Sustainability – Sustainability, Resiliency and Risk Mitigation

March 27, 2024 by Brad A. Molotsky

Sustainability and Real Estate – Thoughts from the I-Global Conference 3-26-24

We had the pleasure or participating in the I-Global LP and GP Conference yesterday in New York City. In a fast moving, lots of ground covered panel headlined by Andrea Pinabell – RE Tech, Uma Moriarity – Center Square, John Forester – RMR Group, Hyon Rah – DWS and Randy Hoff – PWC which I had the honor of moderating, the discussion focused on Sustainability, ESG and Real Estate investment.

The panel covered how each of their organizations have set goals and targets for sustainability including some setting net zero 2024 goals (wow), operational efficiency and energy usage reduction goals, water and recycling goals, return on investment goals and how sustainability is used as part of the various lenses to evaluate and determine which assets to purchase and invest in and how resiliency and weather impacts like hurricanes, floods, and wild fires are relevant to decisions being made by investment committees on where to invest and where to divest assets.

We touched on the advent of Energy Star, the free tool from the EPA that has been around for decades and keeps getting better with more in depth features and analysis tools, and how it can be used to measure building performance within a market segment as well as across various market segments given that the data within the tool is normalized for weather and temperature.

The panel defined and discussed Scope 1 (the energy one consumes and the greenhouse gas (“ghg”) impact of it on site), Scope 2 (the energy one brings on site and the ghg impact from a utility) and Scope 3 (the ghg impact from one’s supply chain and one’s own travel) and why it is important to be measuring and monitoring these items, even though the final SEC Rules on Climate Disclosure did not include Scope 3 reporting, noting that the California Climate bills that were passed in 2023, do indeed include Scope 3 measuring and reporting.

We touched on the challenge of data integrity and data management when multiple geographies and product types are owned and operated but that these challenges can be met and how their organizations were indeed including sustainability features within their due diligence processes in purchasing properties and in developing them let alone operating them within their various portfolios.

Building performance on energy, water and waste within the 48 cities, 3 states and 2 counties requiring such monitoring, measuring and reporting was also reviewed as was the new Local Law 97 type mandates requiring greenhouse gas measuring and reporting and a fining regime for non-compliance in various cities like Boston, New York, Washington DC, Denver, San Francisco, etc. were continuing to appear and evolve and how such trends are being tracked by the Institute for Market Transformation (IMT) on line with an easy to see tool and map.

Lastly, we spoke of the various changes to the final rules in the SEC’s Rules on Climate Disclosure which are now the law, but which have been granted a temporary stay by the 5th Circuit, delaying their implementation but not impacting various public companies from complying anyway given the likelihood that the rules will be required at some point in the near future.

We also learned that the panelists were currently enjoying Columbia University’s Energy podcast, Monday Morning Quarterback, All In, How I Built This and the Energy Gang as their guilty pleasure ESG or other podcasts.

Green Spouts: The picture that was painted by the panelists, despite news headlines in certain business publications to the contrary, is that sustainability, weather incidents, resiliency and risk mitigation are topics that are agnostic to politics and political winds and that very large real estate companies are continuing to focus on and expand their ambit of goal setting, measuring, monitoring and acting on various energy, water, waste and social and governance issues where they believe they can obtain an appropriate return or where they are otherwise being required by law to report their results.

Duane Morris has an active 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, please contact Brad A. Molotsky, David Amerikaner, Joseph West, Sharon Caffrey, Sheila Rafferty-Wiggins, Alice Shanahan, Jeff Hamera, Nanette Heide, Joel Ephross, Jolie-Anne Ansley, Robert Montejo or the attorney in the firm with whom you are regularly in contact.

September 18, 2023October 11, 2023 by Brad A. Molotsky

California Jumps the Line ahead of the SEC and enacts two significant Climate Disclosure Bills

Last week, the California legislature passed and, over the weekend (on October 9, 2023) Governor Newsom signed, two climate disclosure bills which focus on the financial risk of greenhouse gas emissions. Full text of the bills can be found at SB 261 and SB 253.

The bills will require that companies doing business in California will be required to state and certify their scope 1, 2 and 3 greenhouse gas emissions and to state and certify their climate related financial risks.

Given that many US companies and many EU and UK companies that do business in the US also transact in California, these laws will have a meaningful impact on many public and non-public companies alike irrespective of the pace or lack thereof from the SEC on its own set of federal climate disclosure obligations.

Bill 261 – Under SB 261, companies with annual revenues of more than $500 Million Dollars that do business in California will now be required to compile and issue a biennial climate-related financial risk report, with the first due date being January 1, 2026.

Bill Text – SB-261 Greenhouse gases: climate-related financial risk. (ca.gov)

“Climate related financial risk” under SB 261 is defined as a “material risk of harm to immediate and long-term financial outcomes due to physical and transaction risks, including but not limited to, risks to corporate operations, provision of goods and services, supply chain, employee health and safety, capital and financial investments, institutional investments, financial standing of loan receipts and borrowers, shareholder value, consumer demand and financial markets and economic health.” Wow, that is a pretty wide ambit of what risks will fall within the definition of climate related financial risks!

SB 261 requires that the reports required under the Bill must be prepared in accordance with the Task Force on Climate Related Financial Disclosures (also referred to as TCFD) reporting framework. Reports that are prepared under the International Financial Reporting Standards -Sustainability Disclosure Standards (or ISSB) will also be acceptable. Failure to report under the Bill will be subject to an annual fine of up to $50,000 per year.

Bill 253 – SB 253, also known as the Climate Corporate Data Accountability Act, applies to companies that do business in California and have total annual revenues in excess of $1 Billion. The reporting requirements will not be applicable until January 2026, once the California Air Resources Board (CARB) has adopted implementing regulations, which must occur by January 1, 2025.
CARB’s implementing regulations will likely provide the key details of the reporting process, including the following:
Bill Text – SB-253 Climate Corporate Data Accountability Act. (ca.gov)

Scope 1 and Scope 2 Emissions. Beginning in January 2026, reporting entities must annually publicly disclose their scope 1 and scope 2 GHG emissions for the prior fiscal year. The bill defines Scope 1 emissions as “all direct greenhouse gas emissions that stem from sources that a reporting entity owns or directly controls, regardless of location, including, but not limited to, fuel combustion activities.” Scope 2 emissions are defined as “indirect greenhouse gas emissions from consumed electricity, steam, heating, or cooling purchased or acquired by a reporting entity, regardless of location.” Most publicly traded companies have begun some level if not a very detailed level of Scope 1 and 2 tracking, with many actually already reporting these metrics.

Scope 3 Emissions. Beginning in 2027, reporting entities will also be required to annually disclose their scope 3 emissions for the prior fiscal year. Scope 3 emissions include “indirect upstream and downstream greenhouse gas emissions, other than scope 2 emissions, from sources that the reporting entity does not own or directly control,” which may include “purchased goods and services, business travel, employee commutes, and process and use of sold products.” Many in the industry are concerned about how they are going to get their supply chain to measure and report in a meaningful way data that will become the reporting entities’ Scope 3 emissions.

Annual Fees. Reporting entities will be required to pay an annual fee to CARB upon filing their annual disclosures. These fees are supposed to be used to fund CARB’s oversight of the program.

Administrative Penalties. Reporting entities that fail to timely file their annual disclosures will be subject to administrative penalties of up to $500,000 per reporting year.

Reporting Standards. Reporting entities must measure and report their GHG emissions in conformance with the Greenhouse Gas Protocol, a set of reporting standards developed by the World Resources Institute (WRI) and the World Business Council for Sustainable Development (WBC). Reporting entities must also engage an independent third-party assurance provider to audit their scope 1 and 2 emissions beginning in 2026, and their scope 3 emissions beginning in 2030.

Green Sprouts – SB 253 and SB 261 make California the first state to require GHG emissions and climate risk reporting from large companies. The bills, which are now law, jump the SEC’s proposed climate disclosure rules which have not yet been finalized or released after two publicly disclosed delays in implementation.

Given the number of companies that “do business in California”, irrespective of when and how the SEC makes its climate disclosure rules final and if it does this fall, California has once again cemented its place of relevance in the climate change arena and has mandated movement in this space by larger companies doing business in California. It remains to be seen if other states follow their lead but surely New York, Washington, D.C., Massachusetts and others will take a very hard look at proceeding down this path.

Duane Morris has an active 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, please contact Brad A. Molotsky, David Amerikaner, Joseph West, Sharon Caffrey, 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.

July 19, 2023 by Drew D. Salvest

ISSB issues global sustainability and climate-related standards

In June 2023, the International Sustainability Standards Board (the ISSB) published its first set of global sustainability and climate-related disclosure standards for investors[1]. The ISSB was established in November 2021 at the UN Climate Change Conference (COP26) as a sister board to the International Accounting Standards Board (IASB) and is responsible for developing IFRS sustainability standards to better inform investment decisions and meet the needs of the capital markets.

Although IFRS is not used in the US, the standards are likely to influence the Securities and Exchange Commission’s (SEC) sustainability reporting requirements that are currently being developed. IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information (IFRS S1) and IFRS S2 Climate-related Disclosures (IFRS S2) have been drafted in response to users of financial reports calling for information to be presented in a comparable, verifiable and consistent way.

Overview:

IFRS S1 is a set of sustainability-related financial disclosures that prescribe how companies should report information about their sustainability-related risks and opportunities in a way that is useful to users of financial reports in making investment decisions. The standards require companies to disclose and report on sustainability-related risks and opportunities over the short, medium and long term to investors. IFRS S1 requires companies to disclosure information regarding sustainability targets, governance, strategy and risk management.

IFRS S2 is a set of climate-related disclosures that have been developed to provide information to investors about a company’s climate-related risks and opportunities. IFRS S2 incorporates recommendations provided by the Task Force on Climate-related Financial Disclosures (TCFD). IFRS S2 requires a company to disclose its Scope 1, Scope 2 and Scope 3 greenhouse gas emissions.

Next Steps:

IFRS S1 and IFRS S2 are effective for annual reporting periods beginning on or after 1 January 2024. The standards are not mandatory and it is up to individual countries to decide whether listed companies are required to apply them. It is expected that the standards will be voluntarily adopted as non-financial reporting on sustainability becomes market standard. The UK has indicated its intent to incorporate the ISSB standards, however the EU and US plan to introduce their own separate disclosure requirements. European companies are subject to disclosure requirements with the European Sustainability Reporting Standards (ESRS) and the SEC’s climate-related disclosure rules were proposed in 2022 and are due to be issued later this year. It remains to be seen how the different reporting obligations will work together to avoid duplication and inconsistency. The ISSB has been working with EFRAG (European Financial Reporting Advisory Group) on the specific reporting requirements of the CSRD to ensure there is a level of consistency between the standards. Guidance is expected to be issued by the ISSB in order to avoid duplication between the different standards in the EU. The ISSB has also established the Transition Implementation Group to work with stakeholders to facilitate implementation of the standards and address concerns. The International Organization of Securities Commissions (IOSCO) also intends to independently review the ISSB standards.

If you have any questions about this post, please contact Drew D. Salvest, Natalie A. Stewart or Rebecca Green.

Duane Morris has an active 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, 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.

[1] https://www.ifrs.org/news-and-events/news/2023/06/issb-issues-ifrs-s1-ifrs-s2/

April 27, 2023 by Brad A. Molotsky

Plastic Bag Bans – Do They Work?

According to an article in the Philadelphia Inquirer per a report issued by the City of Philadelphia (the “City”), the City’s 2019 plastic bag ban has resulted in a significant reduction in the use of plastic bags – i.e., the equivalent of filling Philadelphia City Hall with plastic bags every 8 months which would be approximately 200 Million less plastic bags. The City’s report – “Evaluating the Ban: Philadelphia’s Plastic Bag Ban and Changes in Bag Usage in the City” (the “Report”) focused on 2021 to 2022, was conducted by the University of Pittsburgh and Swarthmore College and, concluded that the ban significantly reduced plastic bag use in the City.

Click on this link for a copy of the Report. extension://elhekieabhbkpmcefcoobjddigjcaadp/https://www.phila.gov/media/20230426164234/PlasticBagBanReport-1.pdf#:~:text=We%20used%20a%20difference-in-difference%20approach%20to%20estimate%20the,clear%20boundary%20between%20the%20regulated%20and%20unregulated%20areas.

The City’s ban was passed by City Council in 2019 and took effect on July 1, 2021. It prohibits retailer from providing single use plastic bags and paper bags not made of at least 40% recycled material.

Per the Inquirer, 16 other municipalities in Pennsylvania have some sort of plastic bag ban, including Cheltenham, Radnor, Haverford, Media and Pittsburgh. Cheltenham’s ordinance was recently adopted earlier this week and regulates single use plastic bags, including restaurants’ use of such bags.

The Report concluded that in each category improvement was shown in both the City and the suburbs by way of reusable bag use and reduction of plastic bag use (i.e., proportion using any plastic bag (down), proportion using any paper bag (up) , proportion using any recycled bag (up), proportion using no bag (up), number of plastic bags used per customer (down), number of paper bags used per customer (up) and number of reusable bags used per customer (up)).

As hoped for, the ban resulted in a 53% reduction in the likelihood of a consumer using a plastic bag.

Across the bridge in New Jersey, the State enacted the Single Use Waste Reduction Act in May, 2022 which banned plastic bags and foam food containers and built off of an earlier plastic straw ban which went into effect in 2021. Bags in NJ used to wrap uncooked meat, fish or poultry; bags used to package loose items; and bags used to carry live animals are all exempt from the ban. Residents continue to be frustrated, per recent polling, with the inclusion of a ban on paper bags which are not permitted to be handed out or sold at big box stores and grocery stores larger than 2,500 feet in size. The NJ ban also includes carry out and to go styrofoam cups, plates and to go containers .

Take Aways – it appears pretty clear that behavior can be changed via regulation and that the ban on the use of single use plastic bags and similar products is, in fact, reducing the among of these bags in the waste stream and in common usage without a real negative effect other than some convenience by consumers. Like many things these days, not all municipalities or States will pursue this avenue as a means to reduce dependence on plastics which tend to find their way into our water ways and waste streams, but those that do pass such bans are seeing a marked decrease in the use of these products.

Duane Morris has an active 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.

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.

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.

April 23, 2021 by David Amerikaner

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

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

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

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

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

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

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

A recording of the conversation is available here.

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

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

April 22, 2021April 23, 2021 by David Amerikaner

Renewable Energy Legislation: Pathways to 100% Clean Energy

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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