The Latest Approach to Addressing Climate Risk and Environmental Sustainability
Earth Day has been with us for over five decades. Environmental issues are just as relevant now as they were for the original Earth Day event that drew 20 million people together to discuss issues including clean water and clean air. Today, government is advancing new climate initiatives. These new approaches move beyond what many would consider traditional environment laws addressing water pollution, wetland impacts, or cleanup of contaminated soils.
This past year, newly enacted climate laws defining climate disclosure will increase efforts to bring market forces into the regulatory equation. These new approaches address sustainability but they are not without controversy. Some of America’s largest companies support these efforts and others oppose them. However, a recent survey of America’s CEO’s indicated that sustainability strategies are their top operational priority over the next year and they expect significant returns from sustainability investments over the next three to five years.
Even with ongoing efforts to address climate change, ocean temperatures are rising threatening a significant hurricane season in the Atlantic Ocean, polar temperatures are rising rapidly with potentially significant consequences, and weather is becoming more extreme as rainfall amounts dramatically increase threatening flooding and damage across the country. In 2023, energy production related greenhouse gases (“GHG”) hit a record.
New Climate Disclosure Requirements: State, Federal, and International.
Climate related risk is routinely factored into decision making of many businesses. Disclosure of these risks and company sustainability efforts was initially a voluntary effort. There are many narratives on climate change regarding business obligations. However, there is government consensus that larger companies need to transparently address the sustainability of their operations. The new climate disclosure laws will impact tens of thousands of companies and become milestones in the field of climate risk and sustainability.
SEC Adopts Climate Disclosure Requirements.
This year, the federal Security and Exchange Commission (the “SEC”) adopted its climate disclosure rule requiring reporting of climate-related risks from greenhouse gasses that are deemed to have a material impact on businesses. The agency estimates that about 7,000 domestic publicly traded corporations will now be required to make specified disclosures. The disclosures include direct impacts from greenhouse gas emissions (Scope 1) and for indirect impacts (Scope 2) for energy needed for company operations. In the final rule, SEC did not include indirect emissions (Scope 3) from the supply chain and customers, both upstream and downstream, that a company does not directly control. In response, critics of the rule have expressed concerns that the lack of Scope 3 emissions reporting requirements weakens the final rule.
California’s Climate Disclosure Laws.
Last year, California enacted laws to directly address and define climate disclosure. One law, the Climate-Related Financial Risk Act requires that each year, companies review, assess, and disclose financially related climate risks and the steps they are taking to manage these risks. It applies to companies with a $500 million dollar business threshold and addresses Scope 1, 2, and 3 emissions. The reality is that this threshold, and the fact that most businesses operate in California, will likely result in almost every large company being required to meet its disclosure requirements. These requirements cover over 10,000 companies, including all large companies and not just those that are publicly traded. The second law, the Climate Corporate Data Accountability Act, requires annual disclosure of carbon dioxide and methane emissions by companies with at least $1 billion in revenue.
New York’s Climate Disclosure Legislation.
Despite being the financial capital of the world, New York has yet to adopt its own climate disclosure law. There are, however, bills in the Legislature that could change that, bringing New York into to this climate and sustainability space. One leading bill takes a similar approach to California’s and will include Scope 3 emissions.
The European Corporate Sustainability Disclosure.
On April 21, 2021, the European Commission adopted the Corporate Sustainability Reporting Directive, which substantially expands the climate information that must be reported by covered companies. It went into effect in January 2023 and will be phased in over the next five years. It is expected that approximately 49,000 companies, including most large multinational corporations, will be subject to these rules.
Direct Market Action: New York’s Upcoming Cap and Invest System.
In 2019, New York took a leadership position with the landmark Climate Leadership and Community Protection Act (“CLCPA”). This law continues to drive legal developments in the state. It requires a new Cap and Invest program that will account for all GHG emissions in New York. It will set annual caps needed to meet emissions reductions of 40% by 2030, and at least 85% from 1990 levels by 2050. The carbon emissions, by sector, shows the distribution of sources of these emissions: 32% from buildings, 28% from transportation,13% from electricity, 12% from waste, 9% from industry, and 6% from agriculture.
The Cap and Invest program relies upon market incentives. Large sources would be required to report emissions and obtain allowances equal to the emissions associated with their activities. The allowance prices will increase over time, providing an incentive to transition to lower emitting sources. The program includes, among others, mandating climate change emissions reductions, addressing disadvantaged community’s pollution concerns, ensuring affordability for statewide residents and businesses, and to support New York’s overall investments in climate mitigation, energy efficiency, and clean transportation projects. These funds will be used, in part, to fund an annual Climate Action Rebate to address and mitigate costs to consumers of the climate transition.
Conclusion: Increasing climate change requires new approaches.
The earth’s climate is changing. Citizen motivation, demonstrated by Earth Day, has and will continue to play an important role in raising awareness for needed change. Despite many remaining challenges, there are a number of encouraging developments showing what is possible in the climate space. In 2024, United States greenhouse gasses from the energy sector decreased by four percent. New York is a leader in this category. A wind turbine farm located thirty-five miles east of Montauk can now power over 70,000 homes without any emissions.
Even with many efforts to reduce climate emissions, there are growing concerns because data shows that limiting emissions to keep temperature increases to the international goal of 1.5 degrees Celsius in 2100 may prove elusive and unattainable. The consequences of missing this target, many experts predict, will be substantial.
Government is responding to climate change, but existing government regulations, alone, cannot solve the climate challenge. The new climate disclosure rules will set reporting requirements for company’s climate risk and sustainability initiatives. The information will help inform sustainable investment strategies and impact climate risk aversion in the marketplace. In addition, New York’s upcoming Cap and Invest program will create a market to decrease statewide emission levels.
These new laws and regulations will continue to face challenges, both legal and practical, as they are implemented and refined to address the concerns of the regulated community. These laws present new and important tools to address the climate crisis and enable a more sustainable approach by business.
2024 Annual Legislative Forum and Luncheon, Albany, New York.
We are pleased to announce that on May 8, 2024, John Parker who leads our Environmental, Energy and Resources practice will convene an event entitled "Encouraging Environmental Sustainability and Managing Climate Risk: The Increasing Role of Markets in Meeting the Climate Change Challenge," as Chair of the Annual Legislative Forum of the Environmental and Energy Law Section of the New York State Bar Association.
Annual Legislative Forum brings together Government leaders, Legislative leaders, and industry experts to discuss progress on meeting New York’s climate change goals focusing on the growing field of climate disclosure and the developing State Cap and Invest program aimed at reducing the amount of climate changing gases released each year in the state.
This year, the Annual Legislative Forum will be combined into a two-day event with the Annual Oil Spill Symposium.
If you are interested in attending the May 8, 2024 event, it is a hybrid (zoom) event and will also be in person at the New York State Bar Association Headquarters at 1 Elk Street, Albany, New York. It is free and open to the public, but registration is required.
Please contact Amy Jasiewicz at ajasiewicz@nysba.org to register.
__________________
John Parker leads the firm’s Environmental, Energy and Resources Practice. He also serves on the Environmental and Energy Law Section of the New York State Bar Association where he is a member of the Executive Committee and he is the Chair of the Legislation Committee that sponsors the Annual Legislative Forum. He also serves as Vice-Chair of the Environmental Law Committee of the Nassau County Bar Association.
|
