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.

 

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/

 

 

 

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.

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.

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.

 

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.

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.

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.

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.

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, David Amerikaner, Nanette Heide, Darrick Mix, Michael Schwamm, or the attorney in the firm with whom you are regularly in contact.

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. 

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), Nanette Heide, Darrick Mix, Michael Schwamm, David Amerikaner or the attorney in the firm with whom you are regularly in contact.

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The opinions expressed on this blog are those of the author and are not to be construed as legal advice.

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