ESG – Environmental, Social and Governance (ESG)

April 12, 2023 by Brad A. Molotsky

NJ Legislature Passes Flood Warning Requirements for Leases and the Sales of Real Property – Applies to both Commercial and Residential Property

Earlier this week, New Jersey lawmakers passed SB 3110, a bill (the “Bill”) that would require Landlords and Seller of commercial and residential Real Estate to warn prospective tenants and buyers about previous flooding on various types of properties.

SB 3110 has been sent to NJ Governor Murphy for review and execution and will need implementing regulations from the New Jersey Department of Community Affairs (NJDCA) that are anticipated within 90 days of passage of the Bill.

SB 3110 requires that both Sellers and Landlords disclose whether a property is located in a 100-year floodplain or 500-year floodplain, as determined by the Federal Emergency Management Agency (FEMA).

The Bill mandates that NJ Department of Environmental Protection (NJDEP) create a user-friendly website where landlords, owners, tenants and buyers can check whether a property is in a flood zone or at risk of flooding in the future.

NJDCA will also be charged with developing a standard notice for landlords and owners to fill out to disclose whether a flood risks exist.

Note, that, under SB 3110, a tenant who experiences “substantial flood damage” but whom wasn’t properly notified by a landlord of the risk of such a flood, could terminate a lease and sue to recover damages,. “Substantial Flood Damage” is defined as damages of at least 5 months rent worth of damage.

Some of the questions the disclosure form will likely address include:

Is any or all of the property located wholly or partially in the Special Flood Hazard Area (“100-year floodplain”) according to FEMA’s current flood insurance rate maps for your area?
Is any or all of the property located wholly or partially in a Moderate Risk Flood Hazard Area (“500-year floodplain”) according to FEMA’s current flood insurance rate maps for your area?
Is the property subject to any requirement under federal law to obtain and maintain flood insurance on the property?
Have you ever received assistance, or are you aware of any previous owners receiving assistance, from FEMA, the U.S. Small Business Administration, or any other federal disaster flood assistance for flood damage to the property?
Is there flood insurance on the property?
Is there a FEMA elevation certificate available for the property? If so, the elevation certificate must be shared with the buyer.
Have you ever filed a claim for flood damage to the property with any insurance provider, including the National Flood Insurance Program? If the claim was approved, what was the amount received?
Is any or all of the property located in a designated wetland?
Has the property experienced any flood damage, water seepage, or pooled water due to a natural flood event, such as heavy rainfall, costal storm surge, tidal inundation, or river overflow? If so, how many times?

Some of these questions are contained within the Bill and others are likely the subject of DCA’s form creation to address the disclosure obligation if SB 3110 is signed into law.

Parting Thoughts – Given New Jersey’s past history in the last decade with hurricanes and increasing flooding and given that New Jersey has been assigned a grade of an F by the NRDC in connection with its flood disclosure policies, it should come as no real surprise that the legislature is moving to attempt to address this type of tenant and buyer of real property risk and provide for a more informed purchase/leasing process.

Duane Morris has an active ESG and Sustainability Team to help organizations and individuals plan, respond to, and execute on your Sustainability and ESG questions, planning and initiatives. We would be happy to discussion your proposed project and how this DOE funding prize might apply to you. For more information or if you have any questions about this post, please contact Brad A. Molotsky, Alice Shanahan, Jeff Hamera, Nanette Heide, Jolie-Anne Ansley, Robert Montejo, Seth Cooley or David Amerikaner or the attorney in the firm with whom you in regular contact or the attorney in the firm with whom you are regularly in contact.

April 3, 2023April 3, 2023 by Rebecca Green

ESG and the Growing Interplay with Class Action Lawsuits

The plaintiffs’ class action bar is exceedingly innovative and in constant pursuit of “the next big then” insofar as potential liability is concerned for acts and omissions of Corporate America. Environmental, Social, and Governance – known as “ESG” – each of the verticals within ESG are surely are topics on the mind of leading plaintiffs’ class action litigators. As ESG-related issues evolve and become increasingly more important to corporate stakeholders, class action litigation against companies is inevitable and has already begun to take shape. This blog post reviews the current landscape of litigation risks, and underscores how good corporate compliance programs and corporate citizenship are prerequisites to minimizing risk.

The Class Action Context:

In 2022, the plaintiffs’ class action bar filed, litigated, and settled class actions at a breathtaking pace. The aggregate totals of the top ten class action settlements – in areas as diverse as mass torts, consumer fraud, antitrust, civil rights, securities fraud, privacy, and employment-related claims – reached the highest historical totals in the history of American jurisprudence. Class actions and government enforcement litigation spiked to over $63 billion in settlement totals. As analyzed in our Duane Morris Class Action Review https://blogs.duanemorris.com/classactiondefense/2023/01/04/it-is-here-the-duane-morris-class-action-review-2023/, the totals included $50.32 billion for products liability and mass tort, $8.5 billion for consumer fraud, $3.7 billion for antitrust, $3.25 billion for securities fraud, and $1.3 billion for civil rights.

As “success begets success’ in this litigation space, the plaintiffs’ bar is loaded for bear in 2023, and focused on areas of opportunity for litigation targets. ESG-related areas are a prime area of risk.

The ESG Context

Corporate ESG programs is in a state of constant evolution. Early iterations were heavily focused on corporate social responsibility (or “CSR”), with companies sponsoring initiatives that were intended to benefit their communities. They entailed things like employee volunteering, youth training, and charitable contributions as well as internal programs like recycling and employee affinity groups. These efforts were not particularly controversial.

In recent years, ESG programs have become more extensive and more deeply integrated with companies’ core business strategies, including strategies for avoiding risks, such as those presented by employment discrimination claims, the impacts of climate change, supply chain accountability, and cybersecurity and privacy. Companies and studies have increasingly framed ESG programs as contributing to shareholder value.

As ESG programs become larger and more integrated into a company’s business, so do the risks of attracting attention from regulators and private litigants.

And The Lawsuits Begin From All Quarters:

While class action litigation can emanate from many sources, four areas in particular are of importance in the ESG space.

Shareholders: Lawsuits by shareholders regarding ESG matters are accelerating. Examples include claims that their stock holdings have lost value as a result of false disclosures about issues like sexual harassment allegations involving key executives, cybersecurity incidents, or environmental disasters. Even absent a stock drop, some shareholders have brought successful derivative suits focused on ESG issues. Of recent note, employees of corporations incorporated in Delaware who serve in officer roles may be sued for breach of the duty of oversight in the particular area over which they have responsibility, including oversight over workplace harassment policies. In its ruling https://blogs.duanemorris.com/classactiondefense/2023/01/30/delaware-says-corporate-officers-are-now-subject-to-a-duty-of-oversight-in-the-workplace-harassment-context/ in In Re McDonald’s Corp. Stockholder Derivative Litigation, No. 2021-CV-324 (Del. Ch. Jan. 25, 2023), the Delaware Court of Chancery determined that like directors, officers are subject to oversight claims. The ruling expands the scope of the rule established in the case of In Re Caremark International Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996), which recognized the duty of oversight for directors. The decision will likely result in a flurry of litigation activity by the plaintiffs’ bar, as new cases will be filed alleging that officers in corporations who were responsible for overseeing human resource functions can be held liable for failing to properly oversee investigations of workplace misconduct such as sexual harassment.

Vendors and Business Partners: As companies face increasing demands to address ESG issues in their operations and throughout their supply chains, ESG requirements in commercial contracts are increasing in prevalence. Requirements imposed on vendors, suppliers, and partners – to ensure their operations do not introduce ESG risks (e.g., by using forced or child labor or employing unsustainable environmental practices) are becoming regular staples in a commercial context. In addition, as more companies report greenhouse gas emissions – and may soon be required by the SEC to report on them – they increasingly require companies in their supply chain to provide information about their own emissions. Furthermore, if the SEC’s proposed cybersecurity disclosure rules are enacted, companies also may require increased reporting regarding cybersecurity from vendors and others. These actions – and disclosures – provide fodder for “greenwashing” claims, where consumers claim that company statements about environmental or social aspects of their products are false and misleading. The theories in these class actions are expanding by encompassing allegations involving product statements as well as a company’s general statements about its commitment to sustainability.

State Consumer Protection and Employment Laws: The patchwork quilt of state laws create myriad causes of action for alleged false advertising and other misleading marketing statements. The plaintiffs’ bar also has invoked statutes like the Trafficking Victims Protection Reauthorization Act to bring claims against companies for alleged failures to stop alleged human rights violations in their supply chains. These claims typically allege that the existence of company policies and programs aimed at helping end human rights violations are themselves a basis for liability. In making human capital management disclosures a part of ESG efforts (including whether to disclose numeric metrics or targets based on race or gender), companies may find themselves in a difficult place with respect to potential liability stemming from stated commitments to diversity and inclusion. On the one hand, companies that fail to achieve numeric targets they articulate (e.g., a certain percent or increase in diversity among management) may subject themselves to claims of having overpromised when discussing their future plans. Conversely, employers that achieve such targets may face “reverse discrimination” claims alleging that they abandoned race-based or gender-neutral employment practices to hit numbers set forth in their public statements.

Government Enforcement Litigation: Federal, state and local government regulators have taken multiple actions against companies based on their alleged contributions to climate change or alleged illegal activities. For instance, in 2019, the U.S. Department of Justice investigated auto companies for possible antitrust violations for agreeing with California to adopt emissions standards more restrictive than those established by federal law. While the investigation did not reveal wrongdoing, it underscores the creativity that proponents and opponents of ESG efforts can employ.

Implications For Corporate America:

The creation, content, and implementation of ESG programs carries increasing litigation risks for corporations but it is unlikely that ESG progams will diminish is size or scale in the coming years given increased focus by Fortune 100s and 500s and increased regulation at the federal and state levels.

Sound planning, comprehensive legal compliance, and systematic auditing of ESG programs should be a key focus and process of all entities beginning or continuing their ESG journey. As more and more companies adopt some level of corporative ESG strategy planning, compliance and auditing are some of the key imperatives in this new world of exposure to diminish and limit one’s exposure.

Duane Morris has an active Class Action Team to help organizations respond to the ever increasing need to be proactive to these types of risks. For more information or if you have any questions about this post, please contact Gerald (Jerry) L. Maatman, Jennifer Riley or the attorney in the firm whom you are regularly in contact with. We also have ESG and Sustainability Team to help organizations and individuals plan, respond to, and execute on your Sustainability and ESG planning and initiatives. For more information or if you have any questions about this post, please contact Brad A. Molotsky, David Amerikaner, Sheila Rafferty-Wiggins, Alice Shanahan, Jeff Hamera, Nanette Heide, Joel Ephross, Jolie-Anne Ansley, Robert Montejo, Seth Cooley, or the attorney in the firm with whom you are regularly in contact.

December 14, 2022December 16, 2022 by Duane Morris

New ESG Disclosure Rules: EU Corporate Sustainability Reporting Directive

In April 2021 the European Commission presented a proposal for a Corporate Sustainability Reporting Directive (CSRD) that would amend the current Non-Financial Reporting Directive (NFRD) and form part of the wider EU policy to require companies to publicly disclose information and data around environmental, social affairs and governance matters.

On 28 November 2022, the European Council adopted the CSRD following adoption by the European Parliament on 10 November 2022. The CSRD will come into force 20 days after publication in the EU Official Journal and EU member states will then have 18 months to incorporate it into their national laws.

To read the full text of this blog post by Drew Salvest, Natalie Stewart and Rebecca Green, please visit the Duane Morris London Blog.

June 10, 2022 by Brad A. Molotsky

Data Centers – From the Clouds – Much Ado about ESG!

We had the opportunity to chat with some of the leading owners and builders of data centers space today on our Data Centers Task Force group meeting. Fascinating and fun conversation with Aaron Binkley of Digital Realty and David Hall and David Sitkowski from Clune Construction Company.

Some key take aways from the conversation:

– multiple new entrants into the data center space are putting pressure on rents (upward) with a lot of venture capital funding the new entries

– Increased focus by Owners (and customer/users) on renewable energy with an understanding that the renewable energy is cheaper but NOT Free.

– Energy markets remain a bit volatile for renewable energy with federal tariff on solar panels continuing to negatively impact supply

– Climate related reporting from the EU taxonomy, Singapore and potential SEC proposed rules creating a continued ESG focus by owners and customers in the Date Center space

– Supply chain issues continue to negatively affect delivery times and cost – causing consternation but opportunity as well

– Noting generators are taking in certain locations over 72 weeks for delivery and switch gear breakers taking over 16 months for delivery from the normal 6 months

– Labor Shortages continue in various markets delaying jobs – e.g., Pacific NW on carpentry and Phoenix on electricians and other trades

– Deals continue to increase in size and scale despite increased need for local based service of smaller scale

– Increased cooperating and sharing of work pipeline to enable design and build on time

– increased federal work in the data center site space

– increased interest by customers in LEED and Energy Star certifications but not everywhere

– increased interest in power coming from solar and wind sources both on site and off site through power purchase agreements (e.g., in VA, TX, CA, Illinois and NJ)

– customers and employees continuing to ask about sustainable features in buildings and in power supply and other areas of design

– Communities are beginning to wake up to data centers and in certain locations object to their noise and power consumption, noting the lack of traffic and school impacts given their use

– Water is becoming more and more relevant to the conversation and how water is or is not used in cooling systems (noting – Digital Realty does not use water in its cooling solution but towns where they operate are starting to ask about this resource)

– Permitting for generators which used to be relatively easy to obtain is now starting to get a bit trickier and harder to get on an over the counter baiss given potential air quality issues and diesel for generator issues – resulting in additional time for development permits

– Site Selection – certain jurisdictions with a high amount of data centers are beginning to increase real estate taxes for the data center user/owner which will likely, in turn, have these owners focus on other locations which are not so pricey by way of taxes.

From the Cloud – on balance, labor shortages, supply chain and increased focus by customers on ESG is driving various changes to design and build in the data center space to ensure timely and on budget deliveries. While supply chain issues should clear up in Q4 to Q1 of 23′, the focus on ESG should continue well into the future as more and more customers are adopting GhG reduction targets and more and more owners follow the lead of big industry players like Digital Realty and Prologis.

Duane Morris has an active Data Centers Team as well as an ESG and Sustainability Team to help organizations and individuals plan, respond to, and execute on your data center project and your Sustainability and ESG planning and initiatives. We would be happy to discussion your proposed project with you. For more information or if you have any questions about this post, please contact Brad A. Molotsky, Jeff Hamera, Joel Ephross, Robert Montejos or David Amerikaner or the attorney in the firm with whom you in regular contact.or the attorney in the firm with whom you are regularly in contact.

February 22, 2022 by Brad A. Molotsky

ESG: Sustainability Linked Loans becoming more Commonplace in the Marketplace – Louise Melchor, Esq.

As environmental, social, and governance (“ESG”) initiatives are increasingly implemented by borrowers and lenders, sustainability linked loans provide opportunities for both.

What are Sustainability Linked Loans?

Sustainability linked loans (“SLLs”) are based on the Sustainability Linked Loan Principles developed by the LMA, APLMA and LSTA.[1] In SLLs, a borrower, together with its lender group, determine and set certain sustainability performance targets (“SPTs”) for the borrower to achieve, to be measured by key performance indicators (“KPIs”). Independent organizations, including the Sustainability Accounting Standards Board (“SASB”), provide guidance on the ESG metrics most relevant to certain industry sectors. Once agreed between the borrower and lenders, the KPI/SPT benchmarks are then integrated into margin adjustments to the interest rate or commitment fee for the credit facility (i.e., by achieving the KPIs, the interest rate is reduced). The credit facility documentation will also include reporting requirements for independent, external verification of the borrower’s performance level with respect to each SPT for each KPI, at least annually.

Borrower Benefits

Many companies have already undertaken ESG data collection and reporting, and more will likely do so as the SEC expands its focus on ESG disclosures and as more investors demand this information. While the above noted third party verification and reporting costs are inherent to SLLs, borrowers that are already engaging in these efforts may find they can efficiently obtain an additional economic incentive through SLL financing. Additionally, SLLs can be part of a comprehensive alignment with the borrower’s ESG strategies and policies.

Lender Benefits

Lenders are undertaking ESG initiatives as well, in which SLLs may be a component. And, regulatory agencies for certain lenders are communicating their plans to provide guidance on climate-related risks, and integrate these principles into their supervisory expectations.[2] Further, studies have shown that companies (e.g., SLL borrowers) that identify and manage their ESG risks have improved financial performance.[3] So, financing SLLs can benefit lenders across policy, regulatory and business aspects.

Current State of the Market and Next Steps

Although SLLs are a relatively new financing concept, particularly in the U.S., the volume of SLLs globally quadrupled in issuance between 2020 and 2021.[4] As ESG momentum continues to build in the U.S., the volume of SLLs is likewise expected to continue to grow. Currently, terms are negotiated on a transaction specific basis, and market provisions have not been added to the LSTA’s suite of documentation. But, as SLLs become more common, the market is likely to coalesce on terms. Stay tuned for more updates on SLLs and other trending sustainable finance products, including green bonds and commercial property assessed clean energy (C-PACE) financing.

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. For more information, or if you have any questions about this post, please contact Louise Melchor, the author or Brad A. Molotsky, Nanette Heide, Seth Cooley, David Amerikaner, Jolie-Anne Ansley, Hari Kumar or the attorney in the firm with whom you are regularly in contact.

[1] Available at https://www.lsta.org/content/sustainability-linked-loan-principles-sllp/

[2] See https://www.occ.gov/news-issuances/bulletins/2021/bulletin-2021-62.html and https://www.dfs.ny.gov/reports_and_publications/press_releases/pr202111032

[3] https://www.msci.com/esg-101-what-is-esg/esg-and-performance

[4] See https://about.bnef.com/blog/1h-2022-sustainable-finance-market-outlook/

December 19, 2021 by Brad A. Molotsky

ESG: – New York City Council Passes a Natural Gas Ban for New Buildings

Last week, New York City’s city council approved a ban on natural gas as a fuel source in newly constructed buildings.

Per reporting from NPR, nearly 40% of carbon emissions in the country — and more than 50% of New York City’s emissions — come from buildings.

The new natural gas ban in newly constructed buildings, by a vote of 40-7, applies to buildings that are up to 7-stories in height by the end of 2023; buildings that are taller than 7-stories have until 2027 to comply.

The bill contains several exceptions, including hospitals, laundromats and crematoriums.

As noted by NPR, the legislation also requires that the Mayor’s Office of Long-Term Planning and Sustainability conduct 2 long term studies. The first will examine the use of heat pump technology and the second is a study on the impact of the new bill on the city’s electrical grid.

Not surprising there has been massive pushback from the natural gas industry against these type of natural gas bans. This pushback, however, has not stopped cities around the country from proceeding with various types of natural gas ban efforts. By way of example, at least 42 cities in California have acted to limit natural gas in new buildings, and Salt Lake City, Utah and Denver, Colorado have also made plans to move toward required electrification in buildings.

Moreover, in Ithaca, New York, the city committed to ending the use of natural gas in all buildings — not just new ones.

Passing this type of natural gas ban for new buildings in New York City, the largest city in the country, marks a significant move for other cities trying to move similar legislation to attempt to cut down carbon emissions in the fight against climate change, joining cities like San Jose and San Francisco that have made similar commitments to reduce emissions.

The efforts to ban natural gas in new buildings in New York City is also being considered on a state wide basis in the New York Senate and House. Senator Brian Kavanagh (D) and Assembly Member Emily Gallagher (D) are working on legislation that would require any buildings constructed in New York after 2023 to be entirely powered by electricity. If their legislation passes, New York would become the first state to ban natural gas in new buildings on a state-wide level.

Triple Bottom Line – By passing this type of natural gas ban in new buildings, focusing on buildings as one of the largest emitters of green house gases, New York has provided other cities with a leader to attempt to follow if they are so inclined. As noted, California has been attempting this type of ban on a city by city basis and has passed 42 such bans throughout the state. If New York state follows the NYC lead it will become the first state to enact such a ban and would mark a bit of a watershed moment in the fight against greenhouse gas emissions showing that buildings can indeed be constructed in this manner if reduced emissions are one of the key goals attempting to be achieved by the builder/owner or the legislature.

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. For more information, or if you have any questions about this post, please contact Brad A. Molotsky, Nanette Heide, Seth Cooley, David Amerikaner, Jolie-Anne Ansley, Hari Kumar or the attorney in the firm with whom you are regularly in contact.

November 15, 2021 by Drew D. Salvest

The HM Treasury’s Roadmap to Sustainable Investing: Overview and Key Considerations for Businesses

On 18 October 2021, the HM Treasury published a policy paper titled “Greening Finance: A Roadmap to Sustainable Investing” (the Roadmap) that sets out the government’s long-term strategy to green the financial sector.

The Roadmap outlines a three-phase strategy to achieve this goal. The first phase is “informing” where sellers of investment products, financial services firms and corporates will be required to report information on sustainability. The second phase is “action” where this information is mainstreamed into business and financial decisions. The third is the “shift” phase; ensuring financial flows across the economy shift to align with the UK’s net zero commitment.

The Roadmap sets out the government’s strategy to achieve phase 1 through economy-wide Sustainability Disclosure Requirements (SDR), the UK Green Taxonomy and Investor Stewardship. Each of these are outlined below.

1. SDR: what will businesses have to report on?

The SDR’s aim is to combine existing and new sustainability disclosure requirements in one framework for corporates, asset managers / owners and creators of investment products. The framework will be implemented through legislation, with sector-specific requirements being determined by government departments and regulators. The Roadmap emphasises that these new requirements will go further than existing disclosure requirements (such as those required by the Task Force on Climate-Related Financial Disclosures) by requiring reporting on environmental impact. SDR will also go beyond the FCA’s existing ESG framework by requiring asset managers / owners and creators of investment products to substantiate ESG claims in a way that is both comparable and accessible. SDR will also require disclosure with reference to the UK’s Green Taxonomy. Certain firms will have to publish transition plans, detailing how they intend to align with the government’s net zero goal by 2050.

Certain UK-registered companies and listed issuers, including financial services firms, will need to disclose information about how they identify, assess and manage sustainability factors arising from their global operations in their Annual Reports. Financial services firms that manage or administer money for investors will need to disclose the sustainability-related information that clients and end-consumers need to make informed decisions about their investments. Investment product firms will need to disclose, at product level, the sustainability-related information that consumers need to make informed decisions about their investments.

2. UK Green Taxonomy

The lack of commonly accepted definitions makes it difficult for companies and investors to clearly understand the environmental impact of their decisions and can lead to issues such as greenwashing. To address this, the government is implementing the UK Green Taxonomy (the Taxonomy) that outlines criteria that specific economic activities must meet to be considered environmentally sustainable and “Taxonomy-aligned”.

Reporting against the Taxonomy will form part of SDR. Certain companies will be required to disclose the proportion of their activities that are Taxonomy-aligned. Providers of investment funds and creators of investment products will have to do the same for the assets that they invest in and products they create.

The Taxonomy has six objectives: Climate change mitigation, climate change adaptation, sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention and control and protection and restoration of biodiversity and ecosystems. Each of the environmental objectives will be underpinned by a set of standards known as Technical Screening Criteria (TSC). To be considered Taxonomy-aligned, an activity must meet three tests. It must make a substantial contribution to one of the six environmental objectives, do no significant harm to the other objectives (this aims to ensure that activities which support one objective do not have a significant adverse impact on another) and meet a set of minimum safeguards: these are minimum standards for doing business, constituting alignment with the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights.

Although Taxonomy-alignment will be determined by reported data rather than projections, the Taxonomy also recognises companies that are working to meet environmental objectives in the future. For example, due to technological constraints, some economic activities cannot currently be conducted in a way which is aligned with net zero-ambitions. For a number of these activities, the TSCs will set the threshold for Taxonomy alignment at the “best-in-sector” emissions level. These are known as “transitional activities”. Secondly, some companies will report on the proportion of their capital expenditure that is Taxonomy-aligned. This will enable these companies to demonstrate their investment in producing green activities in the future.

3. Investor Stewardship in Green Finance

The Roadmap outlines the government’s expectation that the pensions and investment sectors should seek to integrate ESG considerations into investment decision-making, monitoring and engagement strategies, escalation and collaboration (with other investors) and voting practices. For example, when exercising their shareholder rights, being ready to vote against directors, corporate actions or other resolutions.

Next Steps

The key dates and developments to look out for are:

November 2021 – discussion papers on SDR disclosures, consumer-facing product-level SDR disclosures and the sustainable investment labelling regime
Q1 2022 – consultation on two of the environmental objectives under the Taxonomy (climate change mitigation and climate change adaptation)
2022 – consultations on SDR disclosures, consumer-facing product-level SDR disclosures and the sustainable investment labelling regime
End of 2022 – legislation on draft TSCs for climate change mitigation and climate change adaptation
End of 2022 – government expects pensions and investment sector organisations to have published a high-quality net zero transition plan
Q1 2023 – government to consult on expansion of TSCs and standards for remaining four environmental objectives under the Taxonomy
End of 2023 – government to assess progress on its expectations for stewardship within the UK pensions and investment sectors

Key Considerations for Businesses

Although companies will have adequate notice before becoming subject to disclosure requirements, in order to be prepared companies are advised to review existing disclosure practices and determine the additional information required to be disclosed and the processes in place for gathering that additional information. Companies are also advised to keep up-to-date with the key consultation and implementation dates outlined above.

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.

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. For more information, please contact Brad A. Molotsky, David Amerikaner, Nanette Heide, Darrick Mix, Vijay Bange, Steve Nichol, or the attorney in the firm with whom you are regularly in contact.

October 29, 2021 by Brad A. Molotsky

ESG – NJ BPU awards 165 MW of Community Solar in Yr 2 of Pilot Program

Earlier this week, on October 28, 2021, the New Jersey Board of Public Utilities (“BPU”) approved 105 applications under New Jersey’s Community Solar Energy Pilot Program. The applications and awards will create 165 megawatts of clean energy – enough energy to power approximately 33,000 homes – available to low-to-moderate income and historically underserved communities. Year 2 of the pilot program represented a significant increase in the amount of power generated (i.e., from 78 MW to 165 MW) and the number of applications seeking to install community solar.

According to Governor Murphy, “our Community Solar Pilot Program is a national model for clean energy equity and environmental justice, This program not only makes solar available to those in historically underserved communities, but also will spur economic growth and create career opportunities for a diverse, more inclusive workforce. Community solar is a key pillar in our commitment to transition New Jersey away from harmful emissions and towards 100% clean energy by 2050.”

A community solar project is a solar array whose output is divided between multiple homes or businesses that want to use renewable energy but don’t have a solar array on-site.

Community solar programs aim to create a more equitable solar market.

According to NJ BIZ, the projects will each allocate a minimum of 51% of their capacity to low- and moderate-income participants and will all be located on landfills, brownfields or rooftops.

Though 105 projects were approved, the NJBPU received 412 applications, representing almost 804 MW, for the second year of the pilot program.

In the pilot program’s first year, the BPU received a total of 252 applications representing more than 650 MW of total capacity, and approved 45 applications providing almost 78 MW in solar energy capacity.

Earlier this month, the BPU announced that it will be moving forward to make the Community Solar Pilot Program permanent.

Triple Bottom Line – New Jersey continues to be a factor in the US solar market place. Making the community solar pilot program a permanent program will continue to position the state as a leader in solar deployment and per capita renewable energy use. The power creation represented by the program will likely solidify existing solar jobs and create new ones to service the demand for installations and service. Low and Moderate income families will benefit by the cheaper cost of energy given the renewable nature of the deployment. As the program moves to a permanent status we will continue to keep an eye on the regulations and report back with our findings.

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. For more information, or if you have any questions about this post, please contact Brad A. Molotsky, Nanette Heide, Jolie-Anne S. Ansley, David Amerikaner, Seth Cooley, Vijay Bange, Stephen Nichol, or the attorney in the firm with whom you are regularly in contact.

September 28, 2021 by Brad A. Molotsky

ESG: Boston University Joins the Growing List of Universities Divesting from Fossil Fuels

Earlier this week, Boston University’s Board of Trustees announced that they had decided to divest its endowment from fossil fuels.

According to an open letter dated Sept. 23 and posted on the school’s website, President Robert Brown said the board made its decision earlier that week.

As of Sept. 22, the school will no longer commit direct investments in companies that extract fossil fuels. It will also divest from current, direct investments in fossil fuel extractors and will not commit to any new investments in dedicated fossil-fuel focused products in any asset class.

However, the school has private fossil fuel investments that will likely take more than a decade to wind down per reporting from Justin Mitchell.

The release also indicated that the endowment will seek out investment managers that can provide opportunities in renewable energy sources and “fossil-fuel-free products.”

Brown’s letter also stated that only “a very small fraction” of the university’s endowment is invested in “fossil fuel producers and extractors,” rendering the move to divest “economically inconsequential.”

According to Mr. Mitchell, the endowment is valued at more than $3 billion, according to Boston University’s website and it had approximately $2.4 billion at the end of the 2020 fiscal year, according to an annual report from the National Association of College and University Business Officers.

Boston University is the latest prominent university endowment to announce a divestment from fossil fuels, joining the University of California, Brown University, Cornell University, Georgetown University and Harvard University, in committing to this type of divestiture program.

Triple Bottom Line – BU has joined the growing chorus of major institutions that have begun divesting their endowments of fossil fuel investments. While BU’s announcement is not individually overly statistically significant numerically, the number of major higher educational institutions is continuing to grow and gain momentum. As more institutions of higher education join this chorus, it is likely that fossil fuel divestiture will become more than a few one offs and has the potential to become a trend in the ESG space.

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. For more information, or if you have any questions about this post, please contact Brad A. Molotsky, Nanette Heide, Darrick Mix, Jolie-Anne S. Ansley, David Amerikaner, Edward Cramp, Katherine D. Brody, Vijay Bange, Stephen Nichol, or the attorney in the firm with whom you are regularly in contact.

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.