The following interview originally appeared in the National Law Journal.
What you need to know
- One of the significant issues many of their multinational clients have is the growing divide between how they operate and what’s expected of them in the U.S. versus Europe.
- At the same time the legal field has experienced this anti-ESG backlash over the last year in the U.S., the EU has moved full speed ahead on many ESG initiatives with significant consequences for businesses, including the EU Taxonomy, the Sustainable Finance Disclosure Regulation, the Corporate Sustainability Reporting Directive, and the Corporate Sustainability Due Diligence Directive.
- There is also growing litigation risk because with so much more scrutiny, and so much more information in the public domain, there are a range of stakeholders and potential plaintiffs on ESG issues, from state officials to NGOs
The Biden administration has set clear policy goals to establish effective corporate net-zero strategies on the one hand, yet there has also been growing pushback against the climate aspect of ESG in many red states. How do you advise clients on climate regulation in this very fluid environment?
Jayni Hein: We are all witnessing this summer, yet again, record-breaking land and ocean temperatures and pervasive wildfire smoke. It’s undeniable that climate change is affecting how we live today and how businesses operate. How both the government and the private sector respond is critically important.
With respect to the climate regulation work that we are doing for our clients, there are a few key pillars of our work. First and foremost, with respect to climate regulation, we are focusing on the core legal issues that are essential to our client’s operation and business strategy. For our energy and power sector clients, this includes Clean Air Act regulation and state regulation of greenhouse gas emissions and other air pollution. For our transportation clients, this includes federal emission standards and state programs like California’s low carbon fuel standard.
While these regulations are foundational to our clients, they are also subject to significant changes across presidential administrations. So we’re actively advising clients on engagement in the ongoing rulemaking process on how they can strategically plan and operate in the midst of this regulatory uncertainty.
We are also advising clients on how to take advantage of the largest federal investments in clean energy and climate mitigation and history. With the passage of the Inflation Reduction Act in 2022 and the Infrastructure Investment and Jobs Act in 2021, these laws are driving a domestic clean energy renaissance.
We are partnering with our clients to help them take full advantage of these incentives to structure new ventures and to develop projects here in the United States; this work is driving the clean energy economy.
As a third pillar of our work, we help corporate clients set and meet their decarbonization goals. While “ESG” has become almost a dirty word in some Republican states and circles, at the same time, many of our clients are focused on strategies to decarbonize. This has created a tricky landscape for some.
As a result of all of this activity, Covington launched a new carbon management and climate mitigation practice on June 1. It was created from the need to provide our clients with holistic legal and policy advice with respect to climate mitigation and carbon management.
Dan Feldman: We are closely tracking a whole range of ESG initiatives at state levels in both red states and blue states. We are monitoring what’s happening in Congress, particularly with the recent congressional hearings from different committees on the House side, and also what’s happening internationally in a whole range of jurisdictions.
This anti-ESG backlash is getting a lot of press attention right now, and in some cases, has migrated into the legal and regulatory framework such as in the recent passage of legislation in Florida.
Our clients are trying to be responsible and responsive to a whole array of stakeholders that are engaged on ESG and sometimes with conflicting views. Their investors may be demanding some criteria and their employees and consumers may be seeking something else. And then the array of governments that they are actively engaging with and the jurisdictions in which they operate in are making demands across the political spectrum.
The challenges frequently are helping clients better define and execute what their fiduciary responsibilities may be as best as possible. And it can be quite difficult given this range of opinions about what ESG consists of, how it should be implemented, and what should be prioritized.
You touched on the challenging environment corporations operate in—could you explain how you advise clients to meet these challenges?
DF: It can be complicated. Regulations including most notably the SEC Climate-Related Disclosure Rules are still in development. How they wind up, whether it will just cover Scope 1 and 2, or also potentially Scope 3 disclosures remains to be seen.
But we are also waiting for final Clean Air Act regulations. The FTC Green Guides were put out over a decade ago and are in the process of being updated now. So we’re waiting for clearer guidance on claims from being sustainable to net zero or carbon neutral. The regulatory terrain is uncertain.
Second of all, the pathways are still fairly unclear how a company can best meet corporate commitments they’ve already made or are contemplating on decarbonization.
We are still trying to ensure that these mechanisms can be scaled in a way that’s most effective, and that there’s accountability, guidance and instruction for companies that are seeking to execute on their commitments.
That can mean how they implement science-based target initiatives. It can mean their adherence to protocols like the Greenhouse Gas Protocols. It can mean how they incorporate carbon offsets or voluntary carbon markets into their decarbonization plans. Much of this is still at such a relatively formative stage, it means that there’s frequently not clear cut decisive answers that will guide them.
As a result, clients are trying to work with quite imperfect information in terms of their execution. This a multijurisdictional challenge that a number of our clients have, operating both in some red states which are taking more anti-ESG action—sometimes rhetoric, but sometimes proposed legislation—as well as blue states that are looking to push boundaries in support of more progressive ESG policies.
One of the really significant issues we have with many of our multinational clients is the growing divide between how they operate and what’s expected of them in the U.S. versus Europe. At the same time that we have experienced this anti-ESG backlash over the last year in the U.S., the EU has moved full speed ahead on many ESG initiatives with significant consequences for businesses, including the EU Taxonomy, the Sustainable Finance Disclosure Regulation, the Corporate Sustainability Reporting Directive (CSRD), and the Corporate Sustainability Due Diligence Directive (CSDDD).
Lastly there is a growing litigation risk because with so much more scrutiny, and so much more information in the public domain, there are a range of stakeholders and potential plaintiffs on ESG issues, from state officials to NGOs. It could mean an array of greenwashing and environmental marketing claims and class actions challenging net zero claims, or state attorneys general led antitrust lawsuits, or other forms of climate litigation.
There has always been the potential for reputational risk or operational risk for companies resulting from ESG issues, but there’s now also more acute legal and regulatory risk.
How do you bridge the challenge for clients from committing to carbon transaction and net-zero strategies to actual implementation?
JH: To distill this to a few key points. First: set ambitious, yet achievable decarbonization goals. A lot of companies have goals and targets, yet increasingly, there are risks when companies have goals, but don’t actually have a plan to meet those targets.
That takes me to the second point: create a clear plan for achieving those objectives. This can include setting both short and long-term goals, conducting emissions accounting and reporting, and creating actionable plans for mitigating emissions.
Every company is situated a bit differently in regard to mitigation. Some companies are actively building renewable energy; others are procuring renewable energy from clean energy developers.
Others are interested in things like offsets or entering the carbon market. The plan that works well for one company may not be the best plan for another.
Third, involve a full range of stakeholders including relevant communities, advocates, and government officials.
There’s so much interest in what the private sector is doing in this space—this includes shareholders, employees, customers, and it certainly includes any local community that’s directly affected by a company’s operations. Think about who the stakeholders are, involve them in the process, and consider ways to optimize stakeholder benefits. There’s so much at stake when it comes to climate change and decarbonization—and the clock is ticking. We’re focused on helping our clients achieve their ambitious goals efficiently and durably.
Reprinted with permission from the August 28, 2023 edition of the National Law Journal© 2023 ALM Global Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-256-2472 or firstname.lastname@example.org