At this point, those paying attention are quite familiar with the United States Securities and Exchange Commission (SEC) proposed rule S7-10-22, The Enhancement and Standardization of Climate-Related Disclosures for Investors and its sister regulation in Europe, the Corporate Sustainability Reporting Directive (CSRD).Footnote1,Footnote2 I wrote about the formation of this rule back in 2021, long before its release, and have been consistent in warning real estate industry practitioners about the systemic changes ahead (Cloutier et al., Citation2021). As highlighted in my numerous talks, firms that make climate claims based on metrics outside of internationally accepted standards based measurement are increasingly in legal peril.
This Editorial briefly makes three points. First, it highlights the initial set of lawsuits already filed in what will inevitably be an ensuing wave of litigation. Second, provides some context and history of the Federal Trade Commission (FTC) and SEC’s track record of litigating environmental claims. Third, identifies internationally recognized standards based organizations that are likely to hold up to regulatory scrutiny in the U.S. and EU.Footnote3
Lawsuits Already Filed, Signaling More to Come
Perhaps the clearest signal of the legal peril firms may face as a result of new climate regulation is the increasing number of lawsuits filed against prominent companies. Firms in diverse industries such as Danone,Footnote4 Delta,Footnote5 and NikeFootnote6 already face legal action related to climate risk. These lawsuits should serve as a wake-up call for businesses, signaling environmental claims may not be lightly made without potential consequences.
In real estate, there are many rumblings of the lawsuits to come (or possibly already underway). You will see these appear as consumer class action suits for securities fraud for publicly traded firms in the residential sector—especially with publicly traded homebuilders. These will manifest in the commercial sector initially with Real Estate Investment Trusts (REITs). These will likely be followed by private capital lawsuits on behalf of both consumers and capital sources. A 2023 survey by Norton Rose Fulbright indicated that fully one third of major firms list ESG related class actions among their greatest concerns.Footnote7
FTC and SEC Litigation
The (FTC) published its most recent set of “Green Guides,” designed “to help marketers avoid making environmental claims that mislead consumers,” in 2012.Footnote8 This guide is currently being updated and just completed a comment period in Q1 2023.Footnote9 In addition to the aforementioned proposed climate disclosure rule, the SEC has issued several risk alerts and task forces to deal with potentially misleading and/or unsupported ESG and climate statements; a current list may be found at the SEC website on Climate and ESG Risks and Opportunities.Footnote10
The FTC has recently levied fines against Kohl’s and Walmart for improper environmental claims, along with numerous smaller firms.Footnote11 The SEC has publicly announced investigations (in some cases now settlements/fines) against Goldman Sachs,Footnote12 BNY Mellon Investment Advisers,Footnote13 and Vale ($55.9 million fine),Footnote14 to name a few.
The purpose of identifying these legal actions is not to single out any of the firms mentioned. Simply, to demonstrate that the U.S. Federal government is actively enforcing climate and ESG compliance. As rules become clearer under the proposed climate rule, expect increased enforcement and ever increasing consequences for non-compliant firms.
Regulatory Standards Organizations
There is really only one way to assess climate claims consistently and accurately and that is using internationally accepted standards organizations. I previously argued that the SEC should rely to some extent on the International Organization for Standardization (ISO) climate reporting,Footnote15 and indications are they will adopt the International Sustainability Standards Board Recommendations (ISSB) recommendations through the International Financial Reporting Standards (IFRS)—this is the author’s own prediction as there are no formal announcements. Within ISSB standards, almost certainly ISO 14000 series environmental standards, will be an acceptable measurement for climate reporting.
ISO and IFRS are internationally recognized standards organizations. The American National Standards Institute (ANSI) and ASTM International are recognized standards organizations frequently referred to in real estate. In ESG broadly, the SEC ESG Risk report highlighted the United Nations Principles of Responsible Investment (UNPRI) and the Equator Principles as globally accepted standards.Footnote16
Importantly, building certification organizations are not recognized standards setting organizations. Self-proclaimed protocols may or may not ultimately be recognized by regulators and the market feedback raised some issues on protocols during the first IFRS comment period.Footnote17 While these organizations have provided signaling benefits in the absence of formal standards, caveat emptor to businesses that rely on these for regulatory rigor.
Conclusion
The new climate regulations worldwide signify a shifting landscape for businesses. As firms strive to navigate this evolving terrain, they face potential legal perils stemming from climate-related issues. Numerous examples represent only the surface of the iceberg already in play as a multitude of other actions currently exist in various states of public release.
If you make a carbon neutrality claim, if you make an ESG claim, under what system are you backing it up? Are you using standards that will be recognized by regulatory enforcement agencies?
Lastly, perhaps you think, as a private steward of capital, these rules may not apply to you. Perhaps. Unless, you happen to have a tenant who is public, are part of the value chain of a firm that makes ESG claims, or manage capital from an institutional client that makes climate/ESG claims. If you fall into any of those categories, the potential for legal peril applies to you.
Notes
3 Disclaimer: This article is not intended to give specific legal, regulatory or compliance advice but rather to provide general insights to consult with your advisors.
Reference
- Cloutier, D., Robinson, S., & Sullivan, G. (2021). The coming us regulatory oversight of, and demand for, climate disclosure. CRE Real Estate Issues, 45(28), 1–11.