Category: Corporate Compliance

New Sexual Harassment Prevention Requirements for Many Chicago Employers

Beginning July 1, 2022, Chicago employers who are licensed by or have work locations in the City of Chicago must comply with new sexual harassment prevention training and notification requirements. These requirements were formalized on April 27, when the Chicago City Counsel amended the Chicago Human Rights Ordinance.

The amendments require covered employers to:

  • Provide annual training for employees and supervisors on sexual harassment prevention and bystander intervention.

  • Adopt a written sexual harassment policy.

  • Display a poster (in English and Spanish) in a conspicuous area in the workplace on sexual harassment prohibitions.

Covered Employers

The law applies to employers with one or more employees within the City of Chicago that:

  • Are subject to one or more of the license requirements in Title 4 of the city’s municipal code; and/or

  • Maintain a business facility within the city’s geographic boundaries.

Covered Employees

A covered employee is an individual who is engaged in work within the geographical boundaries of the City of Chicago.

Requirements for Employers

Sexual harassment prevention and bystander intervention training. Employers must mandate that employees participate annually in:

  • Sexual harassment prevention training, the duration of which depends on the type of employee:

    • One hour for rank-and-file employees

    • Two hours for supervisors and managers

  • One hour of bystander intervention training.

Note that these requirements exceed those currently applicable to employers by the State of Illinois. Employers must ensure that covered employees participate in their first  required trainings by no later than June 30, 2023 (one year following the effective date of the law) and annually thereafter.

Written sexual harassment policy. Employers must adopt a written policy on sexual harassment that includes:

  • A statement that sexual harassment and retaliation for reporting sexual harassment are illegal in Chicago;

  • The meaning of “sexual harassment” as defined in the city’s municipal code (which is broader than the definition under federal or state law, as it includes sexual misconduct, which encompasses “any behavior of a sexual nature involving coercion, abuse of authority, or misuse of an individual’s employment position.”)

  • The annual training requirements for sexual harassment prevention and bystander intervention;

  • Examples of prohibited conduct that constitute sexual harassment; and

  • Details on resources available to employees, including:

    • How to report allegations of sexual harassment internally, such as instructions for confidential reporting to a manager, employer’s corporate headquarters, or human resources department; and

    • Legal services, including governmental services, available to individuals who may have experienced sexual harassment.

The written policy must be available in employees’ primary language within the first week of their employment.

Poster. Employers must conspicuously display (in English and Spanish), in at least one location in the workplace where employees commonly gather, posters designed by the Chicago Commission on Human Relations (the Commission). The posters address the prohibitions on sexual harassment.

Other Changes to Consider

The amendments give employees extra time to file complaints, give the Commission extra time to act on such complaints, impose certain recordkeeping requirements, and enhance penalties for violations. Specific issues include:

Increased statute of limitations. Employees who experience sexual harassment now have 365 days, instead of 300 days, after the violation occurs to file a complaint with the Commission.

More time for the Commission to issue a complaint. The Commission may delay issuing a sexual harassment complaint to the respondent from 10 days to up to 30 days after the complainant files such complaint.

Recordkeeping. Employers must retain for at least five years, or for the duration of any claim, civil action, or investigation pending pursuant to the ordinance, whichever is longer, records regarding their sexual harassment policy, training, and compliance with the ordinance.

Penalties. An employer that violates the policy, training, or posting requirements is subject to a fine ranging from $500 to $1,000 per violation. Every day that a violation continues will be considered a separate and distinct offense.

Recommendations

Covered employers should make sure that they adopt a written sexual harassment policy, provide training, and display posters that comply with the new requirements. Employers also should be prepared to provide their sexual harassment policy, in the employee’s primary language, to newly hired employees during onboarding. Much’s labor and employment attorneys are available to help you navigate these new requirements and implement changes to ensure compliance.

Article By Camille N. Khodadad and Charlotte F. Franklin of  Much Shelist, P.C.

For more labor and employment news, click here to visit the National Law Review.

© 2022 Much Shelist, P.C.

How Changing Beneficial Ownership Reporting May Impact Activism

The SEC in February proposed amendments to Regulation 13D-G to modernize beneficial ownership reporting requirements. Adoption of the amendments as proposed will accelerate the timing – and expand the scope – of knowledge of certain activist activities. The deadline for comments on the proposed rules was April 11 and final rules are expected to be released later this year.

The current reporting timeline creates an asymmetry of information between beneficial owners on the one hand and other stockholders and issuers on the other. The SEC proposal is seeking to eliminate this asymmetry and address other concerns surrounding current beneficial ownership reporting. The accelerated beneficial ownership reporting deadlines will result in greater transparency in stock ownership, allowing market participants to receive material information in a timely manner and potentially alleviating the market manipulation and abusive tactics used by some investors.

The shortened filing deadlines should benefit a company’s overall shareholder engagement activities. The investor relations team at a company will have a more accurate and up-to-date picture of its institutional investor base throughout the year, which should result in more timely outreach to such shareholders.

INVESTOR ACCUMULATION OF SHARES BEFORE DISCLOSURE

Although issuers will likely view the proposed rules as beneficial, many commentators have predicted a negative impact on shareholder activism. Under the current reporting requirements, certain activist investors may benefit by having both additional time to accumulate shares before disclosing such activities and potentially more flexibility in strategizing with other investors.

Many commentators have argued that the proposed shorter timeline for beneficial ownership reporting will negatively impact an activist shareholder’s ability to accumulate shares of an issuer at a potentially lower price than if market participants had more timely knowledge of such activity and intent. In many cases a company’s stock price is impacted once an investor files a Schedule 13D with clear activist intent. This can even occur in some cases once a Schedule 13G is filed by a known activist investor without current activist intent.

If the shorter reporting deadlines reduce such investors’ profit, it is expected that an investor’s incentive to accumulate stock in order to initiate change at a company will also be reduced. Activists instead may be encouraged to engage more with management. In other words, the shorter reporting period may deter short-term activists and encourage more long-term focused activism.

TIMING OF ISSUER RESPONSE

The shorter reporting deadlines are also expected to result in management having earlier notice of any takeover attempt and to give a company the opportunity to react more quickly to any such attempt. There is potential for this to lead to increased use of low-threshold poison pills. But the SEC stated in the proposed rules release that it believes the risk of abundant reactionary low-threshold poison pills is overstated due to scrutiny of such poison pills from courts and academia, limitations imposed by state law and the unlikelihood that the beneficial ownership would trigger the low-threshold poison pills.

Companies that have low-threshold poison pills – such as one designed to protect a company’s net operating losses – may want to review them to confirm that the proposed rules would not be expected to have any impact. For example, such poison pills may link the definition of beneficial ownership to the SEC rules, including Schedule 13D and 13G filings.

‘GROUP’ REPORTING

Another proposed change expected to affect shareholder activism is the expanded definition of ‘group’ for the purposes of reporting under Schedule 13D. The current rules require an explicit agreement between two or more persons to establish a group for purposes of the beneficial ownership reporting thresholds.

Commentators believe that under the current rules, certain investors seeking change at a company may share the fact that they are accumulating shares of a company with other shareholders or activists, which can then act on this information before the general public is aware; in other words, before public disclosure in and market reaction to the Schedule 13D filing. This activity may result in near-term gains for the select few involved before uninformed shareholders can react.

Under the SEC’s proposed amended Rule 13d-5, persons who share information with another regarding an upcoming Schedule 13D filing are deemed to have formed a group within the meaning of Section 13(d)(3) regardless of whether an explicit agreement is in place, and such concerted action will trigger reporting requirements. This proposed change is expected to benefit companies and shareholders overall by preventing certain investors from acting in concert on information not known to a company and its other shareholders.

The full impact of the proposed rule changes on shareholder activism cannot be accurately predicted, but we believe that at a minimum, issuers will find it beneficial to have more regularly updated information on their institutional investor base for, among other things, their shareholder engagement efforts.

Article By Alexandra Clark Layfield and Rachel Solino of  Jones Walker LLP

For more Securities and SEC news, click here to visit the National Law Review.

© 2022 Jones Walker LLP

Biden Revisions to the NEPA Regulations Now in Effect

The Biden Administration is amending the federal regulations for implementing the National Environmental Policy Act (NEPA) to reverse certain changes made by the Trump Administration. The first set of amendments took effect last Friday on May 20, 2022.

As background, the Council for Environmental Quality (CEQ) first issued the NEPA implementing regulations in 1978. They remained unchanged for more than 40 years until the Trump Administration published its 2020 rule updating the regulations to facilitate “more efficient, effective, timely NEPA reviews.” Developers, construction companies, and other businesses generally supported these changes with the hope they would streamline a lengthy process that often significantly delays projects. However, environmentalists opposed the changes, fearing they would weaken important protections, including those aimed at reducing climate change impacts and protecting natural resources. Upon taking office, the Biden Administration immediately began an effort to reverse parts of the 2020 rule.

The Biden amendments will be issued in two phases. The “Phase One” rule was published on April 20, 2022, and is in effect as of May 20, 2022. The “Phase Two” rule, which is expected to include more comprehensive revisions, will be issued “over the coming months”.

 The Phase One rule reinstates the following three key provisions of the NEPA regulations:

1.  Statement of Purpose and Need, and Scope of Reasonable Alternatives (40 CFR 1502.13)

Under NEPA, an agency’s statement of purpose and need informs the range of alternative actions analyzed in an environmental assessment (EA) or environmental impact statement (EIS). The NEPA regulations historically required agencies to consider “reasonable alternatives not within the jurisdiction of the lead agency.” The 2020 rule updates, however, instructed agencies to limit the statement of purpose and need, and therefore the range of alternatives, to only those that are consistent with the applicant’s goals and the agency’s statutory authority.

The Phase One rule removes these limitations to re-establish federal agencies’ discretion to consider a variety of factors, including a range of reasonable alternatives that are not entirely consistent with the goals of the project applicant. Accordingly, federal agencies may again coordinate with communities and project proponents to evaluate alternatives that could minimize environmental and public health costs, but extend beyond the scope of the agency’s authority or do not serve the applicant’s goals.

2.  Agency Implementing Regulations (40 CFR 1507.3)

The Phase One rule also removes language that could limit agencies’ standards and procedures for implementing NEPA rules that extend beyond CEQ regulatory requirements. This update reestablishes CEQ regulations as the “floor” for NEPA environmental review, and restores the agency’s discretion and flexibility to tailor NEPA procedures to align with specific agency and public needs. In contrast, the 2020 rule would have made the CEQ regulations a “ceiling” for NEPA requirements, effectively restricting agencies’ discretion to develop and implement procedures beyond requisite CEQ regulations.

3.  Scope of Effects (40 CFR 1508.1(g))

Finally, the Phase One rule restores the definition of “effects” that requires agencies to consider the historic categories of “reasonably foreseeable” direct, indirect, and cumulative effects. The 2020 rule, in contrast, limited the scope of this analysis to effects with a “reasonably close causal relationship,” and included language indicating that agencies were only required to consider direct effects, had discretion to consider indirect effects, and should not consider cumulative effects in NEPA review. The Phase One rule change thus ensures that agencies’ NEPA documents will evaluate all relevant environmental impacts resulting from the agency decision.

Here, the Phase One rule reversal is particularly impactful in terms of an agency’s consideration of climate change, where cumulative effects tend to be substantially greater than the effects of the individual project. The Phase One update confirms CEQ’s view that climate change impacts are adequately considered in evaluating direct, indirect and cumulative effects.

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Except for reinstating these three key provisions, the Phase One rule does not affect other changes made by the 2020 rule.  The Biden Administration plans to introduce more comprehensive changes as part of the forthcoming Phase Two rule. These changes, which are anticipated to be more controversial and draw additional public attention, are expected to address environmental justice, public participation, and streamlining provisions, including the use of plain language, deadlines, page limits, and inter-agency coordination.

Article By Alexander L. Merritt and Kathryn C. Kafka of Sheppard, Mullin, Richter & Hampton LLP

For more environmental legal news, click here to visit the National Law Review.

Copyright © 2022, Sheppard Mullin Richter & Hampton LLP.

New Jersey Employers Are Now Required to Provide Written Notice Before Using Tracking Devices in Employee-Operated Vehicles

Earlier this year, New Jersey Governor Phil Murphy signed into law Assembly Bill No. 3950, which requires employers in the State to provide written notice to an employee before using a tracking device on a vehicle used by the employee. The new law, which went into effect on April 18, 2022, recognizes that employers may have a legitimate business interest in being able to track their workforce’s whereabouts—particularly when traveling or working offsite—while also reconciling that with the protection of workers’ privacy rights. At the very least, the days of covertly tracking employee vehicles appear to be a thing of the past.

The law defines “tracking device” as any “electronic or mechanical device which is designed or intended to be used for the sole purpose of tracking the movement of a vehicle, person, or device,” with a specific carveout for devices used solely for the purpose of documenting employee expense reimbursement.

Significantly, the written notice requirement applies to the use of tracking devices in any vehicles used by an employee. It does not matter whether it is an employee’s personal vehicle (whether owned or leased) or company-owned or provided. Written notice must be provided regardless.

Failure to comply with the law’s notice requirements can carry substantial penalties. An employer who knowingly makes use of a tracking device in a vehicle used by an employee without providing written notice to the employee shall be subject to a civil penalty up to $1,000.00 for the first violation, and then up to $2,500.00 for each subsequent violation. These fines can add up quickly, especially for service businesses with large vehicle fleets, among others. Additionally, it is possible that failure to comply with the law’s notice requirements may implicate employee privacy rights that could lead to further civil exposure.

Private employers within the State must ensure they have appropriate policies and procedures in place to comply with the new law’s requirements and insulate their businesses from potential liability for violations. While it does not specify what the required “written notice” must look like or how it must be conveyed to employees, at minimum employers should update their employee handbooks as well as provide a stand-alone, written notice to employees, with signed confirmation and acknowledgement of receipt. Additionally, rule and regulations regarding GPS tracking of employee vehicles may vary from state to state, so employers with a multi-state presence or service area need to be aware of the different laws that may apply to them depending on where their employees are working.

Employers who have not yet updated their forms and procedures should immediately contact counsel and take steps to ensure that they are in compliance. Similarly, it may be prudent for employers who drafted their own policies to have experienced employment counsel perform a policy or handbook review and provide advice and guidance regarding employer responsibilities and obligations, including but not limited to ensuring compliance with New Jersey’s new vehicle tracking device law.

COPYRIGHT © 2022, STARK & STARK
Article By Cory Rand with Stark & Stark.
For more articles about New Jersey Legislation, visit the NLR New Jersey law section.

Calling All Whistleblowers: Department of Justice Launches Office of Environmental Justice

Last week, the United States Attorney General announced the creation of the Office of Environmental Justice (OEJ) within the Department of Justice. The OEJ will manage DOJ’s environmental justice projects and “serve as the central hub for our efforts to advance our comprehensive environmental justice enforcement strategy” and address the “harm caused by environmental crime, pollution, and climate change.”

In his speech, Attorney General Merrick B. Garland remarked that OEJ will “prioritize the cases that will have the greatest impact on the communities most overburdened by environmental harm” in partnership with the Civil Rights Division, Office for Access to Justice, Office of Tribal Justice, and United States Attorneys’ Offices.
Whistleblowers take note: violations of environmental laws (Clean Air Act, Clean Water Act) can be a basis for a False Claims Act case.

In 2019, the DOJ settled a case against a domestic producer of Omega-3 fish oil supplements, fishmeal, and fish solubles for livestock and aquaculture feed. The producer allegedly falsely certified compliance with federal environmental laws on a loan application. Under the terms of the settlement, the fish oil producer paid $1 million. A former employee blew the whistle on their employer’s fishy business and was rewarded $200,000 as part of a qui tam lawsuit.

False certification of environmental law compliance harms taxpayers, workers, residents, and the environment for generations. The Assistant Attorney General of the DOJ’s Civil Division said about the case, “Companies will face appropriate consequences if they misrepresent their eligibility to participate in federal programs and divert resources from those who should receive federal support.” It’s up to employees of manufacturers, contractors, construction companies, power plants, and others who receive government funds to report environmentally hazardous misconduct, so that, as the U.S. Attorney said, “Businessmen and companies that lie to get their hands on taxpayer money will be held accountable for their actions.”

Article By Eva Gunasekera and Renée Brooker of Tycko & Zavareei LLP

For more whistleblower legal news, click here to visit the National Law Review.

© 2022 by Tycko & Zavareei LLP

Wisconsin Judge Rules that the WDNR Lacks Authority to Regulate PFAS

On April 12, 2022, a Wisconsin judge ruled in the case of Wisconsin Manufacturers & Commerce, Inc. and Leather Rich, Inc. v. WDNR, (Waukesha County Case 2021CV000342) that the WDNR lacks the authority to regulate PFAS chemicals because the Wisconsin Legislature has not established regulatory standards for them. According to the lawsuit, Leather Rich, Inc. entered into a voluntary WDNR environmental cleanup program in 2019, and the following year WDNR indicated that the businesses enrolled in the program were required to test for emerging contaminants, including PFAS. The plaintiffs in the case argued that because the WDNR had created a list of emerging contaminants without any legislative oversight or opportunity for public comment, and had not adopted regulatory standards through administrative rulemaking, the WDNR lacked the authority to require such testing. The judge’s ruling would require the WDNR to wait until legislators have established standards for PFAS through adoption of regulatory limits in state law or through administrative rules. It is estimated that the adoption of standards for PFAS could require 1-2 years. An attorney for the WDNR indicated that the WDNR plans to appeal the decision and file a motion to place the judge’s order on hold.

The WDNR has historically taken the position that the agency has authority under Wisconsin’s “Hazardous Substance Spill Act” (“Spill Act” – Wis. Stats. 292.11) to regulate PFAS even in the absence of established standards, as the Spill Act gives the WDNR broad authority to require testing and remediation of such chemicals. In late February, the WDNR’s Natural Resources Board (NRB)—the entity that sets policy for the WDNR—took steps toward the adoption of statewide standards for two of the most common PFAS compounds, which included an approval to adopt a drinking water standard of 70 parts per trillion (ppt) for two of the most common PFAS compounds; perfluorooctanoic acid (PFOA) and polyfluorooctane sulfonate (PFOS).

PFAS is an acronym for per- and polyfluorolalkyl substances, which are chemicals that were widely used from the 1960s to the early 2000s in the manufacture of a variety of consumer products, such as stain resistant carpets, non-stick cookware (e.g., Teflon), firefighting foam, food packaging (e.g., microwave popcorn bags/pizza boxes), water resistant clothing (e.g., pre-2000 GoreTex), water resistant repellent (e.g., Scotchgard) and dental floss. While the use of PFAS compounds has largely been phased out in the U.S., these compounds are still used in the manufacturing of many products worldwide. These substances, known as “forever chemicals,” have received considerable attention by federal and state environmental regulatory agencies because of their resistance to chemical breakdown due to the chemical bond between carbon and fluorine atoms in the PFAS compounds, which is one of the strongest in nature. Because of this, humans can still be exposed to PFAS long after the chemicals were released into the environment.

The WDNR has identified approximately 90 sites throughout Wisconsin with PFAS contamination, including municipalities such as Madison, Marinette, Peshtigo and Wausau with PFAS-contaminated groundwater.

©2022 von Briesen & Roper, s.c
For more articles about state lawsuits, visit the NLR Litigation section.

L’Oreal PFAS Lawsuit Again Shows ESG Risks of Marketing

In less than six months, L’Oreal has now found itself to be the target of PFAS lawsuits related to its mascara products. The latest L’Oreal PFAS lawsuit was filed in the New Jersey federal court on April 8, 2022. Cosmetics and PFAS is a topic that saw increased scrutiny from the scientific community, legislature, and the media in 2021. As we predicted in early 2021, the increased attention on the industry presented significant risks to the cosmetics industry, and our prediction was that the developments made the cosmetics industry the number two target for future PFAS lawsuits. In less than three months, four industry giants – Shiseido, CoverGirl, L’Oreal and Burt’s Bees – were hit with lawsuits related to their cosmetics and PFAS content in some of the companies’ products.  The industry, insurers, and investment companies interested in the consumer goods vertical with niche interest in cosmetics companies must pay careful attention to the cosmetics lawsuits and the increasing trend of lawsuits targeting the industry.

PFAS and Cosmetics: the 2021 Foundation

On June 15, 2021, a scientific study in the Journal of Environmental Science and Technology Letters published conclusions regarding testing of a variety of cosmetics products from the United States and Canada for PFAS content, and found PFAS present in over half of the products. On the same day that the study was published, the No PFAS In Cosmetics Act 2021 was introduced in the Senate by U.S. Senators Susan Collins (R-ME), Richard Blumenthal (D-CT), Dianne Feinstein (D-CA), Maggie Hassan (D-NH), Jeanne Shaheen (D-NH), Kirsten Gillibrand (D-NY), and Angus King (I-ME). The bill sought to ban PFAS in cosmetics.

These two developments led us to conclude “with these developments, our prediction that cosmetics is the number two target for PFAS litigation issues behind water rings true.”

Why PFAS In Cosmetics Is A Concern

PFAS content in cosmetics raises concerns for human health in scientific communities due to the fact that PFAS are capable of entering the bloodstream in ways other than direct oral ingestion, and one of these ways includes dermal absorption. Concerns have also been raised regarding absorption of PFAS into the bloodstream by way of tear ducts. The absorption issue is one that is being studied fairly extensively through various pending scientific studies. At the end of 2021, the federal Agency for Toxic Substances and Disease Registry (ATSDR) went so far as to recommend that citizens in Southern New Hampshire reduce their risk of further PFAS exposure by avoiding the use of certain consumer goods, including cosmetics.

L’Oreal PFAS Lawsuit

On April 8, 2022, plaintiff Rebecca Vega filed a lawsuit in the New Jersey federal court seeking a proposed class action lawsuit against LOreal. The L’Oreal PFAS lawsuit alleges that the company does not disclose to consumers that its mascara and other products contain PFAS. Instead, the lawsuit states, the products were fraudulently and misleadingly marketed as safe for consumers and environmentally friendly, in violation of federal and state consumer laws. The Complaint details several examples of L’Oreal marketing indicating the safe nature of the products.

The plaintiff seeks certification of the class action lawsuit, injunctive relief, damages, fees, costs and a jury trial. The proposed class is any consumer in the United States, or in the subclass of New Jersey, who purchased the relevant L’Oreal products.

Just the Beginning For Cosmetics Industry

With studies underway, legislation pending that targets cosmetics, and increasing media reporting on cosmetics concerns to human health, the cosmetics industry has a target on its back with respect to PFAS that will have impacts on the industry’s involvement in litigation. Twelve months ago, we made this prediction: “Personal injury / products liability cases, false advertising, and failure to disclose theories of liability are some of the more prominent allegations that cosmetics companies are likely to face. Further, the cosmetics industry is concerned about federal and state level regulatory enforcement action for environmental pollution remediation costs stemming from placing PFAS waste into the environment as a by-product of the manufacturing process.”

The first part of our prediction is becoming reality, as four significant cosmetics industry players now find themselves embroiled in litigation focused on false advertising, consumer protection violations, and deceptive statements made in marketing and ESG reports. The lawsuits may well serve as a test case for plaintiffs’ bar to determine whether similar lawsuits will be successful in any (or all) of the fifty states in this country. Each cosmetics company faces the stark possibility of needing to defend lawsuits involving plaintiffs in all fifty states for products that contain PFAS.

It should be noted that these lawsuits would only touch on the marketing, advertising, ESG reporting, and consumer protection type of issues. Separate products lawsuits could follow that take direct aim at obtaining damages for personal injury for plaintiffs from cosmetics products. In addition, environmental pollution lawsuits could seek damage for diminution of property value, cleanup costs, and PFAS filtration systems if drinking water cleanup is required.

Conclusion

It is of the utmost importance that businesses along the whole supply chain in the cosmetics industry evaluate their PFAS risk. Public health and environmental groups urge legislators to regulate PFAS at an ever-increasing pace. Similarly, state level EPA enforcement action is increasing at a several-fold rate every year. Now, the first wave of lawsuits take direct aim at the cosmetics industry. Companies that did not manufacture PFAS, but merely utilized PFAS in their manufacturing processes, are therefore becoming targets of costly enforcement actions at rates that continue to multiply year over year. Lawsuits are also filed monthly by citizens or municipalities against companies that are increasingly not PFAS chemical manufacturers.

©2022 CMBG3 Law, LLC. All rights reserved.
Article By John Gardella with CMBG3 Law.
For more articles on ESG lawsuits, visit the NLR Environmental, Energy & Resources section.

The SEC’s Proposed Rules on Climate-Related Disclosures – What to Do Now: A Guide for In-House Counsel Facing the Proposed Rules

The U.S. Securities and Exchange Commission’s recently proposed rules governing climate-related disclosures, if adopted as proposed, would represent a sea change to the existing public-company disclosure regime.  The rules would require that public companies include the following, among other disclosures, in reports and registration statements filed with the SEC:

  • disclosure of greenhouse gas (GHG) emissions data covering Scope 1 and Scope 2 emissions for all companies and Scope 3 emissions for companies1 (other than those that qualify as “smaller reporting companies”) for which Scope 3 emissions are material or that have set emissions reduction targets that include Scope 3 emissions, with third-party attestation being required for Scope 1 and Scope 2 data for companies that qualify as “large accelerated filers” or “accelerated filers”;
  • extensive and detailed disclosures regarding climate-related risks, including physical risks and transition-related risks, to a company’s financial statements, business operations or value chain (i.e., upstream and downstream activities of third parties related to the company’s operations);
  • disclosure in the notes to audited financial statements of quantitative and qualitative information regarding financial impacts of climate-related risk, including disaggregated quantitative information with respect to impacts of physical risks or transition activities on specific financial statement line items if the impact is 1% or more of the line item;
  • extensive and detailed disclosures regarding climate-related governance, strategy and risk management; and
  • to the extent relevant to a particular company, disclosures regarding the company’s transition plan, climate-related targets or goals, use of scenario analyses or other analytical tools in evaluating climate-related risk and use of an internal carbon price.

For many companies, the rules would require enterprise-wide changes to how the company collects, assesses and reports climate-related data and other information, as well as changes to their governance structures and systems of controls.  Changes may be driven both by the need to comply with the disclosure requirements and by a company’s view of how its disclosures will be received by investors or the public generally.

The tasks of understanding the implications of the proposed rules for a particular company and preparing for eventually complying with the rules are monumental, and, unfortunately, public companies currently find themselves in the difficult position of possibly needing to act with some urgency in order to be prepared to comply with rules of uncertain substance on an uncertain timeline.  At this point, the proposed rules are just that – proposed and not final.  The period for public comment on the proposed rules will run until May 20 at the earliest and could be extended by the SEC, and public comments are likely to reflect the controversial nature of the proposed rules and strong opinions by both supporters and detractors.  After the comment period, whether and when the SEC releases final rules, and the extent to which any final rules largely follow or reflect significant changes from the proposed rules, will remain to be seen.  Like the proposed rules, any final rules should provide for phase-in periods for compliance.  Further, any final rules are almost certain to face legal challenges that could delay implementation of the rules even if such challenges ultimately are unsuccessful.  It is therefore very difficult to predict when companies will need to comply with new rules and precisely what information they will be required to disclose under new rules.

Despite that uncertainty, it appears very likely that the SEC will adopt final climate-related disclosure rules in the not-too-distant future and that those rules will include in some form most, if not all, of the big buckets of disclosure requirements reflected in the proposed rules.  Because of the significant effort and degree of organizational change that compliance with the rules likely will require, companies may not be able to wait until final rules are released to begin assessing the impacts of the proposed rules on their organizations.  And, if the SEC were to adopt final rules later this year in the proposed form, companies that are large accelerated filers with a calendar fiscal year would be required to include information for 2023, including Scope 1 and 2 emissions data, in their annual reports filed in early 2024, meaning that they would need to have the systems in place to track and record the relevant information by the end of this year.

Assessing the potential impact of the proposed rules on a company and preparing the company for eventually complying with the rules will require participation from many different parts of the organization, but we expect that, at many companies, the task of setting the company on a course to do those things will fall on the general counsel and other in-house counsel with responsibility for relevant substantive areas.  With that in mind, we have prepared the following guide for in-house counsel with respect to near-term actions their companies should be taking or should consider taking, depending on their circumstances.  Bracewell will expand on a number of the topics noted below in future alerts, webinars or other similar communications.

1.   Engage senior management, the board of directors and relevant board committees and begin assessing governance, oversight and management of climate-related risks.

In-house counsel likely will be hearing from their CEOs and board members, if they haven’t already, asking what the proposed rules mean for their company.  In any case, in-house counsel should ensure that top-level management and board members understand the potential challenges and changes their companies may face with the proposed rules and encourage the level of board and senior management oversight and engagement that is appropriate for their situation.  The proposed rules would require companies to provide detailed disclosures concerning their boards’ oversight of climate-related risks and management’s role in assessing and managing those risks. Although many companies already have robust board oversight of ESG matters and include related disclosures in their SEC filings, the proposed rules are far more granular in dictating the type of information that would need to be disclosed.

In that regard, in-house counsel may be asked what changes, if any, should be made to board or committee composition and structure in light of the proposed new disclosure requirements.  Among other matters, consideration should be given to whether the creation of a new ESG committee – or a purely climate-focused committee – is appropriate or whether responsibility reasonably can be shouldered by an existing committee, such as the audit committee.

2.   Establish organizational responsibility for assessing the implications of the proposed rules for your company.

As noted above, this is a huge task that will require input from a multidisciplinary team, including legal, accounting, operations and possibly other personnel.  Identifying the right team and setting clear responsibilities and timelines are critical near-term tasks.

3.   Understand the potential timeline for compliance with the proposed rules as it relates to your organization.

As noted above, there is considerable uncertainty regarding, among other matters, whether final rules will require compliance on the timelines contemplated in the proposed rules, which would have the compliance requirements phased in over several years based on a company’s status as a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  This fact sheet on the proposed rules published by the SEC provides helpful tables (on page 3) detailing the phase-in periods contemplated by the proposed rules for companies with a calendar fiscal year, assuming the proposed rules were adopted as final with an effective date in December 2022.

Despite the uncertainty, it is certainly possible that the SEC could adopt final rules later this year with compliance dates as contemplated by the proposed rules, and companies therefore would be ill-advised to assume that they will have a longer ramp-up period than they would under the proposed rules and the assumption of a December 2022 effective date.

4.   Understand the proposed rules and the disclosures they will require for your company based on its specific circumstances, including with regard to differences between what the company is disclosing now and what would be required by the proposed rules.

The proposed rules are highly prescriptive and are intended to produce consistent and comparable disclosures across the public-company spectrum.  With limited exceptions (e.g., that smaller reporting companies would be exempted from the requirement to disclose Scope 3 emissions), all public companies will need to assess required disclosure under all provisions of the rules.  That assessment, however, will need to be made in light of the company’s specific circumstances, and there will be categories of required disclosures that are very relevant to some industries or companies but of no or limited relevance to other industries or companies.  Additionally, many companies have been voluntarily disclosing information that is similar to some of the information that may be required to be provided under the proposes rules, but there may be gaps between or differences in required disclosures and a company’s current practices.

As companies begin to digest the proposed rules, it will make sense for them to drill down on the specific types of disclosures they would need to make if the proposed rules were adopted as proposed.  Questions that companies might ask themselves include the following:

  • Will we need to disclose Scope 3 emissions data based on materiality or having set targets or goals including Scope 3 emissions?
  • What, if anything, have we done with respect to the following topics such that disclosure regarding those topics would be required?
    • Adoption of a transition plan
    • Setting of climate-related goals or targets
    • Use of carbon offsets or renewable energy credits in setting goals or targets
    • Use of scenario analyses or other analytical tools in evaluating climate risk
    • Use of an internal carbon price
      • Note that, with respect to goals or targets, the proposed rules refer to a company’s having “set” such goals or targets and not to its having publicly disclosed them.  Similarly, with respect to all of these topics, it is not clear that the related disclosure would be triggered only by some level of formality or organizational scope in the adoption, setting or use of the applicable item.  Companies therefore should assess the relevance of these topics broadly, including informal use or discussion within the organization.
  • What information that we are not currently disclosing would the proposed rules require us to disclose?
  • For information that we are currently disclosing, would the proposed rules require that information to be established, assembled or disclosed differently, or disclosed more expansively or granularly, from how we are doing it now?  If so, how?
  • Which required disclosures might be particularly challenging for our company, such that they might merit special or prioritized focus?

5.   Begin to evaluate existing systems and resources related to climate-related information and identify changes that will need to be made.

Companies in some industries, such as energy or manufacturing, likely already have systems in place to collect much of the data called for by the proposed rules, and many public companies have been publishing voluntary disclosures in the form of ESG reports for years.  However, smaller companies in such industries may not currently have the resources necessary to devote to compliance with the new rules.  Likewise, companies in non-GHG intensive industries, such as financial services, previously may not have had the need, or a more limited need, for such systems.  And even those companies that are experienced in collecting and disclosing climate-related data and other information likely would, under the proposed rules, need to expand their systems to cover a much broader universe of information and ensure that controls and procedures meet standards for disclosures in SEC-filed documents and are appropriate for enhanced scrutiny and potential liability that will come with including such disclosures in SEC-filed documents.  Companies may need to invest significantly in new personnel with appropriate expertise and in new technology, and they will need to expand their disclosure controls and procedures and internal control over financial reporting to cover new sets of information that are wide-ranging, voluminous and highly detailed.  Accordingly, public companies should begin to assess their existing capabilities and identify the changes they would need to make to comply with proposed rules to ensure that the changes can be effected in time to comply with new rules.

Additionally, the climate-related risk disclosures contemplated by the proposed rules may require that companies devote significant resources to expanding the process by which they identify and assess climate-related risk.  Further, the need for companies to evaluate climate-related risks to upstream and downstream – value chain – activities, and potentially to disclose Scope 3 emissions associated with those activities, may pose significant challenges and likely will require many companies to develop new processes to address disclosure requirements that relate to matters that are largely outside of the company’s control and access.  These are areas that companies may want to focus on in the near term.

6.   Evaluate needs and strategy for retaining third parties to assist with disclosures, including for attestation of GHG emissions data.

As noted above, for large accelerated filers and accelerated filers, the proposed rules would require attestation regarding Scope 1 and Scope 2 GHG emissions data by an independent third party meeting certain minimum qualifications, which may be a public accounting firm if it meets the minimum qualifications but need not be an accounting firm.  The market for providing these attestation services is evolving and will continue to evolve as accounting firms and others develop their ability to provide these services.  Some observers have raised concerns that the supply of emission-attestation services may not initially meet the demand for such services that the proposed rules would create.  Companies may wish to begin thinking about their options for third-parties to handle the attestation, particularly large accelerated filers who could be subject to the attestation requirements as soon as in their 2024 annual reports filed in early 2025. Additionally, it is important for companies to have conversations around attestation ahead of their information gathering efforts to ensure that the disclosure information being developed and gathered will be sufficient for attestors to provide the required assurance.

In addition to attestation services, companies should consider their potential need for and access to other third-party advisors with the necessary expertise and experience, including attorneys, accountants/auditors and firms providing consulting and other services to assist companies with climate-related disclosures.

7.   Consider whether the disclosures contemplated by the proposed rules warrant any changes to your current, planned or contemplated climate-related activities, such as setting or disclosing of climate-related goals or targets.

As noted above, the proposed rules contemplate detailed disclosures regarding several matters that may or may not be relevant to a particular company depending on things that the company may or may not have done in advance of the initial compliance date for the proposed rules.  These include whether a company has:

  • adopted a climate transition plan,
  • set climate-related goals or targets,
  • included Scope 3 emissions in its goals or targets,
  • used carbon offsets or renewable energy credits in setting its goals or targets,
  • used scenario analyses or other analytical tools in assessing climate-related risk, or
  • used an internal carbon price.

Companies may wish to reassess their existing, planned or contemplated activities in these areas in view of the proposed rules.  It may be the case that a company would want to modify its activities in one or more of these areas when viewed through the lens of what the company’s disclosures regarding such activities would look like under the proposed rules.  For example, if your company is planning to set or announce new GHG emissions goals, should the company modify the goals as they relate to Scope 3 emissions or otherwise before doing so, or would it be preferable for the company to delay any such setting or announcement of goals until there is clarity on the content of final rules?

8.   Determine whether to submit comments on the proposed rules.

The proposed rule release includes over 200 requests for comment.  Comments are due by the later of 30 days after the date the proposing release is published in the Federal Register (which had not happened as of the date of this update) or May 20, 2022.  (As noted above, it is possible that the comment period could be extended beyond that date, but, unless and until the SEC actually does that, parties desiring to submit comments should proceed with the expectation that they will need to submit them by the applicable current deadline.)  Although the SEC will not agree with all comments received and may adopt final rules despite strong and widely-held opposing views reflected in the comments, the SEC and its staff will consider the comments received in adopting final rules and likely will make at least some changes to the proposed rules based on comments.  If your company would like to have its voice heard on the proposed rules, you may consider doing so by submitting comments directly or through an industry association or similar group.

9.   Monitor developments.

As noted above, we are in the early stages of the process through which the proposed rules could, in their current form or with changes, become final rules with which public companies actually would need to comply.  In-house lawyers should continue to monitor developments and advise others in their organizations of such developments as appropriate so that preparations for compliance with new climate-related disclosure rules can be adjusted as necessary.

10. Don’t forget that climate-related disclosures may be required under existing SEC rules and interpretations.

With the anticipation of a massive new disclosure regime for climate-related matters and preparation for compliance with that regime, it might be easy to overlook that fact the existing SEC rules and interpretations may require climate-related disclosures in SEC filings, and the SEC staff may issue comments on climate-related disclosures, or the absence thereof, in a company’s SEC filings, as they did for a number companies in the fall of 2021 with respect to the companies’ 2020 annual reports on Form 10-K.  Pending the adoption and implementation of final new rules, companies should continue to assess their disclosures in view of the SEC’s 2010 guidance on climate-related disclosures.

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1. Scope 1 emissions are direct GHG emissions from operations that are owned or controlled by a company.  Scope 2 emissions are indirect GHG emissions from the generation of purchased or acquired energy that is consumed by a company’s operations.  Scope 3 emissions are all indirect GHG emissions not otherwise included in a company’s Scope 2 emissions, which occur in the upstream and downstream activities of a company’s value chain.

© 2022 Bracewell LLP
For more about SEC disclosures, please visit the NLR Financial, Securities & Banking section.

When Board Conflict Crosses the Line…

Elected officials are, naturally, sometimes at the center of conflict and division within their board.  Conflict is to be expected.  However, what happens when board members take action to freeze out a minority board member from information that he or she needs to do his or her respective job?  The use of information-control tactics against minority members on a board, impeding their ability to receive that information necessary to perform his or her duties is problematic – and it may be unconstitutional.\

Elected officials have duty to be informed. Palm v.Centre Tp., 415 A.2d 990, 992 (Pa. Commw. Ct. 1980):

It is the duty of a school board member, a commissioner, a councilman, or a supervisor to be informed. Supervisors are not restricted to information furnished at a public meeting. A supervisor has the right to study, investigate, discuss and argue problems and issues prior to the public meeting at which he may vote. Nor is a supervisor restricted to communicating with the people he represents. He is not a judge. He can talk with interested parties as does any legislator.

This responsibility extends beyond the contours of the public meeting and what is discussed at those meetings.

Elected officials have protections under the First Amendment. The Third Circuit has historically recognized that a public official’s right to free speech under the First Amendment will be violated when the retaliatory conduct of her peers interferes with her ability to adequately perform her elected duties. See Werkheiser v. Pocono Tp., 780 F.3d. 172, 182 (3d Cir. 2015); Monteiro v. City of Elizabeth, 436 F.3d 397, 404 (3d Cir. 2006).

To avoid entering the territory of this kind of interference, everyone can play a role in ensuring the government functions adequately and that Board members’ rights, duties, and privileges are protected.  Board division, when gone too far, can cross constitutional lines.  To avoid walking that line, there are things that everyone can do to make for a well-functioning Board or meeting:

  • Managers can stay neutral and ensure that every board member is kept up to date on significant municipal operations and projects.
  • Solicitors can host a meeting with the board to educate the board on laws pertaining to their position, such as a municipal code and the Pennsylvania Sunshine Act.
  • Board members can foster respect for fellow board members and learn how to communicate so that each board member can participate in healthy debate on contentious issues.  Enacting policies related to meeting decorum can be helpful, but they need to be enforced evenhandedly.

For more tips for handling divisiveness among a board, see the December 2021 article on “Tips for Handling Board Conflicts” in the Pa Township News.

©2022 Strassburger McKenna Gutnick & Gefsky