad A. Molotsky (bamolotsky@duanemorris.com), Christiane Schuman Campbell, Darrick Mix, Dominica Anderson, Nanette Heide, David Amerikaner or the attorney in the firm with whom you are regularly in contact.

April 11, 2021 by Brad A. Molotsky

ESG – Lending Costs Tied to Internal Diversity, Equity and Inclusion Goals – a Coming Trend?

Mid week last week, Dawn Lim reported in the Wall Street Journal that BlackRock Inc. had cut a 5 year, $4.4 Billion dollar deal with its lending consortium that ties its lending costs on its credit facility to BlackRock’s ability to meet certain diversity, equity and inclusion goals (“DEI”).

The deal, as reported, ties its borrowing costs to meeting targets for women in senior leadership and to meeting numeric goals regarding Black and Latino employees within its work force. The stated goals for Black and Latino individuals as a percentage of its workforce are 30% of its workforce by 2024. Their goal on women in senior management is to increase numerics by 3% each year through 2024.

BlackRock also is focused on growing its environmental, social and governance assets under management from $200 Billion currently, to over $1 Trillion (with a “T”) by 2030. The goals noted are focusing on aligning its own practices with that of the companies BlackRock invests in as CEO Larry Fink continues to push the envelope on ESG investing and increasing workforce DEI.

The result of the credit facility loan covenants will seek to more closely align the company’s ESG investing goals with its internal corporate goals and impose costs on its asset managers via higher costs in its revolver by not achieving their stated goals.

The Triple Bottom Line: A bit too early to call this evolution of tying lending costs to internal ESG goals as a trend (vs. a reaction to public scrutiny elsewhere), but in my view, it is a big step and a signals to the broader market that such self imposed costs can be achieved and that BlackRock is willing to take this type of risk, that align its investment decisions with its internal policies. Big and bold steps indeed.

If you have any questions about this post, please contact Brad A. Molotsky (bamolotsky@duanemorris.com), Nanette Heide, Darrick Mix, Michael Schwamm, David Amerikaner or the attorney in the firm with whom you are regularly in contact.

March 30, 2021 by Seth v.d.H. Cooley

A Look Back at the Trump EPA and Enforcement

On January 13, 2021, one week prior to the end of the Trump administration, the Environmental Protection Agency released its annual enforcement report for the prior year – “EPA Enforcement Annual Results FY 2020.” https://epa.maps.arcgis.com/apps/Cascade/index.html?appid=9dfe57199392498f872bac6bf2e4867c In keeping with the rhetorical style of the former president, EPA claimed that it had achieved “tremendous results for the public and the environment.” When one looks below the surface, however, a different picture appears.

EPA’s FY 2020 report identifies the following as the “highlights” of its “National Compliance Initiatives” (NCI) efforts to address “the most serious environmental violations,” violations on which EPA “focuses” its enforcement and compliance resources:
Continue reading “A Look Back at the Trump EPA and Enforcement”

March 16, 2021March 16, 2021 by Brad A. Molotsky

ESG – Global ESG funds flow increases to $80.5 B in Q3 of 2020 and $2.5 Trillion in ESG AUM

Per a neat article in Funds Fire last week, Moody’s Investor Services issued a February 2021 report that showed Global ESG flows increased to $80.5 billion in the third quarter of 2020, up 14% from the previous quarter, with sustainable fund assets under management reaching a new high of $1.23 trillion.

In the third quarter, U.S.-based sustainable equity funds saw net inflows of $3.8 billion, even as overall U.S. equity funds saw net outflows of $118.5 billion, the Moody’s report shows.

Clean energy was the top-performing U.S. equity sector, with a total cumulative return of 185%, followed by consumer discretionary, which returned 48.3% last year. Meanwhile, despite entering 2020 with a low valuation, the energy sector lost 33% last year.

President Biden’s focus on renewable infrastructure, along with key political appointments that are likely to influence investment regulations, are likely to have further impact on ESG investing, according to Moody’s.

Per the report, Invesco, which manages $1.37 trillion and oversees $35 billion in dedicated ESG mandates, has targeted 2023 for full ESG integration. BlackRock aims to increase its $200 billion in sustainable investment assets to $1 trillion by the end of the decade.

Further, according to the report, AllianceBernstein was among the firms that had positive momentum in ESG in 2020. At the end of 2020, the firm’s suite of ESG strategies jumped to $16.5 billion, an increase of 60% over the prior year.

According to Funds Fire, Institutional ESG flows, as tracked by eVestment, increased to $109 billion in 2020 from $27.6 billion in 2018. Institutional ESG assets increased to $2.55 trillion from $1.79 trillion over the same period.

The Triple Bottom Line: While numbers can sometimes be manipulated to make a point, in this instance, the sheer numbers and upwards trajectory speaks for itself. An increase from $27 Billion to over $109 Billion in 3 years; and an increase in ESG assets from 1.79 Trillion to over $2.55 Trillion is significant no matter how you chose to view ESG investing.

March 15, 2021March 15, 2021 by Brad A. Molotsky

ESG – Calvert tightens its proxy voting standards to require Diversity by Gender and by Color on Boards

In a post earlier today, the President and CEO of Calvert Research and Management, Jon Streur, discussed his view on why Calvert “raised” their standards for proxy voting on board diversity. Calvert, with over $31 Billion in assets under management, is one of the foremost fund managers who have been utilizing an ESG lens within which to evaluate companies for decades.

Per John, “[a]t Calvert, we have used the power of our proxy vote to hold boards accountable for their attention to diversity for three decades. This year, expectations for corporate diversity are rising, and we are more aware than ever of the value of diverse leadership for long-term corporate performance. For this reason, we are increasing our standards for board diversity.”

As a result of their change in voting standards, Calvert will vote AGAINST the nominating/governance committees of public companies that have fewer than 2 women on the board.

Previously, they voted against the nomination of directors for company boards that lacked representation of women.

They also indicated that for companies in the US, the UK, Australia and Canada, Calvert will also vote AGAINST the nominating/governance committee at public companies that have fewer than 2 people of color on the Board or are less than 40% diverse.

Previously, Calvert’s minimum standard was 1 person of color and a board that was 30% diverse.

Research indicates that diversity is a financially material ESG issue. In research begun in 2019 and continuing currently, Calvert found that in “evaluating the financial materiality of gender diversity factors” that gender diversity factors are associated with improved equity returns for both the U.S. and non-U.S. markets.

Per their data, companies with at least 2 women on the board outperformed when compared to those with fewer women on the board, and U.S. large-cap companies with more than 2 women saw even greater improvement. In the U.S. and certain like markets, similar results were found for ethnically diverse boards.

The Triple Bottom Line: According to Jon and Calvert, “proxy voting is a vital way to hold companies accountable for their commitments to board diversity. This and other tools of structured engagement can help encourage positive change”.

If you have any questions about this post, please contact Brad A. Molotsky (bamolotsky@duanemorris.com), Nanette Heide, Darrick Mix, David Amerikaner or the attorney in the firm with whom you are regularly in contact.