True to its word, the SEC released its proposed rule, The Enhancement and Standardization of Climate-Related Disclosures for Investors, last week. The rule would require companies to disclose a wide variety of climate-related information, including information about climate-related risks that are reasonably likely to have material impacts on its business and/or its consolidated financial statements, and greenhouse gas (GHG) emissions metrics that could help investors assess those risks.

Much has been made of the proposed requirements for GHG emissions reporting—not just for Scope 1 and 2 emissions (emissions from company operations and from the generation of electricity purchased and consumed by the company)—but also for Scope 3 emissions, or emissions from upstream and downstream activities in a company’s value chain. In this post, we will focus on the Scope 3 emissions requirements in the proposed rule.

First, not all companies would be required to report Scope 3 emissions. The proposed rules would require disclosure of Scope 3 emissions only if:

  • The emissions are material, or if there is a substantial likelihood that a reasonable investor would consider them important when making an investment or voting decision; or
  • The company has set a GHG emissions reduction target or goal that includes its Scope 3 emissions.

In limiting the reporting requirement, the SEC sought “[t]o balance the importance of Scope 3 emissions with the potential relative difficulty in data collection and measurement . . . .”

The SEC declined to propose a quantitative metric for the determination of materiality of Scope 3 emissions (although the proposed rule notes that some companies rely on such a metric, and it also seeks additional comment on whether such a metric should be included). Instead, it proposed to use its commonly known materiality standard, explaining that a “one-size-fits-all” approach would not capture the variability of regulatory, policy, and market conditions across companies, nor would it adequately capture the transition risk that is tied to GHG emissions and the choices that a company can make about its value chain because of them.

For companies that have set a GHG emissions reduction target or goal, the proposed rule states that disclosure is needed to help investors understand the potential costs associated with meeting such a goal and track the company’s progress along the way.

So what are Scope 3 emissions? As explained above, Scope 3 emissions are those from upstream and downstream activities in a company’s value chain. Some examples of these upstream and downstream activities include:

  • Purchased goods and services;
  • Transportation and distribution of purchased goods, raw materials, and other inputs;
  • Waste generated in operations;
  • Business travel and commuting by employees;
  • Transportation and distribution of sold products, goods, or other outputs; and
  • End-of-life treatment of a company’s sold products.

Scope 3 emissions data is difficult to gather and quantify, but the SEC is hoping that companies required to report will be able to influence the activities in their value chain and gather emissions data in the process:

“Although a registrant may not own or control the operational activities in its value chain that produce Scope 3 emissions, it nevertheless may influence those activities, for example, by working with its suppliers and downstream distributors to take steps to reduce those entities’ Scopes 1 and 2 emissions (and thus help reduce the registrant’s Scope 3 emissions) and any attendant risks. As such, a registrant may be able to mitigate the challenges of collecting the data required for Scope 3 disclosure.”

The proposed rule suggests that Scope 3 emissions data can be found in the following sources:

  • Emissions reported by parties in the registrant’s value chain, and whether such reports were verified by the registrant or a third party, or unverified;
  • Data concerning specific activities, as reported by parties in the registrant’s value chain; and
  • Data derived from economic studies, published databases, government statistics, industry associations, or other third-party sources outside of a registrant’s value chain, including industry averages of emissions, activities, or economic data.

Companies required to report Scope 3 emissions must do so individually (i.e., listing the emissions from each GHG), and also in the aggregate (carbon dioxide equivalent). They must also report GHG intensity, or the ratio of the impact of GHG emissions per unit of total revenue and per unit of production. The risks associated with climate change must also show up in a company’s financial statement metrics, with certain metrics (for Scope 3 emissions, think transition risk) required to be included in a note to a registrant’s audited financial statements. Lastly, if a company is required to report historic data on its income statement and cash flow statement, it should be prepared to do the same for emissions data (to the extent such emissions data is reasonably available).

The proposed rule would phase in the reporting of Scope 3 emissions, with the first reporting required for large accelerated filers in fiscal year 2024 (filed in 2025). Smaller reporting companies would be exempt from the Scope 3 emissions reporting requirements.

The SEC is seeking comment on the proposed rule. The comment period will remain open until at least May 20, 2022.

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.

Below is an excerpt of an article co-authored with Kayla N. West and Jonathan H. Schaefer that was published in ISHN on February 16, 2022.

The article points out that since the COVID-19 vaccination was made available to the public in late 2020, the topic of vaccination has been widely discussed across the country, in daily news media, by governments and agencies, in the courts, in communities, and in the workplace. This led to various legal challenges, court decisions and rulings, opposition, publicity, and the implementation of various state laws prohibiting or restricting businesses’ and employers’ ability to mandate vaccination. Heading into 2022, companies have been left to face the challenge of implementing policies that are legally-compliant under the patchwork of laws, guidance and rules regarding vaccination and also practical. The authors remind employers “to ensure that they are up-to-date at the local, state, and federal level; understand changes that may be on the horizon with regard to applicable laws in their industry; and remain flexible in terms of their policies and procedures.” Read the full article here.

This week’s post was co-authored by Robinson+Cole Labor and Employment Group lawyer Emily A. Zaklukiewicz.

In today’s world, employees in manufacturing and similar industries spend a majority of their time on-site at work, engaging in work, and communicating with other employees. Over time, employees may form close bonds with other employees, including friendships, close personal relationships, and dating and romantic relationships. While such relationships may be positive for the employees involved, they can create significant legal risks and employee relations issues in the workplace and impact the overall culture and working environment. Therefore, it is critical for employers to understand how to navigate such relationships and limit the associated actual and potential risks.

There may be significant risks associated with the existence or end of close workplace relationships, such as the risk of sexual harassment claims under both hostile work environment and quid pro quo theories as well as retaliation. Generally, under state and federal law, employers are required to provide a workplace that is free of sexual or other harassment and discrimination. When close personal, dating, and romantic relationships exist in the workplace or when such relationships end, it can become increasingly difficult for employers to maintain a workplace that is free of unwelcome sexual advances or favors for both those involved in the relationship and other employees who might observe the behavior. Further, if those relationships end, there could be an increased risk of employee relations and other issues in the workplace and challenges around ensuring employees maintain professional working relationships. Perhaps the most significant risk is when employees who have a reporting relationship at work (supervisor-direct report), have a close personal relationship. In addition to these legal risks, workplace relationships may create conflicts of interest, feelings of favoritism, lack of collegiality or professionalism, and discomfort, among other issues.

Based on the risks that romantic or close personal relationships can cause in the workplace, employers should consider implementing clear policies governing fraternization, workplace or romantic relationships, conduct and behavior expectations, and conflicts of interests. Policies on romantic or close workplace relationships should include several key elements, such as: 1) what relationships are covered (e.g., romantic, dating, close, personal, friendships, etc.); 2) whether such relationships are permitted and for whom (e.g., prohibition against relationships between employees in a direct reporting relationship versus prohibiting all such relationships); 3) whether notice of such relationships must be provided to human resources; 4) expectations for workplace conduct of such employees; and 5) any increased obligations that such relationships may create (e.g., whether there is a risk of resignation or transfer of employees in such relationships, etc.).  Such policies should be clearly written and apply to employees consistently, without regard to the sex or gender of the individual involved. There should also be procedures in place to ensure there are open channels of communication, so employees feel comfortable discussing these issues with their managers or supervisors and human resources.  Managers, supervisors, and employees should understand the policy and expectations and how to manage such relationships if they arise. Employers should also consider training employees on these policies as part of their sexual harassment prevention, workplace culture, or other trainings.

 

 

Paul Ericksen of Industry Week has been writing about supply chain issues for many years.  His most recent article “Supplier Goodwill toward OEMs Has Run Dry” caught my attention.  The title is clearly meant to be provocative even though Paul says in his article that he is not “anti-OEM.”  The article itself identifies several key business realities for suppliers, including ways that they can manage their OEM relationships.

As Paul accurately points out, for most suppliers the OEM relationship is based on leverage.  If you sell a commodity you have less leverage than if you are a sole source.  Further, Paul suggests that suppliers diversify their OEM relationships – certainly accurate – although not as easy to accomplish.

Paul suggests that suppliers impose 30 day payment terms, which clearly recognizes how critical having cash on hand is for manufacturers.  Paul also points out something we have been talking to our clients about for years, namely, how to keep some of the revenue that comes from cost reductions.  Too many suppliers sign contracts without recognizing that they can negotiate that issue.

Overall, Paul’s article is a good read for both suppliers and OEMs.

This week’s post was co-authored by Robinson+Cole Labor and Employment Group lawyer Emily A. Zaklukiewicz.

This week, we continue our 2022 outlook series with a focus on labor and employment.  It goes without saying that over the last two years, the COVID-19 pandemic has revealed certain weaknesses and opportunities in the economy and in our workplaces.  In response, federal, state, and local governments have passed a number of laws and regulations addressing issues such as vaccination and workplace safety, paid leave, pay transparency, and other laws and several legislative trends have emerged.  The following are a few of the issues and trends that may impact manufacturers in 2022.

1. COVID-19 Vaccination Rules

We expect that federal, state, and local governments will continue to actively respond to the COVID-19 pandemic.  Last year, we saw many states and localities impose vaccination and/or testing requirements upon employers across various industries.  Further, the federal government imposed vaccination requirements upon certain federal contractors, healthcare facilities, and private employers employing 100 or more employees.  A myriad of legal challenges were brought in response, the most recent of which resulted in a decision by the U.S. Supreme Court staying the implementation of the federal Occupational Safety and Health Administration’s COVID-19 Emergency Temporary Standard, applicable to employers with 100 or more employees.  Similarly, last November, a Georgia federal court temporarily blocked the vaccine mandate for federal contractors.  In 2022, we may see additional developments concerning these federal initiatives as litigation on these issues continues.  We also expect that state and local governments will continue to implement their own initiatives, especially in the absence of federal regulation.

2. Paid Family and Medical Leave

In recent years, several states have implemented or expanded their paid family and medical leave laws, including California, Colorado, Connecticut, Massachusetts, New Hampshire, New Jersey, New York, Oregon, Rhode Island, Washington, and the District of Columbia. As a result, employers in states that have enacted paid family and medical leave laws may see increased use of family and medical leave, on a long-term basis, amongst employees and should be prepared to manage such leave from a human resources and operational perspective.

3. Wage Disclosure Laws

In recent years, several states and localities have imposed pay transparency obligations upon employers. These laws contain varying employer obligations including providing wage ranges to new employees, including wage ranges or compensation on job postings, among other obligations.  In light of these new requirements, employers should take steps to ensure they are in compliance with their relevant disclosure obligations in 2022 and beyond.  We expect to see more states and localities join this trend, aimed at closing discriminatory wage gaps that may exist and increasing pay equity, in the coming years.

4. The “Great Resignation”

On the heels of the COVID-19 pandemic, many manufacturers are grappling with staggering labor shortages as employees across the country are resigning from their jobs at unprecedented rates, a trend that some have coined the “Great Resignation.” This trend is attributable, in part, to workforce issues such as exhaustion, burn-out, and stress among employees, which have worsened during the pandemic. As manufacturers seek to attract and retain talent in 2022, we expect to see an increased focus on hiring, recruitment, and incentivization of prospective and current employees.  Further, we may see a shift in trends surrounding compensation, leave, benefits, and other offerings aimed at employee retention.  Lastly, employers seeking to address staffing issues may wish to increase their focus on employee engagement and morale, wellness and mental health, training and development, recognition and rewards, and their overall workplace culture in 2022.

5. Union Organizing

In 2021, the Biden administration designated both a new General Counsel and Chairman of the National Labor Relations Board (NLRB), both of whom have expressed the NLRB’s plans to significantly expand employee rights and protections under the National Labor Relations Act.  As a result, in 2022, we may see the labor movement gain momentum, with higher rates of union organizing activity among employees across various industries. Employers should consider monitoring this issue, training supervisors on labor laws, and seeking counsel when necessary.

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.

Thank you to my colleagues Jonathan Schaefer and Abby Warren for their contributions to this post.

We take a break from our regularly scheduled “2022 outlook” programming to bring you breaking news on the seesaw that is the enforcement of OSHA’s Emergency Temporary Standard (ETS) regarding COVID-19 vaccination or testing. As we previously reported, it was on, then it was off. Then it was on, and now it is off again. Yesterday, the United States Supreme Court reinstated the stay of OSHA’s ETS, ultimately sending the rule back to the Sixth Circuit to await a full review on the merits.

In the 6-3 opinion, the Supreme Court held that, while OSHA has the authority to regulate “occupational dangers,” it does not have the authority to regulate “public health more broadly.” The Supreme Court held that, while COVID-19 might be present in workplaces, it is not necessarily an occupational hazard in most. “Permitting OSHA to regulate the hazards of daily life—simply because most Americans have jobs and face those same risks while on the clock—would significantly expand OSHA’s regulatory authority without clear congressional authorization.”

While the ultimate fate of OSHA’s ETS will continue to play out in the courtroom, U.S. Secretary of Labor Marty Walsh released a statement urging employers to require workers to get vaccinated or tested weekly.  Secretary Walsh also referenced OSHA’s existing COVID-19 guidance as a resource for employers to keep workers safe from COVID-19. Secretary Walsh concluded by saying:

“Regardless of the ultimate outcome of these proceedings, OSHA will do everything in its existing authority to hold businesses accountable for protecting workers, including under the Covid-19 National Emphasis Program and General Duty Clause.”

Manufacturers should continue to monitor the fate of the OSHA ETS as it heads back to the Sixth Circuit. In addition, the Executive Order related to COVID-19 vaccination/testing for federal contractors that we previously summarized, while currently stayed, may be reinitiated as well. Manufacturers should continue to monitor legal developments related to the Executive Order.

In late 2012, we created the Manufacturing Law Blog with the goal of providing our manufacturing clients with a holistic approach to the unique issues they face in their global operations.  Starting in 2016, we began a new tradition of dedicating our first three posts of the year to a yearly outlook from our different vantage points.

This year, I’m starting us off by addressing corporate compliance and litigation issues that manufacturers might expect to face in 2022:

  1. Reshoring – Hype or a fundamental change? Yes, there will be reshoring, but I am not convinced that this trend will explode in 2022 as there are significant challenges for doing so particularly when the manufacturing involved is labor-intensive.  That said, I do believe the attitude towards manufacturing domestically has changed throughout the supply chain during the COVID era.
  2. “Buy American” – Efforts to require manufacturers to buy domestically have been around for many years. Other countries are imposing “protectionist” laws to require more investment.  I expect to see more foreign direct investment into the United States for this reason.
  3. Force Majeure – This legal phrase was the “word” of 2020-2021 as it offers a basis to excuse contractual performance. We are starting to see some of these cases work their way through the courts, and we will be watching closely to see if any of them has a lasting impact on manufacturers.  You don’t need to be a lawyer to predict that the word “pandemic” will be in all force majeure clauses going forward.
  4. Acquisition Activity – There is no shortage of potential buyers of manufacturing companies, including strategic buyers and private equity buyers. There has been an increase in so-called proprietary deals (i.e., where one buyer negotiates exclusively) as opposed to auctions.  I think this will continue in 2022.
  5. Creative Solutions to Supply Chain Issues – Everyone wants to talk about the supply chain crisis that is impacting both consumers and industrial companies. In 2022, I will be working with companies as they develop creative solutions to these issues.  As an example, some companies are trying to find alternative ports of entry.

 

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.

On December 21, 2021, the U.S. Supreme Court took its first step into the fray over federal vaccine mandates. As we have previously posted, legal challenges to the Biden administration’s various vaccine mandates have been working their way through the courts since November. Most recently, the U.S. Court of Appeals for the Sixth Circuit ruled last Friday that OSHA’s Emergency Temporary Standard (ETS) for COVID-19, which includes a vaccine-or-testing mandate, could continue after it was halted by another court the day after it went into effect. In an unusual move, the Supreme Court announced it will hold a special hearing on January 7 to hear arguments on both the ETS and a regulation from the Centers for Medicare and Medicaid Services (CMS) requiring vaccines for health care workers. The Supreme Court has not yet issued any rulings to stay either requirement. Both requirements are set to go into effect in January.

The January 7 hearing will occur just before the Supreme Court is set to begin its regularly scheduled term. The hearing also moves these legal challenges from the so-called “shadow docket,” which has been subject to criticism lately. The Supreme Court has repeatedly upheld state-implemented vaccine mandates in a variety of circumstances. However, the future of OSHA’s ETS and the federal contractor vaccine mandate will likely turn on whether Congress authorized the executive branch to institute these types of requirements. While the Justices’ questions during the January 7 hearing will likely give some insight into how they may rule, the date of a ruling on the future of these requirements is not known.