Thank you to Jonathan Schaefer for this post. Jon focuses his practice on environmental compliance counseling, occupational health and safety, permitting, site remediation, and litigation related to federal and state regulatory programs.

Growing evidence suggests that corporate focus on ESG—Environmental, Social, and Corporate Governance—may offer short- and long-term advantages to both companies and investors. These advantages are in addition to and apart from the residual benefits to society-at-large that may be created by a company with a strong ESG performance.

While some may view ESG as a set of factors used solely by socially conscious investors to screen potential investments or environmentalists to pressure a company into changing its operations, ESG is becoming an increasingly mainstream set of criteria. Investors are starting to focus on ESG to forecast and manage risks, and corporate leaders are looking to ESG for marketing and production efficiency.

What is ESG?

ESG stands for Environmental, Social, and Corporate Governance. The term refers to the three central factors in measuring the sustainability and societal impact of an investment in a company. For many, the term ESG brings to mind environmental issues like sustainability, climate change, and resource scarcity. These issues form an important element of ESG, but ESG means so much more. The environmental pillar of ESG looks at how a company performs as a steward of the environment. The social pillar examines how a company manages its labor practices, talent, product safety, data privacy, and relationships in its local communities. The governance pillar deals with a company’s leadership, executive and board compensation, internal audits and controls, anti-corruption, and shareholder rights.

ESG criteria may help to better determine the future financial performance of companies by balancing risk and return in the context of how a company’s business handles or interacts with these environmental, social, and corporate governance issues.

Recent Federal Activity

Despite this increased focus, some may still believe that ESG is not mainstream enough to justify spending limited corporate time and resources on it. For companies that are subject to regulation by the U.S. Securities and Exchange Commission (SEC), that perception may be changing. The SEC issued guidance in 2010 advising companies to disclose climate change-related developments that are material to their businesses. But that guidance does not carry the force of law, and it gives companies leeway to decide what is and is not material. The disclosures can either paint a rosy picture (when a company is likely to save money by switching to renewable energy) or a gloomy one (when a company has operations in flood zones that are facing rising waters). Currently, companies also do not have to reveal any quantitative data about their greenhouse gas emissions to the SEC.

However, the SEC recently announced that it would increase scrutiny of how thoroughly companies evaluate and disclose ESG risks, specifically climate change, and the impacts such risks may have on operations. The SEC’s new Climate and ESG Task Force will seek to uncover wrongdoing by looking for gaps or misstatements in a company’s reporting about climate risks under current rules. In addition, the Task Force will look for potential disclosure and compliance problems concerning the ESG strategies of investment advisers and funds.

In addition to creation of the Task Force, both the Acting Chair of the SEC and President Biden’s nominee to chair the SEC have signaled that establishing a mandatory, comprehensive framework for public company reporting of ESG issues could be forthcoming.

While we await the SEC’s proposed rules regarding mandatory climate change disclosures (signaled to be coming as soon as next Monday, March 21), the SEC has been digging in to company filings to scrutinize how, if at all, its registrants are addressing climate change. As we previously reported, the SEC took a number of actions last year to suggest that there would be increased attention, and perhaps enforcement, related to the depth of a company’s climate change disclosures. True to its word, the past year has seen an increase in SEC comment letters focused on climate change and the scope of disclosures being made under existing regulations, as well as the SEC’s 12-year-old guidance on disclosures related to climate change.

In September of last year, the SEC released a sample comment letter to demonstrate the types of inquiries the SEC might make if it was not satisfied with a company’s climate change disclosures. The SEC has followed up by issuing comment letters to companies in line with the sample that was released. A selection of the types of inquiries seen in the comment letters are as follows:

  • We note that you provide more expansive disclosure in your corporate social responsibility (CSR) report than you provided in your SEC filings. Please advise us what consideration you gave to providing the same type of climate-related disclosure in your SEC filings as you provided in your CSR report.
  • In your CSR report, you state that you are committed to lowering the total amount of energy that you consume in your operations and reducing your greenhouse gas emissions. Please revise your disclosure to identify any material past and/or future capital expenditures for climate-related projects related to these initiatives. If material, please quantify these expenditures.
  • Disclose the material effects of transition risks related to climate change that may affect your business, financial condition, and results of operations, such as policy and regulatory changes that could impose operational and compliance burdens, market trends that may alter business opportunities, credit risks, or technological changes.
  • We note the disclosure in your annual report and proxy statement about enhancements you made during 2020 and 2021 to your environmental initiatives. Please quantify any material capital expenditures or compliance costs related to these initiatives.
  • To the extent material, discuss the indirect consequences of climate-related regulation or business trends, such as the following:
    • decreased demand for goods and services that produce significant greenhouse gas emissions or are related to carbon-based energy sources;
    • increased demand for goods and services that result in lower emissions than competing products;
    • increased competition to develop innovative new products and services that result in lower emissions; and
    • any anticipated reputational risks resulting from operations or products that produce material greenhouse gas emissions
  • If material, discuss the significant physical effects of climate change on your operations and results. This disclosure may include quantification of material weather-related damages to your property or operations and any weather-related impacts on the cost or availability of insurance.

The increase in comment letters is one of the many ways we expect to see the SEC continue its focus on climate change, and may just be the tip of the iceberg with the potential for mandatory climate change disclosure rules on the horizon.

Last week, Jeff kicked off our 2022 outlook for manufacturers, covering corporate compliance and litigation. This week, I am turning to the environmental, health, and safety issues that may occupy the minds and the time of manufacturers in 2022.

1. Emerging Contaminants

We have been talking about per- and polyfluoroalkyl substances (PFAS) for so long now they hardly seem to qualify as “emerging.” But this year, EPA is expected to take a number of specific actions that will directly impact manufacturers. At the end of last year, EPA issued its PFAS Strategic Roadmap, outlining its action plan for PFAS through 2024. Notably, the Roadmap begins by classifying PFAS EPA’s approach into three directives: Research, Restrict, and Remediate.

In 2022, EPA aims to greatly expand monitoring of public drinking water supplies for PFAS. It also intends propose a rule to establish national primary drinking water regulations for two of the main PFAS compounds—PFOA and PFOS. To use an often-repeated phrase, when you look for PFAS compounds, you find them. This increased sampling, likely detection, and ultimate regulation of PFAS in public water supplies will likely lead to further legal action, as water suppliers and regulators alike look for the parties responsible for the PFAS they are almost certain to find when they start looking.

EPA is also expected to use Clean Water Act wastewater discharge permits as a way to reduce PFAS discharges. In 2022, EPA plans to restrict PFAS discharges from certain industrial categories—organic chemicals plastics, and synthetic fibers; metal finishing; and electroplating— as well as to study the potential for a number of other industries to contribute PFAS to the nation’s waterways through their discharges.

EPA has long talked about designating PFOA and PFOS (and potentially other PFAS compounds) as hazardous substances under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA). 2022 may be the year. EPA has committed to proposing that designation for PFOA and PFOS in 2022, with a final rule coming in 2023. It also plans to undertake formal efforts to determine whether other PFAS compounds should share this designation. The “hazardous substances” designation will allow EPA greater authority to seek information on, and require cleanup of, PFAS, and it will also open PFAS contamination up to the wild world of Superfund litigation.

We could devote the rest of this post to the potential for PFAS-related developments in 2022, but alas, there are other things we need to keep our eye on as well. But it is important to note that EPA is planning actions to further regulate PFAS across the board—under the programs listed above as well as the Toxic Substances Control Act, Clean Air Act, and others. And this is to say nothing of proposed state actions related to PFAS, which we also expect to heat up in 2022.

Contrary to what you might think based on the content of this post so far, PFAS is not the only emerging contaminant on our radar. Another one to watch in 2022 is microplastics. Microplastics are exactly what they sound like—tiny, often microscopic particles of plastic that can either be directly released into the environment or formed as a result of breakdown of larger plastics. California has already started down the road of developing regulations for microplastics, even while the scientific community still works to determine the potential human health and environmental impacts associated with them. Notably, California is working towards developing analytical testing methods for microplastics in 2022, which may kick off a wave of studies to determine how pervasive they truly are—and what to do about it.

2. ESG Developments

While we continue to wait for more formal and consistent disclosure regulations from the U.S. Securities and Exchange Commission regarding ESG—environmental, social, and governance—factors, manufacturers are already dealing with ESG in a variety of ways. It is finding its way into corporate filings, board rooms, courtrooms, press releases, the media (traditional and social), and the minds of both investors and consumers. And it is having real consequences on the bottom line.

Many manufacturers have been making climate change-related disclosures for years, albeit under a general standard of materiality that is generally left to the interpretation of the discloser. In some cases, these disclosures have been used to tout a company’s sustainability profile, and advertising and marketing efforts typically follow suit. But as consumers and investors grow increasingly interested in—and educated about—environmental issues, these sustainability statements can sometimes have the opposite impact. Many manufacturers have been the targets of greenwashing lawsuits, with plaintiffs alleging consumer protection violations when a manufacturer’s claims about a particular product do not match up with reality. These claims have also found their way into shareholder derivative suits, as we have previously reported. We can expect to see this activity continue, and likely increase, in 2022, as consumers and investors continue to meaningfully dig in to corporate sustainability claims as they evaluate their purchases and investments.

3. Environmental Justice Guidance

In 2022, EPA is expected to issue important guidance that has the potential to advance the Biden Administration’s environmental justice agenda. The document, “Guidelines for Cumulative Risk Assessment Planning and Problem Formation,” will provide a framework to analyze cumulative risk in situations of exposure to multiple environmental hazards. The guidance, which has been in the works for years, will be particularly important in assessing the impacts on vulnerable and disadvantaged communities. The guidance will be used in a broad range of environmental programs and is expected to impact cleanup priorities and enforcement decisions.

4. Employee Safety Related to COVID-19

If you are a regular reader, you know that we spent significant time in 2021 covering the myriad OSHA developments related to COVID-19. And while the Emergency Temporary Standard (ETS) related to vaccines and testing appears to be on life support, OSHA has made it clear that it will do everything in its power to protect the nation’s workforce from COVID-19. Will that be through the ETS, another OSHA standard, or already-adopted guidance and the General Duty Clause? Only time will tell, but we can expect to see increased inspection and enforcement in 2022.

Last week, a shareholder of Danimer Scientific, Inc., filed a derivative suit against the company’s executives and board members, alleging that overstated sustainability claims led to millions of dollars in market capitalization losses.

Danimer manufactures polymers, resins, and plastic alternatives that are used in a number of plastic products. The complaint alleges that the company repeatedly touted the biodegradability of these products, as well as their ability to reduce plastic use and pollution. For one product in particular, Nodax, Danimer claimed that it was fully degradable within 12 to 18 weeks after being discarded. According to a Danimer press release, Nodax is a “100% biodegradable, renewable, and sustainable plastic . . . certified as marine degradable, the highest standard of biodegradability, which verifies the material will fully degrade in ocean water without leaving behind harmful microplastics.” The company made similar representations in an SEC Form S-1 registration statement.

Shortly after these statements went public, The Wall Street Journal published a detailed article refuting Danimer’s biodegradation claims. The article cited experts that were skeptical of whether Danimer’s products could really degrade as quickly as advertised under real-world conditions. The article noted that things like ocean temperature, microorganism variation, and plastic shape and size, will all impact biodegradability and may result in significantly longer timelines for degradation.

The next trading day, Danimer’s stock price dropped by almost 13 percent.

After The Wall Street Journal article was published, Spruce Point published additional reports further supporting the notion that Danimer’s biodegradability claims were too good to be true. The company’s stock price further dropped in the wake of these reports.

Plaintiff, a Danimer stockholder, filed the derivative suit against the company’s CEO and Chairman of the Board, CFO, and a number of the company’s directors. Plaintiff claims that these officers and directors breached their fiduciary duties to the company by intentionally or recklessly allowing these misstatements to occur, which resulted in significant losses. Plaintiff also sued the officers and directors for unjust enrichment, waste of corporate assets, and breaches of the Exchange Act.

While we have yet to see where this litigation will go, the suit itself is another example of how ESG principles are having real consequences on market capitalization—and are finding their way into America’s courtrooms.

The case is Perri v. Croskrey, et al., D. Del., Case No. 1:21-cv-01423.

Last week, Coca-Cola was sued by Earth Island Institute for deceptive marketing regarding its sustainability efforts “despite being one of the largest contributors to plastic pollution in the world.”

In the Complaint, Earth Island Institute, a not-for-profit environmental organization, alleges that Coca-Cola is deceiving the public by marketing itself as sustainable and environmentally friendly while “polluting more than any other beverage company and actively working to prevent effective recycling measures in the U.S.” Coca-Cola has developed a number of initiatives to advertise its commitment to plastic waste reduction and recycling, in part through its “Every Bottle Back” and a “World Without Waste” campaigns. It touts its goal to collect and recycle one bottle or can for each one it sells by 2030. Coke also claims that its plastic bottles and caps are designed to be 100% recyclable. The Complaint presents a number of examples of these allegedly misleading statements across a range of mediums, including on its website, in advertising, on social media, and in other corporate reports and statements.

Meanwhile, according to the Complaint, Coca-Cola is the world’s leading plastic waste producer, generating 2.9 million tons of plastic waste per year. It uses about 200,000 plastic bottles per minute, amounting to about one-fifth of the world’s polyethylene terephthalate (PET) bottle output. This plastic production also relies on fossil fuels, resulting in significant CO2 emissions.

This waste generation is complicated by significant deficiencies in recycling. Despite the public’s common understanding that plastic bottles can be recycled, only about 30 percent of them actually are. According to the Complaint, the plastics industry has long understood this problem, but it has sought to convince the consumer that recycling is viable and results in waste reduction. The Complaint even quotes former president of the Plastics Industry Association as saying, “If the public thinks that recycling is working, then they are not going to be as concerned about the environment.”

The Complaint alleges that not only has Coca-Cola failed to implement an effective recycling strategy, it has actively opposed legislation that would improve recycling rates. According to the Complaint, Coke has actively fought against “bottle bills”—laws that would impose a small fee on plastic bottle purchase that would be returned to the consumer when that bottle is returned to a recycling facility. Jurisdictions with these laws tend to have better recycling rates, albeit at a small additional cost to the consumer at the point of purchase.

The Complaint does not allege that Coke has violated any environmental laws. Instead, Earth Island Institute seeks to hold Coke accountable under the Washington, D.C. Consumer Protection Procedures Act. The Complaint alleges that Coca-Cola’s misrepresentations mislead consumers, and that Coke’s products “lack the characteristics, benefits, standards, qualities, or grades” that are stated and implied in its marketing materials. Earth Island Institute does not seek damages; it only seeks to stop Coca-Cola from continuing to make these statements.

This case is the latest example of ESG—Environmental, Social, and Governance—factors playing out in practice.