climate change Archives - The National Law Forum

SEC Stays Climate Disclosure Regulations in Response to Consolidated Eighth Circuit Challenges

On April 4, the SEC issued an order staying the implementation of the recently finalized climate disclosure rules (Final Rules) in response to the consolidated legal challenges in the US Court of Appeals for the Eighth Circuit. The SEC has discretion to stay its rules pending judicial review and the SEC stated that a stay would “allow the court of appeals to focus on deciding the merits [of the cases].” However, this voluntary stay should not be taken as a sign that the SEC intends to abandon the Final Rules, as the SEC said it will “continue vigorously defending the Final Rules’ validity in court and looks forward to expeditious resolution of the litigation.”

The Final Rules have faced a slew of legal challenges since adoption and the SEC also noted that the stay avoids potential uncertainty if registrants were to become subject to the Final Rules during the pendency of the legal challenges.

Weather & Climate Risk Management Part IV: Taxation of Weather Risk Management Products

Are there differences in the way in which weather derivatives and weather insurance are taxed?

Yes. Weather insurance products, including parametric insurance, are taxed as insurance; and derivatives are taxed in accordance with the tax rules applicable to the particular type of derivative product held by the taxpayer. A business needs to carefully consider these tax differences to determine the best product or products to meet its weather risk management needs.

How is insurance taxed to a policyholder?

When a business buys weather insurance, it pays a premium to the insurance company so that the company assumes the business risks set out in the policy. Assuring the policy is purchased to manage a business’s legitimate weather-related risk, the premium is deductible under Internal Revenue Code (Code) § 162 as an ordinary and necessary business expense.

If insurance coverage is triggered and a policyholder receives a payout under the policy, the payout is not taxable up to the policyholder’s tax basis if the payment reimburses the policyholder for property damage or loss. In other words, payments under insurance policies are not taxable up to the policyholder’s tax basis because the payments simply restore (in whole or in part) the policyholder to the financial position it was in before it incurred the loss. If the reimbursement amount under the policy exceeds the policyholder’s tax basis, the amount it receives over its tax basis is treated as taxable income.[1]

Business interruption insurance covers losses (such as lost profits and ongoing expenses) from events that close or disrupt the normal functioning of the policyholder’s business. The payout amount is often based on past business results. Business interruption insurance proceeds are likely to be taxable to the policyholder because they compensate the policyholder for lost revenue.

To ensure that a policyholder receives the most favorable tax treatment, it must carefully document its business purpose for entering into the insurance, the amount of its tax basis, and receipt of the insurance proceeds.

How are derivatives taxed?

It depends on whether the taxpayer has entered into a futures contract, forward contract, option, swap, cap, or floor. The taxpayer must then consider its status in entering into each derivative: is it acting as a hedger, dealer, trader, or investor? The taxpayer must also determine whether it has made all the required tax identifications and elections. In dealing with derivatives, the taxpayer must go through this three-step process for each product it is considering. Hedgers and dealers receive ordinary income and loss on their derivative transactions, while traders and investors receive capital gain and loss.

Why might a taxpayer want to be treated as a hedger with respect to its weather derivatives?

A taxpayer seeking to use weather derivatives to manage its weather-related business risks typically wants to be treated as a tax hedger so that the gain or loss on its derivative transactions qualify as tax hedges. This would allow the taxpayer to match its derivative gains or losses with its weather-related income or losses. Because ordinary property generates ordinary income or loss, a business hedger typically wants to receive ordinary income or loss on its weather derivatives. In other words, a hedger wants to match the tax treatment it receives on its hedges with that of the items it is hedging. Many risk management transactions with respect to weather-related risks do not meet the hedge definition (see the discussed below). For a detailed discussion of the tax hedging rules, see the forthcoming Q&A with Andie, “Business Taxation of Hedging Transactions.”

What is required for a weather derivative to be treated as a tax hedge?

To qualify as a tax hedge, the transaction must manage interest rate fluctuations, currency fluctuations, or price risk with respect to ordinary property, borrowings, or ordinary obligations.[2] In addition to meeting the definition of a tax hedge, the taxpayer must comply with the identification requirements set out at Code §§ 1221(a)(7) and 1221(b)(2) and the tax accounting requirements set out at Treas. Reg. § 1.446-4.[3]

What is the tax analysis that a taxpayer should conduct to determine if its weather derivatives qualify as tax hedges?

When entering into a weather derivative, a taxpayer should conduct the following tax analysis: (1) is the transaction entered into in the ordinary course of its trade or business (2) primarily (3) to manage price risk (4) on ordinary property or obligations (5) held or to be held by the taxpayer. If the answer to all of these questions is “yes,” then the taxpayer has a qualified tax hedge if—but only if—it complies with all of the required identification rules set out in Code §§ 1221(a)(7) and 1221(b)(2) and as explained in Treasury Regulation § 1.1221-2. If the taxpayer cannot answer all of these questions with a “yes,” then the weather derivative transaction is not a tax hedge, and it is subject to the tax rules that apply to capital assets.[4] The requirement that a taxpayer must be hedging ordinary property, borrowings, or obligations means that favorable tax hedging treatment is not available for many legitimate weather risk management activities.

What types of assets, obligations, and borrowings qualify as ordinary property and ordinary obligations for purposes of the tax hedging rules?

Weather derivatives qualify as tax hedges if they can be tied to price risk with respect to ordinary assets or ordinary obligations. In many situations, however, weather derivatives are entered into to manage a taxpayer’s anticipated profitability, sales volume, plant capacity, or similar issues. These risks are not the transactions that receive tax hedge treatment.

Ordinary property includes property that if sold or exchanged by the taxpayer would not produce capital gain or loss without regard to the taxpayer’s holding period. Items included in a taxpayer’s inventory—such as natural gas or heating oil held by a dealer in those products—are treated as ordinary property that can be hedged. Qualifying hedges can also include hedges of purchases and sales of commodities for which the taxpayer is a dealer, such as electricity, natural gas, or heating oil. If a utility agrees to purchase electricity at a fixed price in the future, for example, the utility is exposed to price risk if it cannot resell the fixed-price electricity for at least the amount it paid to purchase that electricity. Accordingly, the utility could agree to sell electricity under a futures contract (short position) that would qualify as a tax hedge.

On the liability side of a business, the hedge could relate to a taxpayer’s price risk with respect to an ordinary obligation. An ordinary obligation is an obligation the performance of which (or its termination) would not produce a capital gain or loss. For example, a forward contract to sell electricity or natural gas at a fixed price entered into by a dealer is treated as an ordinary obligation. In addition, a utility that enters into a fixed price forward sales contract agreeing to sell electricity at a fixed price has an ordinary obligation to deliver electricity at that fixed price.

What sorts of weather derivative transactions are not tax hedges?

Many legitimate risk management activities do not qualify as tax hedges. Weather derivative transactions that protect overall business profitability (such as volume or revenue risk) are not directly related to ordinary property or ordinary obligations. As a result, weather derivatives entered into to protect a business’s revenue stream or its net income against volume or revenue risk are not tax hedges.

Many taxpayers in the normal course of their businesses enter into weather derivatives to manage volume or revenue risks of reduced demand for their products or services. These transactions are not tax hedges. The taxpayer is not managing a price risk (either current or anticipated) attributable to ordinary assets, borrowings, or ordinary obligations.

Take, for example, a ski resort or amusement park operator that enters into a weather derivative to protect itself against adverse weather conditions that are likely to result in a reduction in the number of skiers or amusement park visitors. The taxpayer’s risk management efforts in these cases either relate to its investment in its facility (which for the most part consists of real estate and business assets that are not taxed as ordinary assets) or to its expected revenue. Similarly, a power generator that hedges its plant capacity or its revenue stream with a weather derivative tied to the number of Cooling Degree Days would not meet the definition of a tax hedge.

Why don’t more weather derivatives qualify as tax hedges?

As part of Congress’ efforts to modernize the tax rules with respect to hedging, it specifically authorized the Treasury to issue regulations to extend the hedging definition to include other risks that the Treasury sets out in regulations.[5] The Treasury, unfortunately, has not proposed or issued any regulations extending the benefits of tax hedging. This means that weather derivative transactions entered into to manage weather-related volume or revenue risks do not qualify as tax hedges. In this situation, the taxpayer receives capital gain or loss on the derivative product.

What are some examples of weather derivatives that can qualify as tax hedges?

A weather derivative qualifies as a tax hedge if it manages the taxpayer’s price risks with respect to ordinary assets or obligations. Thus, a taxpayer entering into weather derivatives primarily to manage its price risk with respect to increased supply costs will meet the definition of a hedging transaction. Such a transaction manages the taxpayer’s price risks with respect to ordinary property.

If, for example, a commodity dealer buys a put option (or sells a call option) on a designated weather event to protect it against price risks with respect to its existing inventories or future fixed-price commitments, the dealer has entered into a qualified tax hedge, provided it meets the identification requirements.

A heating oil distributor with heating oil inventory (or forward contracts to purchase heating oil at a fixed price) might enter into a weather swap to protect itself from the risk of an unseasonably warm heating season. This swap should qualify as a tax hedge because the swap manages the distributor’s risk of a decline in the market price for its heating oil inventories (or a decline in its fixed-price forward contract purchase commitments) due to unseasonably warm weather.

If an electric utility enters into forward commitments to sell electricity at fixed prices for delivery in the summer cooling months, it may buy a call option on a designated weather event that would qualify as a tax hedge to the extent the option protects the utility against the risk of being unable to acquire or generate the electricity at a low enough price if the demand for electricity in the cooling season is higher than expected because of unseasonably warm weather resulting in higher electricity prices.

Conclusion

All organizations face weather and climate risks. As part of their enterprise-wide risk management, they have available to them a number of weather risk transfer tools. This series on weather and climate risk provides a detailed review of weather risk management. Organizations can look to standardized futures and option contracts traded on regulated commodity exchanges; they can enter into customized OTC weather derivatives designed with their specific weather risks in mind; they can put in place indemnity insurance; they can purchase parametric insurance; or they can mix and match multiple derivative products and insurance coverages to meet their specific organization’s needs. In Part I of this Q&A series on Weather & Climate Risk Management, we considered the landscape and context within which weather and climate decision making takes place, along with the overarching risk management approaches and principles that apply. In Part II, we looked at the details on the various weather risk management products. In Part III, we addressed the regulation of these products; and in Part IV, we reviewed the taxation of these various classes of products.

[1] Taxability is subject to a nonrecognition provision at Code § 1033(a) if the taxpayer complies with the requirements to purchase “qualified replacement property.” https://irc.bloombergtax.com/public/uscode/doc/irc/section_1033

[2] Treas. Reg. § 1221-2 and Code §§ 1221(a)(7) and 1221(b)(2).

[3] For a detailed discussion of the tax hedging rules see my forthcoming Q&A with Andie, “Business Taxation of Hedging Transactions” due out in Spring 2024.

[4] If the taxpayer is a dealer or a commodity derivatives dealer, the weather derivative would be an ordinary asset in the taxpayer’s hands.

[5] Code § 1221(b)(2)(A)(iii).

SEC Issues Long-Awaited Climate Risk Disclosure Rule

INTRODUCTION

On Wednesday, 6 March 2024, the Securities and Exchange Commission (SEC) approved its highly anticipated final rules on “The Enhancement and Standardization of Climate-Related Disclosures for Investors” by a vote of 3-2, with Republican Commissioners Hester Peirce and Mark Uyeda dissenting. Accompanying the final rules was a press release and fact sheet detailing the provisions of the rulemaking. The final rules will go into effect 60 days after publication in the Federal Register and will include a phased-in compliance period for all registrants.

This is likely to be one of the most consequential rulemakings of Chairman Gary Gensler’s tenure given the prioritization of addressing climate change as a key pillar for the Biden administration. However, given the significant controversy associated with this rulemaking effort, the final rules are likely to face legal challenges and congressional oversight in the coming months. As such, it remains unclear at this point whether the final rules will survive the forthcoming scrutiny.

WHAT IS IN THE RULE?

According to the SEC’s fact sheet:

“The final rules would require a registrant to disclose, among other things: material climate-related risks; activities to mitigate or adapt to such risks; information about the registrant’s board of directors’ oversight of climate-related risks and management’s role in managing material climate-related risks; and information on any climate-related targets or goals that are material to the registrant’s business, results of operations, or financial condition.
Further, to facilitate investors’ assessment of certain climate-related risks, the final rules would require disclosure of Scope 1 and/or Scope 2 greenhouse gas (GHG) emissions on a phased-in basis by certain larger registrants when those emissions are material; the filing of an attestation report covering the required disclosure of such registrants’ Scope 1 and/or Scope 2 emissions, also on a phased-in basis; and disclosure of the financial statement effects of severe weather events and other natural conditions including, for example, costs and losses.
The final rules would include a phased-in compliance period for all registrants, with the compliance date dependent on the registrant’s filer status and the content of the disclosure.”

NEXT STEPS

The final rules are likely to face significant opposition, including legal challenges and congressional oversight. It is expected that there will be various lawsuits brought against the final rules, which are likely to receive support from several industry groups, or potentially GOP-led state attorneys general who have been active in litigating against environmental, social and governance (ESG) policies and regulations. It is also possible that the final rules could face criticism from some climate advocates that the SEC did not go far enough in its disclosure requirements.

Further, it is expected that the House Financial Services Committee (HFSC) will conduct oversight hearings, as well as introduce a resolution under the Congressional Review Act (CRA), to attempt to block the regulations from taking effect. HFSC Chairman Patrick McHenry (R-NC) indicated that the Oversight and Investigations Subcommittee will hold a field hearing on March 18 and the full Committee will convene a hearing on April 10 to discuss the potential implications of the rules. If a CRA resolution were to pass the House and garner sufficient support from moderate Democrats in the Senate to pass, it would likely be vetoed by President Biden.

Ultimately, the SEC climate risk disclosure rules are unlikely to significantly change the trajectory of corporate disclosures made by multinational companies based in the U.S., most of whom have already been making sustainability disclosures in accordance with the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures. The ongoing problem for investors is that such disclosures are not standardized and therefore are not comparable. Consequently, many of these large issuers may continue to enhance their sustainability disclosures in accordance with standards issued by the International Sustainability Standards Board and the Global Reporting Initiative as an investor relations imperative notwithstanding the SEC’s timetable for implementation of these final rules.

A more detailed analysis of the SEC rules is forthcoming from our Corporate and Asset Management and Investment Funds practices in the coming days.

Top Risks for Businesses in 2024

Just weeks into 2024, it is already clear that uncertainty will be the watchword. Will the economic soft landing of 2023 persist into 2024? Will labor unrest, strong in 2023, settle down as inflation cools? Will inflation remain tamed? Will the U.S. elections bring continuity or a new administration with very different views on the role of the U.S. in the world and in regulating business?

Uncertainty is also fueling a complex risk environment that will require monitoring global developments more so than in the past. As outlined below, geopolitical risks are present, multiple, interconnected and high impact. International relations have traditionally fallen outside the mandate of most C-Suites, but how the U.S. government responds to geopolitical challenges will impact business operations. Beyond additional disruptions to global trade, businesses in 2024 will face risks associated with expanding protectionist economic policies, climate change impacts, and AI-driven disruptors.

Geopolitical Tensions Disrupting Global Trade

The guardrails are coming off the international system that enshrines the ideals of preserving peace and security through diplomatic engagement, respecting international borders (not changing them through military might) and ensuring the free flow of global trade. In 2022, the world was shocked by Russia’s invasion of Ukraine, but it has taken time for the full impact to reverberate through the international system. While political analysts write on a “spillover of conflict,” the more insidious impact is that more leaders of countries and non-state groups are acting outside the guardrails because they are no longer deterred from using military force to achieve political goals, making 2024 ripe for new military conflicts disrupting global trade beyond the ongoing war in Europe.

In October 2023, Hamas launched a war from Gaza against Israel. Thus far, fighting has spread to the West Bank, between Israel and Lebanese Hezbollah in the north, and to the Red Sea, with Iranian-backed Houthis attacking shipping through the strategic Bab al Mandab strait. Container ships and oil tankers, to avoid the risks, are re-routing to the Cape of Good Hope, adding two weeks of extra sailing time, with the associated costs. Insurance premiums for cargo ships sailing in the eastern Mediterranean have skyrocketed, with some no longer servicing Israeli ports. Companies and retailers with tight delivery schedules are switching to airfreight, which is expected to drive up airfreight rates.

Iran, emboldened by its blossoming relationship with Russia as one of Moscow’s new arms suppliers, is activating its proxy armies in Yemen, Iraq, Syria and Lebanon to attack Western targets. In a two-day period in January 2024, the Iran Revolutionary Guards directly launched strikes in Syria, Iraq and Pakistan. Nuclear-armed Pakistan retaliated with a cross border strike in Iran. While there are many nuances to these incidents, it is evident that deterrence against cross-border military conflict is eroding in a region with deep, festering grievances among neighbors. Iran is in an escalatory mode and could resume harassing shipping in the Persian Gulf and the strategic Strait of Hormuz, where about a fifth of the volume of the world’s total oil consumption passes through on a daily basis.

In East Asia, North Korea is also emboldened by the changing geopolitical environment. Pyongyang, too, has become a major supplier of weaponry to Moscow for use in Ukraine. While Russia (and China) in the past have constructively contained North Korean predilection for aggression against its neighbors, Supreme Leader Kim Jong Un may believe the time is ripe to change the status quo. Ominously, in a Jan. 15 speech before the Supreme People’s Assembly (North Korea’s parliament), Kim rejected the policy of reunification with South Korea and proposed incorporating the country into North Korea “in the event of war.” While North Korean leaders frequently revert to brinksmanship and aggressive language, Kim’s speech reflects confidence of a nuclear power, aligned with Russia against a shared adversary – South Korea, which is firmly aligned with the G7 consensus on Russia. A war in the Korean peninsula would be felt around the world because East Asia is central to global shipping and manufacturing, disrupting supply chains, as well as the regional economy.

China is also waiting for the right moment to “unite” Taiwan with the mainland. Beijing has seen the impact of Western sanctions on Russia over Ukraine and has been deterred from aiding the Russian war effort. In many ways, China has benefited from these sanctions and the reorientation of global trade. Also, Russia, with its far weaker economy, has proven surprisingly resilient to sanctions, another lesson for China. Meanwhile, the Taiwanese people voted in January and returned for a third time the ruling party that strongly rejects Chinese territorial claims. Tensions are high, with the Chinese military once again harassing Taiwanese defenses. For Beijing, the “right moment” could fall this year should conflict break out on the Korean peninsula, which would tie the U.S. down because of the Mutual Defense Treaty.

The uncertainty here is not that there are global tensions, but how the U.S. will respond as they develop and how U.S. businesses can navigate external shocks. Will the U.S. be drawn into a new war in the Middle East? Can the U.S. manage multiple conflicts, already deeply involved in supporting Ukraine? Is the U.S. economy resilient enough to withstand trade disruptions? How can businesses strengthen their own resiliency?

Economic Protectionism Increasing Costs and Risks

Geopolitical tensions, the global pandemic and the unequal benefits of globalization are impacting economic policies of the U.S. and the political discourse around the merits of unrestrained free trade. Protectionist economic policies are creeping in, under the nomenclature of “secure supply chains,” “friend-shoring” and “home-shoring.” The U.S. has imposed tariffs on countries (even allies) accused of unfair trade practices and has foreclosed access to certain technologies by unfriendly countries, namely China.

While the response to some of these trade restrictions are new trade agreements with “friends” to regulate access under preferred terms, in essence creating multiple “friends” trade blocs for specific sectors, other responses are retaliatory, including counter tariffs and export restrictions or outright bans. In 2024, the U.S. economy will see the impact of these trade fragmentation policies in acute ways, with upside risks of new business opportunities and downside risks of supply chain disruptions, critical resource competition, increased input costs, compliance risks and increased reputational risks.

Trade with China, which remains significant and important to the stability of the U.S. economy, will pose new risks in 2024. While Washington and Beijing have agreed to some political and security guardrails to manage the relationship, economic competition is unrestrained and stability in the bilateral relations is not guaranteed. The December 2023 bipartisan report by the House Select Committee on the Strategic Competition Between the United States and the Chinese Communist Party, with its 150 recommendations on fundamentally resetting economic and technological competition with China, if even partially adopted, risks reigniting the trade war.

2024 is a presidential election year for the U.S. A change of control of the executive branch could result in many economic and regulatory policy reversals. The definition of “friend” could shift or narrow. Restrictions on trade with China could accelerate.

Impacts of Climate Change and Sustainability Policies

2023 was the hottest year on record, and El Niño conditions are expected to further boost the warming trend. Many regions experienced record-breaking wildfire activity in 2023, including Canada where 18 million hectares of land burned. Extreme storms caused life-threatening flooding in Europe, Asia and the Americas. 2024 is expected to bring even more climate hazards. The impacts will be physical and financial, including growing insurance losses and adverse impacts on operations and value chain. Analysts expect that in 2024, the economic and financial costs of adverse health impacts from climate change will increase, with risks related to the spread of infectious disease, insufficient access to clean water, and physical harm to the elderly and vulnerable. The direct economic effect will be on health systems, but also loss of productivity due to extreme weather incidents and effects of epidemics.

Energy transition to low-carbon emissions is underway in the U.S., but it is uneven and still uncertain. The financial market is investing in an impressive number of startups and large-scale projects revolving around cleantech. Still, there is hesitancy on the opportunity and risks of sustainability. Thus far, progress towards sustainability goals has been private sector-led and government-enabled. There is a risk that government incentive programs encouraging the transition to low-carbon energy could be reversed or curtailed under a new administration.

In 2024, some companies will face more climate disclosure compliance requirements. The Securities and Exchange Commission (SEC) is expected to release its final rule on climate change disclosures. The final action has been delayed several times because of pushback by public companies on some of the requirements, including Scope 3 greenhouse gas emission disclosures (those linked to supply chains and end users). California has not waited for the SEC’s final rule: In October 2023, Gov. Gavin Newsom signed into law legislation that will require large companies to disclose greenhouse gas emissions. The California climate laws go into effect in 2026, but companies will need to start much earlier to build the capabilities to plan, track and report their carbon footprint. For U.S. companies doing business in the European Union, they will need to comply with the EU Corporate Sustainability Reporting Directive, with the rules coming into force mid-2024.

Disruptive Technology

In 2023, generative AI was the talk of the town; in 2024, it will be the walk. Companies are popping up with new tools for every imaginable sector, to increase efficiency, task automation, customization, personalization and cost reduction. Business leaders are scrambling to integrate AI to gain a competitive edge, while navigating the everyday risks related to privacy, liability and security. While there are concerns that AI will displace humans, there is a growing consensus that while some jobs will disappear, people will focus on higher value work. That said, new rounds of labor disruptions linked to workforce transition are likely in 2024.

2024 will also bring AI-generated misinformation and disinformation. Bad actors will spread “synthetic” content, such as sophisticated voice cloning, doctored images and counterfeit websites, seeking to manipulate people, damage companies and economies, and foment dissent.

In 2024, around 2 billion people in more than 50 countries will vote in elections at risk of manipulation by misinformation and disinformation, which could destabilize the real and perceived legitimacy of newly elected governments, risking political unrest, violence, terrorism and erosion of democratic processes. Large democracies will hold elections in 2024, including the U.S., the EU, Mexico, South Korea, India, Pakistan, Indonesia and South Africa. Synthetic content can be very difficult to detect, while easy to produce with AI tools.

This is not a theoretical threat; synthetic content is already being disseminated in the U.S., targeting New Hampshire voters with robocalls that share fake recorded messages from President Biden encouraging people not to vote in the primary election. The U.S. is already polarized with citizens distrustful of the government and media, a ready vulnerability. Businesses are not immune. Notably, CEOs have stood apart, with higher ratings for trustworthiness and risk being called upon to vouch for “truth” (and becoming collateral damage in the fray).

AI-powered malware will make 2023 cyber risks look like child’s play. Attackers can use AI algorithms to find and exploit software vulnerabilities, making attacks precise and effective. AI can help hackers quickly identify security measures and evade them. AI-created phishing attacks will be more sophisticated and difficult to detect because the algorithms can assess larger amounts of piecemeal information and craft messages that mimic communication styles.

The role of states backing cyber armies to spread disinformation or steal information is growing and is part and parcel of the erosion of the existing international order. States face little deterrence from digital cross-border attacks because there are yet to be established mechanisms to impose real costs.

As Foretold, California’s New Forced Speech Laws Are Being Challenged

Last year, I commented on the likely unconstitutionality of two California laws compelling forced speech:

The California legislature has of late adopted the tactic of driving behavior by compelling speech. SB 253 (Wiener), for example, compels disclosure of greenhouse gas emissions and SB 261 (Stern) requires disclosure of climate-related financial risks. Both of these requirements clearly compel speech arguably in contravention of the First Amendment to the U.S. Constitution. Rumsfeld v. Forum for Academic and Institutional Rights, Inc., 547 U.S. 47, 61 (2006) (“Some of this Court’s leading First Amendment precedents have established the principle that freedom of speech prohibits the government from telling people what they must say.”).

I had previously noted that SB 253 was very similar to an earlier bill that did not make it into law.

Yesterday, the Chamber of Commerce of the United States of America and several others filed suit in the Central District Court challenging these laws. In its complaint, the plaintiffs allege that the “State’s plan for compelling speech to combat climate change is unconstitutional – twice over.” The plaintiffs urge the court to apply “strict scrutiny” to both laws because they compel speech about a controversial subject – climate change. If the court applies strict scrutiny, the bills would be presumptively unconstitutional and may be upheld only by proof that they are narrowly tailored to serve compelling state interests. That is an exceedingly high hill to climb.

Because both bills quite obviously violate basic free speech rights, the question arises whether the authors knew or were grossly negligent in not knowing of the constitutional infirmities of the legislation. In 2020, I wrote Senator Wiener, the author of SB 253, that SB 260, “abridges free speech rights guaranteed by the U.S. and California Constitutions”. At the time, I was distressed that the legislative analyses for SB 260 failed to mention the constitutional infirmities of the bill. See Legislators Again Kept In Dark About Constitutional Infirmities Of Climate Corporate Accountability Act and Legislators Again Kept In Dark About Constitutional Infirmities of Climate Corporate Accountability Act.

Key Developments in Environmental Law and Policy in 2023, and What’s Ahead in 2024 [PODCAST]

On this episode of the Bracewell Environmental Law Monitor, we look back at the significant developments in environmental and natural resources law and policy in 2023, as well as look ahead to what’s to come in 2024. Co-hosts Daniel Pope and Taylor Stuart talk with Ann Navaro and Tim Wilkins, partners in Bracewell’s environment, lands and resources practice, about a range of topics, such as climate and environmental justice, renewable energy advancements, regulatory developments and much more.

EPISODE HIGHLIGHTS

[01:44] Big Developments in 2023: The Biden administration’s top priorities have been climate and environmental justice. The big development of 2023 on the climate front has been on the methane side rather than the carbon dioxide side. Regarding environmental justice, the Biden administration and NGOs have been really pushing to apply justice factors in enforcement, in cleanups, new rulemaking, permitting, issuance of grants and loans, and the like.

[06:59] A Significant Year for Jurisdiction Under the Clean Water Act: Almost a year ago, the Biden administration issued its definition of “Waters of the United States.” Subsequently, the Supreme Court issued another decision interpreting Waters of the United States in the Sackett case and essentially eviscerated one of the bases for the Biden administration’s Waters of the US rulemaking. Litigation is ongoing.

[09:33] Congress Amended the National Environmental Policy Act and the Fiscal Responsibility Act: This was enormous, as core provisions had never seen substantive amendments. There are mixed reviews of what that amendment to NEPA accomplished.

[13:41] Renewable Energy: There’s been advancement in renewable energy projects and trying to permit those projects and an emphasis on promoting renewable energy. For example, for offshore wind, in this year and in prior years of the Biden administration, there’s been a lot of advancement on leasing.

[21:57] On the Horizon in Environmental Law in 2024: Ann shares that the US Army Corps of Engineers could revise Nationwide Permit 12. Tim shares that the White House is reviewing EPA’s CERCLA hazardous substance listing for two of the leading PFAS chemicals, and the listing will go final sometime early in 2024. In addition, the SEC’s semi-annual rulemaking agenda for April 2024 promises to include proposed climate disclosure rules for publicly traded companies.

European Citizens Sue States for Breach of Human Rights Resulting from Failure to Take Stronger Climate Action

On September 27, 2023, six “Portuguese young people” were heard by the European Court of Human Rights (ECtHR) in a lawsuit against 32 European governments, including all EU member states, alleging that their failure to act fast enough against climate change has violated the applicants’ human rights to life, physical and mental wellbeing. The applicants claim that the respondents are failing to fulfil their obligations under the Paris Agreement to limit global warming.

The original application cites a number of contributions to climate change made by the respondent states: (i) permitting the release of emissions within national territory and offshore areas over which they have jurisdiction; (ii) permitting the export of fossil fuels extracted on their territory; (iii) permitting the import of goods, the production of which involves the release of emissions into the atmosphere; and (iv) permitting organizations within their jurisdiction to contribute to the release of emissions overseas. Taken together, the applicants say, the respondents have contributed to climate change and, while mitigation measures have been adopted, contributions to adverse climate change continues. The applicants are seeking an order from ECtHR requiring the respondent governments to take more ambitious action.

Describing the impact on them, the applicants say that climate change has contributed to harm to human health. In an expert report commissioned to supplement their application, the applicants say that Portugal is already experiencing the impact of climate change, including an increase in mean and extreme high temperatures, with heatwaves becoming more frequent. As a result, the region is also prone to wildfires – 120 people died and 500,000 hectares of land were burned during wildfires preceded by heatwaves. Responding to the application, a lawyer on behalf of Greece claimed that climate change cannot be directly linked to an adverse impact on human health, stating “[the] effects of climate change, as recorded so far, do not seem to directly affect human life or human health.” Lawyers on behalf of Portugal stated that the applicants failed to provide evidence of the specific damages caused by climate change on their lives.

The case was originally filed in September 2020. The September 27 hearing was one of the largest before the ECtHR, with 22 judges and 86 government lawyers, and took place following one of the hottest summers on record in Europe. A decision is expected in 2024.

Taking the Temperature: The claims made in this case echo certain conclusions reached in the United Nations’ first global stocktake on parties’ achievements under the Paris Agreement. The UN acknowledged that although significant progress has been made, there is a crucial need for nations to significantly enhance their clean energy ambitions if they are to achieve their Paris-aligned objectives.

In July 2023, we discussed the Grantham Institute’s report on trends in climate litigation and the types of strategies being employed by claimants. One of these included so-called government framework actions in which plaintiffs focus on a government’s response to climate change and potentially, its failure to implement policies or legislation. The case brought by the six Portuguese young people falls squarely within this category.

In June 2023, we discussed the lawsuit filed by, among others, Greenpeace and 12 Italian citizens against ENI S.p.A. alleging that ENI knew of the detrimental effect of fossil fuel burning since around 1970 but through “lobbying and greenwashing” continued to encourage extraction, thereby contributing to climate change, and violating the citizens’ rights to life, health and private and family life. In March of this year, a group of Swiss citizens accused the Swiss government of infringing on the right to life and health of elderly women via its climate-related policies. The case is pending in the European Court of Human Rights.

Comparable cases have also been filed in the U.S. In Montana, 16 residents—ranging from ages 2 to 18—commenced litigation claiming that they “have been and will continue to be harmed by the dangerous impacts of fossil fuels and the climate crisis,” and that the defendants have violated the Montana Constitution by fostering and supporting fossil fuel-based energy policies in the state that led to these conditions. In September this year, the court struck down on state constitutional grounds certain provisions of the Montana Environmental Policy Act (MEPA), which restricted Montana from incorporating the impact of greenhouse gas emissions or other forms of climate change in environmental reviews. Similar constitution-based climate-related suits against state governments are pending in other U.S. states.

Administration Continues Overhaul of Endangered Species Act Regulations

On June 22, 2023, the U.S. Fish and Wildlife Service (“FWS”) and the National Marine Fisheries Service (“NMFS”) (collectively, the “Services”) published three proposed rules that would significantly revise their regulations implementing several sections of the Endangered Species Act (“ESA”). Primarily, the Services’ proposals focus on amending or reversing several components of the ESA regulations promulgated in 2019 by the prior Administration, including the implementation of Section 4 (listing of species as threatened or endangered and the designation of critical habitat), Section 7 (consultation procedures); and Section 4(d) (application of the “take” prohibitions to threatened species). In addition, and beyond the scope of the 2019 final rules, the Services are proposing revisions to the Section 7 regulations regarding the scope and application of reasonable and prudent measures (“RPM”) and to the Section 4(d) regulations to include certain exceptions for federally recognized Tribes. Comments on the three proposed rules are due by August 21, 2023.

Background

The species and habitat protected under the ESA extend to all aspects of our communities, lands, and waters. There are almost 2,400 species listed as threatened or endangered pursuant to ESA Section 4. Critical habitat for one or more species has been designated in all regions of the U.S. and its territories. Through the Section 7 consultation process and “take” prohibitions under Sections 9 and 4(d), the ESA imposes species and habitat protection measures on the use and management of private, federal, and state lands and waters and, consequently, on governmental and private activities.

These proposed rules reflect the Biden Administration’s continuing efforts to reform and revise the Services’ approach to ESA implementation that was adopted by the prior Administration. Pursuant to President Biden’s Executive Order 13990, the Services reviewed certain agency actions for consistency with the new Administration’s policy objectives. As part of that review, the Services identified five final rules related to ESA implementation that should be reconsidered. Previously, in 2022, the Services rescinded two of those final rules—the regulatory definition of “habitat” for the purpose of designating critical habitat and the regulatory procedures for excluding areas from critical habitat designations. While these proposed rules reflect the consummation of that initial effort, the Services are currently contemplating additional revisions to other ESA regulations and policies.

Proposed Revisions to the Regulations for Listing Species and Designating Critical Habitat

Section 4 of the ESA dictates how the Services list species as threatened or endangered, delist or reclassify species, and designate areas as critical habitat. The proposed rule would make several targeted revisions to these procedures. Notable changes would include:

Evaluation of the “foreseeable future” for threatened species: The proposed rule would revise the applicable regulatory framework to state that “[t]he term foreseeable future extends as far into the future as the Services can reasonably rely on information about threats to the species and the species’ responses to those threats.” The Services note that this revision is intended to reflect that absolute certainty about utilized information is not necessary, just a reasonable degree of confidence in the prediction. The Services are also considering whether to rescind the framework for interpreting and implementing the “foreseeable future” in its entirety.
Designation of unoccupied critical habitat: The proposed rule would revise the two-step process for determining when unoccupied areas may be designated as critical habitat. proposed rule addresses how specific areas that are unoccupied critical habitats are designated. In part, the Services would remove the requirement that they “will only consider” unoccupied areas to be essential when a designation limited to occupied critical habitat would be inadequate for the conservation of the species. The Services also would remove the provision that an unoccupied area is considered essential when there is reasonable certainty both that the area will contribute to the conservation of the species and that it contains one or more physical or biological features essential to the conservation of the species.
Not prudent determinations for critical habitat designation: The proposed rule would remove the justification for making a not prudent determination when threats to a species’ habitat are from causes that cannot be addressed through management actions in a Section 7 consultation. The Services note that this is intended to address the misperception that a designation of critical habitat could be declined for species impacted by climate change.
Factors for delisting species: The proposed rule would restore language that delisting is appropriate when the species “is recovered.” The Services would also clarify that the delisting analysis is not limited to the same specific factors or threats that led to the listing of the species.
Economic impacts in classification process: The proposed rule would restore the regulatory condition that a species listing determination is to be made “without reference to possible economic or other impacts of such determination.”

Proposed Revisions to the Consultation Regulations

The ESA Section 7 consultation requirement applies to discretionary federal agency actions—including federal permits, licenses and authorizations, management of federal lands, and other federal programs. Federal actions that are likely to adversely affect a listed species or designated critical habitat must undergo a formal consultation review and issuance of a biological opinion evaluating whether the action is likely to jeopardize the continued existence of a species or result in the destruction or adverse modification of critical habitat. The biological opinion also evaluates the extent to which “take” of a listed species may occur as a result of the action and quantifies the level of incidental take that is authorized. The proposed rule would make the following notable changes to the applicable regulations:

Expanded scope of reasonable and prudent measures: The proposed rule would revise and expand the scope of RPMs that could be included as part of an incidental take statement in a biological opinion. In a change from their prior interpretation, and in addition to measures that avoid or minimize impacts of take, the Services would have discretion to include measures as an RPM that offset any remaining impacts of incidental take that cannot be avoided (e.g., for certain impacts, offsetting measures could include restoring or protecting suitable habitat). The Services also would allow RPMs, and their implementing terms and conditions, to occur inside or outside of the action area. Any offsetting measures would be subject to the requirement that RPMs may only involve “minor changes” to the action, must be commensurate with the scale of the impact, and must be within the authority and discretion of the action agency or applicant to carry out.
Revised definition of “effects of the action”: In an effort to clarify that the consequences to listed species or critical habitat that are included within effects of the action relate to both the proposed action and activities that are caused by the proposed action, the proposed rule would add a phrase to the definition to note that it includes “the consequences of other activities that are caused by the proposed action but that are not part of the action.” In addition, the proposed rule would remove provisions at 50 C.F.R. § 402.17, added in 2019, which provide the factors used to determine whether an activity or a consequence is “reasonably certain to occur.”
Revised definition of “environmental baseline”: The proposed rule would revise the definition in an effort to more clearly address the question of a federal agency’s discretion over its own activities and facilities when determining what is included within the environmental baseline. The Services note that it is the federal action agency’s discretion to modify the activity or facility that is the determining factor when deciding which impacts of an action agency’s activity or facility should be included in the environmental baseline, as opposed to the effects of the action. The Services also would remove the term “ongoing” from the definition in an effort to clarify that any continuation of a past and present discretionary practice or operation would be in the environmental baseline.
Clarification of obligation to reinitiate consultation: The proposed rule would remove the phrase “or by the Service” to clarify that it is the federal agency, and not the Services, that has the obligation to request reinitiating of consultation when one or more of the triggering criteria have been met (and discretionary involvement or control over the action is retained).

Proposed Reinstatement of Blanket Protections for FWS Species Listed as Threatened

Pursuant to the ESA, threatened and endangered species are treated differently with respect to what are often called the “take” prohibitions of the Act. In part, ESA Section 9(a)(1) prohibits the unauthorized take—which is defined as an act “to harass, harm, pursue, hunt, shoot, wound, kill, trap, capture, or collect”—of an endangered species. In contrast, under Section 4(d) of the ESA, the Secretary may issue a regulation applying any prohibition set forth in Section 9(a)(1) to a threatened species. Historically, FWS applied a “blanket 4(d) rule” that automatically extended all ESA Section 9(a)(1) prohibitions to a threatened species unless a species-specific rule was otherwise adopted. In 2019, FWS revised its approach to align with NMFS’s long-standing practice, which only applies the ESA prohibitions to threatened species on a species-specific basis. The proposed rule would make the following notable changes to FWS’s approach under Section 4(d):

Reinstate blanket 4(d) rule: The proposed rule would reinstate the general application of the “blanket 4(d) rule” to newly listed threatened species. As before, FWS would retain the option to promulgate species-specific rules that revise the scope or application of the prohibitions that would apply to threatened species.
New exceptions for Tribes: The proposed rule proposed rule would extend to federally recognized Tribes the ability currently afforded to FWS and other federal and state agencies to aid, salvage, or dispose of threatened species. FWS is also considering an additional revision that would extend exceptions to the prohibitions to certain individuals from a federally recognized Tribe’s natural resource agency for take associated with conservation activities pursuant to an approved cooperative agreement that covers the threatened species.

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

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.

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

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.

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