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European Commission Action on Climate Taxonomy and ESG Rating Provider Regulation

On June 13, 2023, the European Commission published “a new package of measures to build on and strengthen the foundations of the EU sustainable finance framework.” The aim is to ensure that the EU sustainable finance framework continues to support companies and the financial sector in connection with climate transition, including making the framework “easier to use” and providing guidance on climate-related disclosure, while encouraging the private funding of transition projects and technologies. These measures are summarized in a publication, “A sustainable finance framework that works on the ground.” Overall, according to the Commission, the package “is another step towards a globally leading legal framework facilitating the financing of the transition.”

The sustainable finance package includes the following measures:

EU Taxonomy Climate Delegated Act: amendments include (i) new criteria for economic activities that make a substantial contribution to one or more non-climate environmental objectives, namely, sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention and control, and protection and restoration of biodiversity and ecosystems; and (ii) changes expanding on economic activities that contribute to climate change mitigation and adaptation “not included so far – in particular in the manufacturing and transport sectors.” The EU Taxonomy Climate Delegated Act has been operative since January 2022 and includes 107 economic activities that are responsible for 64% of greenhouse gas emissions in the EU. In addition, “new economic sectors and activities will be added, and existing ones refined and updated, where needed in line with regulatory and technological developments.” “For large non-financial undertakings, disclosure of the degree of taxonomy alignment regarding climate objectives began in 2023. Disclosures will be phased-in over the coming years for other actors and environmental objectives.”
Proposed Regulation of ESG Rating Providers: the Commission adopted a proposed regulation, which was based on 2021 recommendations from the International Organization of Securities Commissioners, aimed at promoting operational integrity and increased transparency in the ESG ratings market through organizational principles and clear rules addressing conflicts of interest. Ratings providers would be authorized and supervised by the European Securities and Markets Authority. The regulation “provides requirements on disclosures around” ratings methodologies and objectives, and “introduces principle-based organizational requirements on” ratings providers activities. The Commission is also seeking advice from ESMA on the presentation of credit ratings, with the aim being to address shortcomings related to “how ESG factors are incorporated into methodologies and disclosures of how ESG factors impact credit ratings.”
Enhancing Usability: the Commission set out an overview of the measures and tools aimed at enhancing the usability of relevant rules and providing implementation guidance to stakeholders. The Commission Staff Working Document “Enhancing the usability of the EU Taxonomy and the overall EU sustainable finance framework” summarizes the Commission’s most recent initiatives and measures. The Commission also published a new FAQ document that provides guidance on the interpretation and implementation of certain legal provisions of the EU Taxonomy Regulation and on the interactions between the concepts of “taxonomy-aligned investment” and “sustainable investment” under the SFDR.

Taking the Temperature: As previously discussed, the Commission is increasingly taking steps to achieve the goal of reducing net greenhouse gas emissions by at least 55% by 2030, known as Fit for 55. Recent initiatives include the adoption of a carbon sinks goal, the launch of the greenwashing-focused Green Claims Directive, and now, the sustainable finance package.

Another objective of these regulatory initiatives is to provide increased transparency for investors as they assess sustainability and transition-related claims made by issuers. In this regard, the legislative proposal relating to the regulation of ESG rating agencies is significant. As noted in our longer survey, there is little consistency among ESG ratings providers and few established industry norms relating to disclosure, measurement methodologies, transparency and quality of underlying data. That has led to a number of jurisdictions proposing regulation, including (in addition to the EU) the UK, as well as to government inquiries to ratings providers in the U.S.

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CFIUS Determines it Lacks Jurisdiction to Review Chinese Land Acquisition

In 2022, Fufeng USA, a subsidiary of Chinese company Fufeng Group, purchased 370 acres near Grand Forks, North Dakota, with the intention of developing the land to build a plant for wet corn milling and biofermentation,[1] prompting opposition from federal and state politicians.[2] North Dakota Senators, North Dakota’s Governor, and Senator Marco Rubio urged the Committee on Foreign Investment in the United States (CFIUS) to review the acquisition as a potential national security risk for being located within 12 miles from the Grand Forks Air Force Base, which is home to military drone technology and a space networking center.[3] Following CFIUS’ review of Fufeng’s notice submission, CFIUS determined that it lacked jurisdiction over the transaction. This post summarizes the public information about that CFIUS case and provides observations about the responses by North Dakota and CFIUS in the wake of Fufeng’s proposed investment.

CFIUS Review and Determination

1. Procedural History

In conjunction with rising public opposition to its land acquisition, public reports show that Fufeng USA submitted a declaration to CFIUS on July 27, 2022.[4] North Dakota local news outlet Valley News Live obtained a copy of the CFIUS closing letter to that declaration filing, which stated that CFIUS determined on August 31, 2022 that it lacked sufficient information to assess the transaction and requested that the parties file a full notice.[5] (CFIUS has the option under the regulations to request a full notice filing at the conclusion of the abbreviated 30-day review of a declaration filing.) Based on the CFIUS closing letter to that subsequent notice filing, which was likewise obtained and published by Valley News Live, Fufeng USA submitted a notice on October 17, 2022, and CFIUS subsequently concluded that it lacked jurisdiction to review the transaction in December 2022.[6]

2. Why CFIUS did not Review under its Part 802 Covered Real Estate Authority

According the CFIUS Letter released by Fufeng to Valley News Live, Fufeng submitted its notice pursuant to 31 C.F.R. Part 800 (“Part 800”), which pertains to covered transaction involving existing U.S. businesses.[7] The closing letter made no reference to the transaction being reviewed as a “covered real estate transaction” under 31 C.F.R. Part 802 (“Part 802”).[8] A reason for this could be that, at the time the case was before CFIUS, the land acquisition by Fufeng USA was not within any of the requisite proximity thresholds and, thus, did not fall within Part 802 authority. Under Part 802, CFIUS has authority over certain real estate transactions involving property in specific maritime ports or airports, or within defined proximity thresholds to identified “military installations” listed in Appendix A to Part 802. Grand Forks Air Force Base was not included in Appendix A at that time, nor was the acquired land within the defined proximity of any other listed military installation. Accordingly, the only way for CFIUS to extend authority would be under its Part 800 authority relating to certain acquisitions of U.S. businesses.

3. CFIUS Determined It Lacked Jurisdiction Under its Part 800 Covered Transaction Authority

CFIUS’ closing letter to Fufeng stated that “CFIUS has concluded that the Transaction is not a covered transaction and therefore CFIUS does not have jurisdiction under 31 C.F.R. Part 800.”[9] Part 800 provides CFIUS with authority to review covered control transactions (i.e., those transactions that could result in control of a U.S. business by a foreign person) or covered investment transactions (i.e., certain non-controlling investments directly or indirectly by a foreign person in U.S. businesses involved with critical technology, critical infrastructure, or the collection and maintaining of US citizen personal data). Greenfield investments, however, inherently do not involve an existing U.S. business. As such, greenfield investments would be outside of CFIUS’ jurisdiction under Part 800. Although the justification underlying CFIUS’ determination regarding Fufeng’s acquisition is not publicly available, CFIUS might have determined that it lacked authority under Part 800 because Fufeng’s purchase of undeveloped land was not an acquisition of a U.S. business, but more likely a greenfield investment.

State and Federal Response

Under state and federal pressure, the City of Grand Forks, which initially approved Fufeng’s development of the corn milling facility, “officially decided to terminate the development agreement between the city and Fufeng USA Inc.” on April 20, 2023.[10] This decision was largely impacted by the U.S. Air Force’s determination that “the proposed project presents a significant threat to national security with both near- and long-term risks of significant impacts to our operations in the area.”[11] As of today, the land appears to still be under the ownership of Fufeng USA.[12]

CFIUS’ determination that it lacked authority drew sharp criticism from state and federal politicians. North Dakota Senator Cramer purported that CFIUS may have determined the jurisdictional question too narrowly and indicated that the determination may prompt federal legislative action.[13] Senator Marco Rubio (R-Florida) concurred, issuing a statement that permitting the transaction was “dangerous and dumb.”[14] In response to the determination, the Governor of South Dakota announced plans for “legislation potentially limiting foreign purchases of agricultural land” by investigating “proposed purchases of ag land by foreign interests and recommend either approval or denial to the Governor.”[15]

On April 29, 2023, North Dakota Governor Doug Burgum signed Senate Bill No. 2371 into law, which prohibits local development and ownership of real property by foreign adversaries and related entities, effective August 1, 2023. Notably, these entities include businesses with a principal executive offices located in China, as well as businesses with a controlling Chinese interest or certain non-controlling Chinese interest.

On May 5, 2023, the U.S. Department of Treasury, the agency tasked with administering CFIUS, also took steps to expand its authority to cover more real property acquisitions. It published a Proposed Rule that would expand CFIUS covered real estate transaction authority over real restate located with 99 miles of the Grand Forks Air Force Base and seven other facilities located in Arizona, California, Iowa, and North Dakota. See a summary of that Proposed Rule and related implications at this TradePractition.com blog post.

FOOTNOTES

[1] See, Alix Larsen, CFIUS requesting Fufeng USA give more information on corn mill development, Valley News Live (Sep. 1, 2022), https://www.valleynewslive.com/2022/09/01/cfius-requesting-fufeng-usa-give-more-information-corn-mill-development/.

[2] See Letter from Gov. Doug Burgum to Secretaries Janet Yellen and Lloyd Austin (Jul. 25, 2022), https://www.governor.nd.gov/sites/www/files/documents/Gov.%20Burgum%20letter%20urging%20expedited%20CFIUS%20review%2007.25.2022.pdf; Letter from Senators Marco rubio, John Hoeven, and Kevin Cramer to Secretaries Janet Yellen and Lloyd Austin (Jul. 14, 2022), https://senatorkevincramer.app.box.com/s/2462nafbszk2u6yosy77chz9rpojlwtl.

[3] See id; Eamon Javers, Chinese Company’s Purchase of North Dakota Farmland Raises National Security Concerns in Washington, CNBC, July 1, 2022, https://www.cnbc.com/2022/07/01/chinese-purchase-of-north-dakota-farmland-raises-national-security-concerns-in-washington.html.

[4] See, Alix Larsen, CFIUS requesting Fufeng USA give more information on corn mill development (Sep. 1, 2022), https://www.valleynewslive.com/2022/09/01/cfius-requesting-fufeng-usa-give-more-information-corn-mill-development/.

[5] See id.

[6] See Stacie Van Dyke, Fufeng moving forward with corn milling plant in Grand Forks (Dec. 13, 2022), https://www.valleynewslive.com/2022/12/14/fufeng-moving-forward-with-corn-milling-plant-grand-forks/.

[7] See id.

[8] Id.

[9] See id.

[10] Bobby Falat, Grand Forks officially terminates Fufeng Deal (Apr. 20, 2023), https://www.valleynewslive.com/2023/04/20/grand-forks-officially-terminates-fufeng-deal/.

[11] News Release, Senator John Hoeven, Hoeven, Cramer: Air Force Provides Official Position on Fufeng Project in Grand Forks, (Jan. 31, 2023), https://www.hoeven.senate.gov/news/news-releases/hoeven-cramer-air-force-provides-official-position-on-fufeng-project-in-grand-forks.

[12] See, Meghan Arbegast, Fufeng Group owes Grand Forks County more than $2,000 in taxes for first half of 2022 (Apr. 5, 2023), https://www.grandforksherald.com/news/local/fufeng-group-owes-grand-forks-county-more-than-2-000-in-taxes-for-first-half-of-2022.

[13] See Josh Meny, Senator Cramer discusses latest on Fufeng in Grand Forks (Dec. 27, 2022), https://www.kxnet.com/news/kx-conversation/senator-cramer-discusses-latest-on-fufeng-in-grand-forks/.

[14] Press Release, Senator Marco Rubio, Rubio Slams CFIUS’s Refusal to Take Action Regarding Fufeng Farmland Purchase (Dec. 14, 2022) https://www.rubio.senate.gov/public/index.cfm/2022/12/rubio-slams-cfius-s-refusal-to-take-action-regarding-fufeng-farmland-purchase.

[15] Jason Harward, Gov. Kristi Noem takes aim at potential Chinese land purchases in South Dakota (Dec. 13, 2022),https://www.grandforksherald.com/news/south-dakota/gov-kristi-noem-takes-aim-at-potential-chinese-land-purchases-in-south-dakota.

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Diving Into SECURE 2.0: Changes for Small Employer Retirement Plans

International arbitration provides a binding, neutral, and consensual process for resolving contractual disputes between parties, often resulting in resolutions that are quicker, cheaper, more private, and more controllable than litigation in a court of law. Accordingly, arbitration for the resolution of international disputes between contracting parties from different legal jurisdictions has emerged as a fundamental method for resolving complex disputes in an ever-increasingly interconnected world. Multinational companies should make sure they stay up to date on the fundamentals of international arbitration, and it all starts with ensuring any arbitration clause included in an international agreement is drafted in a way that is enforceable and provides contracting parties a clear path toward the resolution of their dispute.

Why Should You Care about What Your Arbitration Clause Says?

An arbitration clause is the starting point for determining the parties’ intent in resolving their dispute outside a court of law. It is an independent agreement within the broader contract, likely enforceable even if the remainder of the contract is procured by fraud, and sits at the apex of what a court or arbitrator will look for to determine the parties’ intent with respect to how a dispute between contracting parties should be resolved.

A clear arbitration clause results in a meaningful, enforceable outcome, minimizes the intervention of U.S. or foreign judiciaries in what should be a private dispute resolution process, grants the third-party administrator and/or the arbitrator the powers necessary to resolve the dispute, and is conducted in accordance with procedures that help guarantee a fair, efficient proceeding.

In contrast, if an arbitration clause is ambiguous, there may be a finding that there is no dispute resolution agreement to enforce. This can result in challenges to the arbitration clause’s enforceability and potential litigation in unfavorable and less-than-ideal judicial systems. Of course, such ambiguity and challenges will create higher costs, longer windows of time to resolve disputes, greater risks that your claims in the dispute will be vulnerable to collateral attacks, and other unintended and unexpected consequences.

What Are the Hallmarks of a Clear Arbitration Clause?

For purposes of clarity, you should ensure your contract’s arbitration clause identifies:

Applicable Law. Which country’s (or state’s) law applies?
Forum and Rules. There are any number of arbitral forums, each with its own nuances in terms of procedure. Knowing the business and potential disputes that could arise will assist in selecting a good fit in terms of applicable rules.
Seat of Arbitration. The seat of the arbitration is more than just the place where the final hearing will take place. It provides a significant backbone to the proceeding and is as important as the selection of the forum and applicable rules.
Number of Arbitrators. The more arbitrators, the larger the cost, but a three-member tribunal has its place in certain disputes.
Language. Selecting the language (or languages) of the arbitration can greatly affect the cost of the proceeding.

Why Does Selecting the Seat of Arbitration Matter?

More than just the physical place where the arbitration will take place, the seat of arbitration is a legal construct that determines the lex arbitri — the procedural law of the arbitration.

Where the contract between the parties or the rules selected by the parties do not provide for certain procedures, the procedural laws of the seat of arbitration will be applied. Among the important aspects of a proceeding that the seat of the arbitration determines is:

Which courts will have supervisory jurisdiction over the arbitration;
Definitions and form of an agreement to arbitrate;
The arbitrability of the dispute;
The constitution of the arbitral tribunal and any grounds for challenge;
The equality of treatment of the parties;
The freedom to agree on detailed rules of procedure;
Interim measures of protection and court assistance;
Default proceedings;
The validity of the arbitration award; and
The finality of the arbitration award, including which courts will hear challenges to the award.

If not clearly identified by the parties, the seat of arbitration — and the procedural laws of that seat — will be selected by the arbitral tribunal.

What Do the Rules You Picked Say About Interim Measures?

A major consideration in selecting the applicable arbitral rules is the availability of interim measures. These are measures of relief, which can include injunctive relief, obtained prior to the commencement of, or during, an arbitral proceeding.

One of the most interesting forms of interim measures is an award of security. An interim award of security in arbitration is a payment of an amount of monies (usually tied to damages) pre-hearing for the conservation of, and enforcement of, a judgment so as to not render a judgment in the future a Pyrrhic victory. These securities prevent the dissipation of assets before it is too late to reach those assets. As such, it is an extremely powerful tool, and determining whether the rules you select, and/or the seat of the arbitration, allows for such an interim award should be a key consideration in drafting your arbitration clause.

What Are the Abilities and Liabilities of Third Parties?

Depending on the circumstances, jurisdiction chosen, governing law, and seat of the arbitration, a third party (a non-signatory to the agreement) can compel arbitration and be compelled to arbitration, the latter being the rarer occurrence. Knowing if there is potential exposure to such parties, which can include directors, officers, employees, beneficiaries, and others, should be assessed prior to entering into an arbitration agreement.

On What Basis Are Arbitral Awards Enforceable?

Arbitral awards, because of the adherence by more than 160 countries to the 1958 New York Convention on the Recognition and Enforcement of Arbitral Awards (“New York Convention”), are the most enforceable award anywhere in the world. Under the New York Convention:

A written agreement to arbitrate, including as contained in a contractual arbitration clause, is generally enforceable.
Subject to very narrow exceptions, an arbitral award may be recognized and enforced as a final judgment in each contracting country.

In contrast, no treaty requires that the judgments of a country’s court system be recognized; these enforcement decisions are made on an ad hoc basis according to principles of comity and public policy. The Hague Judgments Convention on the Recognition and Enforcement of Foreign Judgments, a treaty similar to the New York Convention, may become the relevant applicable framework in the future but is still in its infancy.

How Can Legal Counsel Help My Multinational Company Address International Arbitration Issues?

The best way to ensure a reliable and enforceable arbitration agreement is a careful examination of the structure and purpose of the contract as well as the company’s unique business profile based on how and where it does business.

Adequate legal counsel should provide clients with practical guidance in drafting and enforcing international arbitration agreements. Services provided should include:

Counseling: Counseling companies to understand how international arbitration clauses apply to their multinational operations, how they may benefit from such clauses, and/or how such clauses may not be in their best interest.
Drafting: Working with clients to ensure enforceable and clearly understood arbitration clauses are prepared for the specific contractual relationship, considering the myriad factors that go into preparing such a clause.
Risk Assessments: Working with companies to conduct risk assessments in the event of contract disputes with arbitration clauses.
Arbitration: Arbitrating before tribunals to secure interim securities and/or enforceable arbitral awards in the event of a contract dispute anywhere in the world.

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Is Biodiversity Emerging As A Unifying Concept That Can Help Ease The Political Polarization Surrounding ESG?

Highlights

- In addition to global initiatives by the United Nations, G7, and the U.S., the need for protection against biodiversity loss has become a central focus of the business and investment communities
- Biodiversity protection is emerging worldwide as a unifying concept that can mitigate the political polarization surrounding ESG and promote constructive dialogue about sustainability
- A number of steps can be taken to capitalize on the unique attributes and appeal of biodiversity and leverage its potential to serve as a unifying concept

International Biodiversity Day, May 22, 2023, with its theme “From Agreement to Action: Build Back Biodiversity” was a powerful reminder that momentum for biodiversity conservation is accelerating globally. Biodiversity is increasingly being recognized as a potential unifying concept that can help alleviate some of the extreme political divergence over the term ESG.

ESG, which encompasses a broad range of environmental, social, and governance factors, has become politically charged and the subject of intense debate and varying interpretations. Biodiversity, on the other hand, is widely recognized as a critical aspect of environmental sustainability and it is increasingly acknowledged as a pressing issue by virtually all stakeholders, including scientists, policymakers, businesses, and communities.

Biodiversity represents the variety of life on Earth, including ecosystems, species, and genetic diversity. It is a tangible and universally valued concept that resonates with people from various backgrounds and ideologies. The preservation, protection and conservation of biodiversity are essential for the health and resilience of ecosystems, as well as for addressing climate change and ensuring the well-being of future generations.

By emphasizing biodiversity within sustainability discussions, stakeholders can find common ground and rally around a shared objective: protecting and restoring the Earth’s natural diversity. Biodiversity provides a unifying language and focus that transcends political divisions, as it highlights the interconnectedness of all life forms. It allows for a more tangible and universally valued point of reference, which can facilitate collaboration and drive collective action towards conservation efforts.

In addition to global initiatives by the United Nations, the Group of Seven (G7), and the U.S., the need for protection against biodiversity loss has also become a central focus of business and investment communities, and appears to be receiving a more favorable reception in the U.S. than the broader concepts associated with and motives attributed to ESG investing. This increased attention has, in turn, opened up a number of practical opportunities for action to leverage the potential of biodiversity as a unifying concept.

International Support for Biodiversity Protection

The United Nations formed the Convention on Biological Diversity (CBD) to promote nature and human well-being. The first draft was proposed on May 22, 1992, which was then designated as International Biodiversity Day. Since the Rio Earth Summit in 1992, nearly 200 countries have signed onto this treaty, which is a legally binding commitment to conserve biological diversity, to sustainably use its components and to share equitably the benefits arising from the use of genetic resources.

In December 2022, at the 15th UN Biodiversity Conference (COP15), the CBD adopted the Kunming-Montreal Global Biodiversity Framework that calls for protecting 30 percent of the planet’s land, ocean, and inland waters and includes 23 other targets to help restore and protect ecosystems and endangered species worldwide, and ensure that big businesses disclose biodiversity risks and impacts from their operations. The Kunming-Montreal framework also focused on increasing funding for biodiversity by at least $200 billion per year (with at least $30 billion per year to developing countries by 2030).

The U.S. is one of just a few countries worldwide that has not yet formally approved the CBD. While President Clinton signed the CBD in 1993, the Senate did not ratify it. Although the U.S. was on the sidelines at COP15 in late 2022, in parallel with the CBD approval of the Kunming-Montreal framework, the U.S. reiterated its support for an ambitious and transformative Global Diversity Framework, outlined in this State Department press release.

In addition to committing to conserve at least 30 percent of U.S. lands and waters by 2030, other U.S. leadership initiatives to mainstream and conserve nature that were announced or reaffirmed at that time include:

- Conserving forests and combatting global deforestation
- Prioritizing nature-based solutions to address climate change, nature loss, and inequity
- Incorporating nature into national economic statistics and accounts to support decision-making
- Recognizing and including indigenous knowledge in federal research, policy, and decision-making, including protections for the knowledge holder
- Knowing nature with a national nature assessment that will build on the wealth of existing data, scientific evidence, and Indigenous Knowledge to create a holistic picture of America’s lands, waters, wildlife, ecosystems and the benefits they provide
- Strengthening action for nature deprived communities by expanding access to local parks, tree canopy cover, conservation areas, open space and water-based recreation, public gardens, beaches, and waterways
- Conserving arctic ecosystems through increased research on marine ecosystems, fisheries, and wildlife, including through co-production and co-management with Indigenous Peoples

The U.S. also spearheaded efforts to reverse the decline in biodiversity globally by advancing land and water conservation, combating drivers of nature loss, protecting species, and supporting sustainable use, while also enabling healthy and prosperous communities through sustainable development. The U.S. also affirmed its financial commitment to and support for international development assistance to protect biodiversity. Additionally, the U.S. made major policy and financial commitments to protect oceans and advance marine conservation and a sustainable ocean economy.

Of particular importance, the U.S. reaffirmed its commitment to advancing science-based decision making and its support for the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services.

Most recently, the G7 Hiroshima Leaders’ Communique issued at the close of their meeting on May 20 on the cusp of International Biodiversity Day, affirmed that G7 leadership (including the U.S.) welcomed “the adoption of the historic Kunming-Montreal Global Biodiversity Framework (GBF) to halt and reverse biodiversity loss by 2030, which is fundamental to human well-being, a healthy planet and economic prosperity, and commit to its swift and full implementation and to achievement of each of its goals and targets.”
G7 leadership also reaffirmed their commitment “to substantially increase our national and international funding for nature by 2025,” and “to supporting and advancing a transition to nature positive economies.” Notably, they also pressed companies to do so as well while at the same time voicing support for TNFD’s market framework for corporate nature related disclosures:

“We call on businesses to progressively reduce negative and increase positive impacts on biodiversity. We look forward to the publication of the Taskforce on Nature-related Financial Disclosures’ (TNFD’s) market framework and urge market participants, governments and regulators to support its development.”

Similarly, multilateral development banks (MDBs) were urged by the leaders of G7 to increase their support for biodiversity by leveraging financial resources from all sources and “deploying a full suite of instruments.”

Increasing Focus On Biodiversity By The Financial Sector

The financial sector has taken note of the growing international support for biodiversity conservation and protection. A 2023 study by PwC found that “55% of global GDP—equivalent to about US $58 trillion—is moderately or highly dependent on nature.” In its report The Economic Case for Nature, the World Bank found that a partial collapse of ecosystem services would cost 2.3 percent of global GDP ($2.7 trillion) in 2030. Conversely, the report found that implementing policies beneficial to nature and biodiversity conservation (including achieving the “30×30” goal subsequently approved by the CBD in the Kunming-Montreal framework and by Executive Order in the U.S.) could result in a substantial increase in global real GDP by 2030.

According to a 2020 report by the World Economic Forum, protecting nature and increasing biodiversity could generate business opportunities of $10 trillion a year and create nearly 400 million new jobs by 2030. Given this economic potential, it comes as no surprise that a growing number of investors are focusing on deploying capital for nature-based opportunities, and trying to assess whether and to what extent companies are susceptible to biodiversity related risks.

Toward those ends, the financial sector has been monitoring and supporting the development of TNFD’s market framework for nature related disclosures that was most recently endorsed by G7. That private global effort was launched in 2021 in response to the growing need to factor nature into financial and business decisions. The fourth and final beta version was issued in March 2023:

“The TNFD is a market-led, science-based and government supported initiative to help respond to this imperative. The Taskforce is nearing the end of its two-year framework design and development phase to provide market participants with a risk management and disclosure framework to identify, assess, respond and, where appropriate, disclose their nature-related issues. The TNFD framework, including TCFD-aligned recommended disclosures, will be published in September 2023 ready for market adoption.”

While the TNFD framework is not legally binding, the final version will be coming on line just in time for use as a guide for compliance with the EU’s Corporate Sustainability Reporting Directive (CSRD), which was effective in April 2023. It will require a substantial number of European companies and others operating in the EU, to start making disclosures regarding biodiversity and nature in coming years.

One of the more significant catalysts for investment in the protection of biodiversity and nature was the establishment of the Natural Capital Investment Alliance as part of the United Kingdom’s Sustainable Markets Initiative announced in 2020 and the Terra Carta sustainability charter launched by King Charles a year later. The Alliance is a public/private venture that aims to invest $10 billion in natural capital assets. Speaking at the One Planet Summit on biodiversity where the Alliance was announced in January 2021, King Charles stated “… I have created a Natural Capital Investment Alliance to help us arrive at a common language on Natural Capital Investment so that we can start putting money to work and improve the flow of capital.”

According to research by Environmental Finance, total assets held in thematic biodiversity funds more than tripled in 2022, and it is anticipated that momentum and growth will accelerate in response to COP 15 in December 2023, and approval of the Kunming-Montreal framework.

Positioning Biodiversity As A Unifying Concept

While biodiversity is not replacing ESG, it is gaining more attention within the broader ESG framework. Biodiversity conservation is supported by a vast body of scientific research and has a broad consensus among stakeholders. Many companies are incorporating biodiversity considerations into their sustainability strategies, and setting goals for conservation, habitat restoration, and responsible land use. Investors are also factoring biodiversity into their decision-making processes, looking for companies that demonstrate strong biodiversity conservation efforts.

Given the universal importance of biodiversity, it can serve as a focal point for mutual understanding for stakeholders with varying perspectives. Biodiversity conservation provides a unifying language that encourages collaborative efforts towards shared goals of environmental stewardship and the preservation of natural resources. Protection against biodiversity loss is not an ideological issue. To the contrary, it is fundamental, practical, and existential: the need to preserve the natural systems that support life on Earth. Emphasizing the importance of biodiversity shifts the focus to concrete and tangible actions required globally and locally, such as species preservation, and ecosystem protection, which can garner broader support and participation and help bridge political divides.

While biodiversity protection is by no means a panacea, there are further steps that can be taken to capitalize on its unique attributes and appeal that can improve the potential for biodiversity to serve as a unifying concept that can help reduce the current political polarization in the U.S. over ESG and promote more constructive dialogue around sustainability:

- Universal concern – Biodiversity loss affects every individual and society, regardless of political affiliation. It is a shared concern that is oblivious to political boundaries, as the preservation of nature’s diversity is vital for the well-being of all life on Earth. By emphasizing biodiversity as a unifying concept, stakeholders can find mutuality and work together towards its conservation.
- Inclusivity – Biodiversity requires inclusive engagement by diverse stakeholders and technical and scientific support from local communities, indigenous groups, governments, businesses, civil society organizations and the public. Such engagement fosters dialogue, understanding, and collaboration, breaking down political barriers.
- Tangible and relatable – Biodiversity is a concrete and tangible concept that people can relate to, unlike some of the more complex ESG concepts, like Scope 3 greenhouse gas (GHG) emissions and Net Zero. It encompasses the variety of species, ecosystems, and genetic diversity, which are easily understandable and relatable to everyday experiences. This relatability can bridge political divides and foster broader support for conservation efforts.
- Interconnectedness – Biodiversity underscores the interconnectedness of ecosystems and species emphasizing that actions in one area can have cascading far-reaching consequences on others, including ecological, social, and economic effects. Recognizing this interconnectedness can encourage stakeholders to collaborate across sectors and ideologies to address biodiversity loss collectively.
- Co-benefits and shared values – Biodiversity conservation often aligns with other societal values and goals, such as climate change mitigation, sustainable development, and human well-being. By emphasizing the co-benefits that arise from biodiversity conservation, such as ecosystem services and resilience, stakeholders can rally around shared values and work towards a common vision.
- Economic implications – Biodiversity loss can have significant economic implications for industries like agriculture, tourism, and pharmaceuticals. It can also have impacts on supply chains and market access. Recognizing the economic value of biodiversity and the potential risks associated with its decline can bring together diverse stakeholders, including businesses and investors, who recognize the importance of integrating biodiversity considerations into their strategies and decision-making processes.
- Science-based approach – Biodiversity conservation relies on scientific knowledge and research. Emphasizing the scientific evidence on the importance of biodiversity helps build consensus and transcends political biases, providing a foundation for constructive discussions.
- Local and global perspectives – Biodiversity conservation is relevant at both local and global scales. It allows for discussions that incorporate local knowledge, values, and practices, while recognizing the need for global cooperation to address biodiversity loss and protect shared resources.

To leverage biodiversity as a unifying concept, it is crucial to promote open dialogue, knowledge sharing, and collaboration. Stakeholders should engage in inclusive decision-making processes that respect diverse perspectives and prioritize equitable and sustainable outcomes.

Takeaways

Biodiversity is emerging as a potential unifying concept that can help mitigate the political polarization surrounding the term ESG. While ESG has become a politically charged and debated topic, biodiversity is widely recognized as a critical aspect of environmental sustainability and has broad support across different stakeholders.

By focusing on biodiversity, stakeholders can find common ground in recognizing the importance of preserving nature’s diversity and ensuring the long-term sustainability of ecosystems. Biodiversity loss is a global challenge that affects everyone, irrespective of political affiliation, and it is increasingly acknowledged as a pressing issue by scientists, policymakers, businesses, and communities.

It is important to note that while biodiversity can be a unifying concept, there will still be debates and differing opinions on specific approaches and trade-offs involved in biodiversity conservation. Different stakeholders may have differing priorities, perspectives, and proposed means and methods to address biodiversity loss. The complexity of biodiversity issues, such as balancing conservation with economic development or navigating conflicts between different stakeholder interests, requires careful consideration and dialogue.

For more Financial Legal News, visit the National Law Review.

European Commission Aims to Tackle Greenwashing in Latest Proposal

On March 22, the European Commission unveiled a proposal, the Green Claims Directive (Proposal), aimed at combating greenwashing and misleading environmental claims. By virtue of the Proposal, the EC is attempting to implement measures designed to provide “reliable, comparable and verifiable information” to consumers, with the overall high-level goal to create a level playing field in the EU, wherein companies that make a genuine effort to improve their environmental sustainability can be easily recognized and rewarded by consumers. The Proposal follows a 2020 sweep that found nearly half of environmental claims examined in the EU may be false or deceptive. Following the ordinary legislative procedure, the Proposal will now be subject to the approval of the European Parliament and the Council. There is no set date for entry into force at this time.

The Proposal complements a March 2022 proposal to amend the Consumer Rights Directive to provide consumers with information on products’ durability and repairability, as well as to amend the Unfair Commercial Practices Directive by, among other things, banning “generic, vague environmental claims” and “displaying a voluntary sustainability label which was not based on a third-party verification scheme or established by public authorities.” The Proposal builds on these measures to provide “more specific requirements on unregulated claims, be it for specific product groups, specific sectors or for specific environmental impacts or aspects.” It would require companies that make “green claims to respect minimum standards on how they substantiate and communicate those claims.” Businesses based outside the EU that make environmental claims directed at EU consumers will also have to respect the requirements set out in the Proposal. The criteria target explicit claims, such as “T-shirt made of recycled plastic bottles” and “packaging made of 30% recycled plastic.”

Pursuant to Article 3 of the Proposal, “environmental claims shall be based on an assessment that meets the selected minimum criteria to prevent claims from being misleading,” including, among other things, that the claim “relies on recognised scientific evidence and state of the art technical knowledge,” considers “all significant aspects and impacts to assess the performance,” demonstrates whether the claim is accurate for the whole product or only parts of it, provides information on whether the product performs better than “common practice,” identifies any negative impacts resulting from positive product achievements, and reports greenhouse gas offsets.

Article 4 of the Proposal outlines requirements for comparative claims related to environmental impacts, including disclosure of equivalent data for assessments, use of consistent assumptions for comparisons and use of data sourced in an equivalent manner. The level of substantiation needed will vary based on the type of claim, but all assessments should consider the product’s life-cycle to identify relevant impacts.

Pursuant to Article 10, all environmental claims and labels must be verified and certified by a third-party verifier before being used in commercial communications. An officially accredited body will carry out the verification process and issue a certificate of conformity, which will be recognized across the EU and shared among Member States via the Internal Market Information System. The verifier is required to be an officially accredited, independent body with the necessary expertise, equipment, and infrastructure to carry out the verifications and maintain professional secrecy.

The Proposal is part of a broader trend of governmental regulators, self-regulatory organizations, and standard setters across industries adopting a more formalized approach toward greenwashing. For example, as we recently reported, the UK’s Advertising Standards Authority (ASA) published rules on making carbon neutral and net-zero claims. Instances of enforcement actions over greenwashing allegations have also been on the rise. The Securities and Exchange Board of India recently launched a consultation paper seeking public comment on rules to prevent greenwashing by ESG investment funds, and the European Council and the European Parliament reached an agreement regarding European Green Bonds Standards aimed at, among other things, avoiding greenwashing.

Article By Sukhvir Basran and Rachel Rodman of Cadwalader, Wickersham & Taft LLP

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The EU’s New Green Claims Directive – It’s Not Easy Being Green

Highlights

On March 22, 2023, the European Commission proposed the Green Claims Directive, which is intended to make green claims reliable, comparable and verifiable across the EU and protect consumers from greenwashing
Adding to the momentum generated by other EU green initiatives, this directive could be the catalyst that also spurs the U.S. to approve stronger regulatory enforcement mechanisms to crackdown on greenwashing
This proposed directive overlaps the FTC’s request for comments on its Green Guides, including whether the agency should initiate a rulemaking to establish enforceable requirements related to unfair and deceptive environmental claims. The deadline for comments has been extended to April 24, 2023

The European Commission (EC) proposed the Green Claims Directive (GCD) on March 22, 2023, to crack down on greenwashing and prevent businesses from misleading customers about the environmental characteristics of their products and services. This action was in response, at least in part, to a 2020 commission study that found more than 50 percent of green labels made environmental claims that were “vague, misleading or unfounded,” and 40 percent of these claims were “unsubstantiated.”

This definitive action by the European Union (EU) comes at a time when the U.S. is also considering options to curb greenwashing and could inspire the U.S. to implement stronger regulatory enforcement mechanisms, including promulgation of new enforceable rules by the Federal Trade Commission (FTC) defining and prohibiting unfair and deceptive environmental claims.

According to the EC, under this proposal, consumers “will have more clarity, stronger reassurance that when something is sold as green, it actually is green, and better quality information to choose environment-friendly products and services.”

Scope of the Green Claims Directive

The EC’s objectives in the proposed GCD are to:

Make green claims reliable, comparable and verifiable across the EU
Protect consumers from greenwashing
Contribute to creating a circular and green EU economy by enabling consumers to make informed purchasing decisions
Help establish a level playing field when it comes to environmental performance of products

The related proposal for a directive on empowering consumers for the green transition and annex, referenced in the proposed GCD, defines the green claims to be regulated as follows:

“any message or representation, which is not mandatory under Union law or national law, including text, pictorial, graphic or symbolic representation, in any form, including labels, brand names, company names or product names, in the context of a commercial communication, which states or implies that a product or trader has a positive or no impact on the environment or is less damaging to the environment than other products or traders, respectively, or has improved their impact over time.”

The GCD provides minimum requirements for valid, comparable and verifiable information about the environmental impacts of products that make green claims. The proposal sets clear criteria for companies to prove their environmental claims: “As part of the scientific analysis, companies will identify the environmental impacts that are actually relevant to their product, as well as identifying any possible trade-offs to give a full and accurate picture.” Businesses will be required to provide consumers information on the green claim, either with the product or online. The new rule will require verification by independent auditors before claims can be made and put on the market.

The GCD will also regulate environmental labels. The GCD is proposing to establish standard criteria for the more than 230 voluntary sustainability labels used across the EU, which are currently “subject to different levels of robustness, supervision and transparency.” The GCD will require environmental labels to be reliable, transparent, independently verified and regularly reviewed. Under the new proposal, adding an environmental label on products is still voluntary. The EU’s official EU Ecolabel is exempt from the new rules since it already adheres to a third-party verification standard.

Companies based outside the EU that make green claims or utilize environmental labels that target the consumers of the 27 member states also would be required to comply with the GCD. It will be up to member states to set up the substantiation process for products and labels’ green claims using independent and accredited auditors. The GCD has established the following process criteria:

Claims must be substantiated with scientific evidence that is widely recognised, identifying the relevant environmental impacts and any trade-offs between them
If products or organisations are compared with other products and organisations, these comparisons must be fair and based on equivalent information and data
Claims or labels that use aggregate scoring of the product’s overall environmental impact on, for example, biodiversity, climate, water consumption, soil, etc., shall not be permitted, unless set in EU rules
Environmental labelling schemes should be solid and reliable, and their proliferation must be controlled. EU level schemes should be encouraged, new public schemes, unless developed at EU level, will not be allowed, and new private schemes are only allowed if they can show higher environmental ambition than existing ones and get a pre-approval
Environmental labels must be transparent, verified by a third party, and regularly reviewed

Enforcement of the GCD will take place at the member state level, subject to the proviso in the GCD that “penalties must be ‘effective, proportionate and dissuasive.’” Penalties for violation range from fines to confiscation of revenues and temporary exclusion from public procurement processes and public funding. The directive requires that consumers should be able to bring an action as well.

The EC’s intent is for the GCD to work with the Directive on Empowering the Consumers for the Green Transition, which encourages sustainable consumption by providing understandable information about the environmental impact of products, and identifying the types of claims that are deemed unfair commercial practices. Together these new rules are intended to provide a clear regime for environmental claims and labels. According to the EC, the adoption of this proposed legislation will not only protect consumers and the environment but also give a competitive edge to companies committed to increasing their environmental sustainability.

Initial Public Reaction to the GCD and Next Steps

While some organizations, such as the International Chamber of Commerce, offered support, several interest groups quickly issued public critiques of the proposed GCD. The Sustainable Apparel Coalition asserted that: “The Directive does not mandate a standardized and clearly defined framework based on scientific foundations and fails to provide the legal certainty for companies and clarity to consumers.”

ECOS lamented that “After months of intense lobbying, what could have been legislation contributing to providing reliable environmental information to consumers was substantially watered down,” and added that “In order for claims to be robust and comparable, harmonised methodologies at the EU level will be crucial.” Carbon Market Watch was disappointed that “The draft directive fails to outlaw vague and disingenuous terms like ‘carbon neutrality’, which are a favoured marketing strategy for companies seeking to give their image a green makeover while continuing to pollute with impunity.”

The EC’s proposal will now go to the European Parliament and Council for consideration. This process usually takes about 18 months, during which there will be a public consultation process that will solicit comments, and amendments may be introduced. If the GCD is approved, each of the 27 member states will have 18 months after entry of the GCD to adopt national laws, and those laws will become effective six months after that. As a result, there is a reasonably good prospect that there will be variants in the final laws enacted.

Will the GCD Influence the U.S.’s Approach to Regulation of Greenwashing?

The timing and scope of the GCD is of no small interest in the U.S., where regulation of greenwashing has been ramping up as well. In May 2022, the Securities and Exchange Commission (SEC) issued the proposed Names Rule and ESG Disclosure Rule targeting greenwashing in the naming and purpose of claimed ESG funds. The SEC is expected to take final action on the Names Rule in April 2023.

Additionally, as part of a review process that occurs every 10 years, the FTC is receiving comments on its Green Guides for the Use of Environmental Claims, which also target greenwashing. However, the Green Guides are just that – guides that do not currently have the force of law that are used to help interpret what is “unfair and deceptive.”

It is particularly noteworthy that the FTC has asked the public to comment, for the first time, on whether the agency should initiate a rulemaking under the FTC Act to establish independently enforceable requirements related to unfair and deceptive environmental claims. If the FTC promulgates such a rule, it will have new enforcement authority to impose substantial penalties.

The deadline for comments on the Green Guides was recently extended to April 24, 2023. It is anticipated that there will be a substantial number of comments and it will take some time for the FTC to digest them. It will be interesting to watch the process unfold as the GCD moves toward finalization and the FTC decides whether to commence rulemaking in connection with its Green Guide updates. Once again there is a reasonable prospect that the European initiatives and momentum on green matters, including the GCD, could be a catalyst for the US to step up as well – in this case to implement stronger regulatory enforcement mechanisms to crackdown on greenwashing.

Article By Bruce White of Barnes & Thornburg LLP

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

Locking Tik Tok? White House Requires Removal of TikTok App from Federal IT

On February 28, the White House issued a memorandum giving federal employees 30 days to remove the TikTok application from any government devices. This memo is the result of an act passed by Congress that requires the removal of TikTok from any federal information technology. The act responded to concerns that the Chinese government may use data from TikTok for intelligence gathering on Americans.

I’m Not a Federal Employee — Why Does It Matter?

The White House Memo clearly covers all employees of federal agencies. However, it also covers any information technology used by a contractor who is using federal information technology. As such, if you are a federal contractor using some sort of computer software or technology that is required by the U.S. government, you must remove TikTok in the next 30 days.

The limited exceptions to the removal mandate require federal government approval. The memo mentions national security interests and activities, law enforcement work, and security research as possible exceptions. However, there is a process to apply for an exception – it is not automatic.

Takeaways

Even if you are not a federal employee or a government contractor, this memo would be a good starting place to look back at your company’s social media policies and cell phone use procedures. Do you want TikTok (or any other social media app) on your devices? Many companies have found themselves in PR trouble due to lapses in enforcement of these types of rules. In addition, excessive use of social media in the workplace has been shown to be a drag on productivity.

Article By J. William Manuel and Anne R. Yuengert of Bradley Arant Boult Cummings LLP

For more communications, media, and internet legal news, click here to visit the National Law Review.

G7 Sanctions Enforcement Coordination Mechanism and Centralized EU Sanctions Watchdog Proposed

On Feb. 20, 2023, Dutch Minister of Foreign Affairs Wopke Hoekstra gave a speech titled “Building a secure European future” at the College of Europe in Bruges, Belgium where he made a plea to “(…) sail to the next horizon where sanctions are concerned.” The Dutch Foreign Minister said European Union (EU) “(…) sanctions are hurting the Russians like hell (…)” but at the same time the measures “(…) are being evaded on a massive scale.” Hoekstra believes this is in part because the EU has too little capacity to analyze, coordinate, and promote the sanctions. However, arguably, there is also a lack of capacity at the EU Member-State level to enforce sanctions.

Against this background the Dutch Foreign Minister proposed to set up a sanctions headquarters in Brussels, Belgium, i.e., a novel watchdog or body to tackle the circumvention of EU sanctions. Such a body might represent the nearest EU equivalent to the U.S. Office of Foreign Assets Control (OFAC). OFAC both implements and enforces U.S. economic sanctions (issuing regulations, licenses, and directives, as well as enforcing through issuing administrative subpoenas, civil and administrative monetary penalties, and making criminal referrals to the U.S. Department of Justice). In Hoekstra’s words:

“A place where [EU] Member States can pool information and resources on effectiveness and evasion. Where we do much more to fight circumvention by third countries. This new HQ would establish a watch list of sectors and trade flows with a high circumvention risk. Companies will be obliged to include end-use clauses in their contracts, so that their products don’t end up in the Russian war machine. And the EU should bring down the full force of its collective economic strength and criminal justice systems on those who assist in sanctions evasion. By naming, shaming, sanctioning, and prosecuting them.”

The Dutch Foreign Minister’s proposal – which is also set out in a separate non-paper – apparently is backed and supported by some 10 or so EU Member States, including Germany, France, Italy, and Spain.

Additionally, on Feb. 23, 2023, the press reported the international Group of Seven (G7) is set to create a new tool to coordinate their enforcement of existing sanctions against the Russian Federation (Russia). The aim of the tool, tentatively called the Enforcement Coordination Mechanism, would be to bolster information-sharing and other enforcement actions.

Background

Like other Members of the G7, the EU has adopted throughout 2022 many economic and other sanctions to target Russia’s economy and thwart its ability to continue with its aggression against Ukraine. Nevertheless, currently EU Member States have different definitions of what constitutes a breach of EU sanctions, and what penalties must be applied in case of a breach. This could lead to different degrees of enforcement and risk circumvention of EU sanctions.

As we have reported previously, on Nov. 28, 2022, the Council of the EU adopted a decision to add the violation of restrictive measures to the list of so-called “EU crimes” set out in the Treaty on the Functioning of the EU, which would uniformly criminalize sanctions violations across EU Member States. This proposal still needs the backing of EU Member States, which have traditionally been cautious about reforms that require amendments to their national criminal laws.

Next steps

The decision on when and how to enforce EU sanctions currently lies with individual EU Member States, who also decide on the introduction of the EU’s restrictive measures by unanimity. As such, the Dutch Foreign Minister’s proposal requires the backing and support of more EU Member States. If adopted, the new proposed body could send cases directly to the European Public Prosecutor’s Office (EPPO), assuming the separate “EU crimes” legislative piece was also adopted.

Notably, the Dutch Foreign Minister’s proposal appears to suggest a stronger targeting of third countries, which are not aligned with the EU’s sanctions against Russia or help in their circumvention (e.g., Turkey, China, etc.).

Whether or not an EU sanctions oversight body is established, the Dutch proposal signals the current appetite for enhanced multilateral coordination on economic sanctions implementation and tougher, more consistent enforcement of economic sanctions violations. The G7’s proposed Enforcement Coordination Mechanism points in the same direction.

Australia: ASIC Reveals 2023 Enforcement Priorities

The Australian Securities and Investments Commission (ASIC) has revealed its key enforcement priorities for 2023. This year, ASIC has signalled an expanded focus on enforcement activity targeting:

sustainable finance practices and disclosure of climate risks;
financial scams;
cyber and operational resilience; and
investor harms involving crypto-assets.

In its release, ASIC has emphasised that the regulator’s prioritisation of monitoring in these areas intends to “address misconduct, market integrity threats and consumer harms in sectors including financial services, retail and crypto-assets.”

The warning coincides with this month’s release of ASIC’s enforcement and regulatory report that highlights the major uptick in enforcement and regulatory actions taken by ASIC during the last half of 2022, including:

173 criminal charges being laid and $76.3 million in civil penalties imposed;
heightened action against money laundering risks;
the issuance of 22 design and distribution obligations (DDO) stop orders to prevent consumers and investors being targeted by products inappropriate to their objectives, financial situation and needs; and
the regulator’s first action for greenwashing and consequential issuance of infringement notices for misleading sustainability-related statements.

Another priority of ASIC for the coming year is to increase its transparency to industry and streamline its interactions with the entities it regulates. For the first time, ASIC has released a regulatory developments timetable setting out projected timeframes for ASIC regulatory work, such as the publication of draft or final guidance, and the anticipated making of a legislative instrument. ASIC’s release of these key enforcement priorities and regulatory developments timetable gives us a clear indication of ASIC’s intention to continue its heightened level of surveillance and enforcement action into 2023.

Article By Matthew J. Watts and Rebecca Mangos of K&L Gates

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

EU PFAS Ban Should Raise U.S. Corporate Concerns

On February 7, 2023, the European Chemical Agency (ECHA) unveiled a 200 page proposal that would ban the use of any PFAS in the EU. While the proposal was anticipated by many, the scope of the ban nonetheless drew reactions from a myriad of sectors – from environmentalists to scientists to corporations. U.S. based companies that have any industrial or business interests in the EU must absolutely pay close attention to the EU PFAS ban and consider the impact on business interests.

EU PFAS Ban Proposal

The EU PFAS ban currently proposed would take effect 18 months from the date of enactment; however, the ECHA is contemplating phased-in restrictions of up to 12 years for uses that the group considers challenging to replace in certain applications. The proposal is only the inception of the ECHA regulatory process, which next turns to a public comment period that opens on March 22, 2023 and will run for at least six months. ECHA’s scientific committees to review the proposal and provide feedback. Given the magnitude of comments expected and the likely hurdles that the ECHA will face in finalizing the proposal, it is not expected that the proposal would be finalized prior to 2025.

The EU PFAS ban seeks to prohibit the use of over 10,000 PFAS types, excluding only a sub-class of PFAS that have been deemed “fully degradable.” The proposal indicates: “…the restriction proposal is tailored to address the manufacture, placing on the market, as well as the use of PFASs as such and as constituents in other substances, in mixtures and in articles above a certain concentration. All uses of PFASs are covered by this restriction proposal, regardless of whether they have been specifically assessed by the Dossier Submitters and/or are mentioned in this report or not, unless a specific derogation has been formulated.” (emphasis added) Several specific types of uses and consumer product applicability would be included in the first phase of the proposed ban, including cosmetics, food packaging, clothing and cookware. This first phase of the ban implementation would include uses where alternatives are known, but not yet widely available, which is the reason why the first phase would take effect within 5 years. The second phase of the ban anticipates a 12 year period of time for ban implementation and encompasses uses where alternatives to PFAS are not currently known. Significantly for U.S. business, the proposed ban includes imported goods.

Impact On U.S. Companies

In 2022, U.S. companies exported just shy of $350 billion in goods to the EU. In many instances, companies do not deliberately, intentionally, or knowingly add or utilize PFAS in finished products that are sent to the EU. However, PFAS may be used in manufacturing processes that inadvertently contaminate goods with PFAS. In addition, many U.S. companies rely on overseas companies for supply chain sourcing. Quite commonly, supply chain sources outside of the U.S. do not voluntarily provide chemical composition information for components or goods that they supply. Inquiring of those companies for such information, or certifications that the good contain no PFAS, can be extremely difficult. Getting overseas companies to provide such information often proves impossible and even when certifications are made, the devil may be in the details in terms of what is actually being certified. For example, certifying that goods contain “no hazardous substances” or “no hazardous PFAS” sound reassuring, but by what measure of “hazardous” is the statement being made? Under what country’s regulations? Using which scientific definition? The result of all of these complexities may be that many U.S. based companies need to test their products themselves, which not only increases time to market issues and financial costs associated with production, but also risks to the companies doing business in the U.S. that they may open themselves up to environmental pollution or personal injury lawsuits by conducting such testing. In addition, alternatives may not be as cost effective as PFAS, which impacts businesses and has the potential trickle-down impact of passing some of the costs on to consumers.

While debate continues in the U.S. as to the scientific validity of the “whole class” approach to regulating PFAS (of which there are over 12,000 types according to the EPA), the EU PFAS ban leapfrogs the U.S. debate stage and goes directly to proposing a regulation that would embrace such a “whole class” regulatory scheme. Without a doubt, chemical manufacturers, industrial and manufacturing companies, and some in the science community are expected to strenuously oppose such an approach to regulations for PFAS. The underlying arguments will follow ones advanced and debated already in the U.S. – i.e., not all chemicals act identically, nor have the vast majority of PFAS been shown to date to present health concerns. Proper scientific method does not permit sweeping attributions of testing on legacy PFAS like PFOA and PFOS to be extrapolated and applied to all PFAS. The EU’s response to this via their proposal is that the costs of remediating PFAS from the environment are significant enough that it warrants regulating PFAS as a class to avoid costly, decades-long, and potentially repetitive remediation work in the EU.

Conclusions

It is of the utmost importance for businesses to evaluate their PFAS risk. Public health and environmental groups urge legislators to regulate these compounds in the U.S. and abroad. One major point of contention among members of various industries is whether to regulate PFAS as a class or as individual compounds. While each PFAS compound has a unique chemical makeup and impacts the environment and the human body in different ways, some groups argue PFAS should be regulated together as a class because they interact with each other in the body, thereby resulting in a collective impact. Other groups argue that the individual compounds are too diverse and that regulating them as a class would be over restrictive for some chemicals and not restrictive enough for others.

Companies should remain informed so they do not get caught off guard. States are increasingly passing PFAS product bills that differ in scope. For any manufacturers, especially those who sell goods overseas, it is important to understand how the various standards among countries will impact them, whether PFAS is regulated as individual compounds or as a class. Conducting regular self-audits for possible exposure to PFAS risk and potential regulatory violations can result in long term savings for companies and should be commonplace in their own risk assessment.

For more Environmental Law news, click here to visit the National Law Review

Category: Global

European Commission Action on Climate Taxonomy and ESG Rating Provider Regulation

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