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Litigation Minute: The "E": Environmental Regulation and Ethos

ESG IN LITIGATION SERIES: PART ONE OF EIGHT

WHAT YOU NEED TO KNOW IN A MINUTE OR LESS

Class-action plaintiffs’ lawyers increasingly are using changing environmental regulations, new reporting requirements, and companies’ voluntary disclosures as the alleged basis for a legal duty when filing wide-ranging putative class actions. These trends are part of the evolving landscape of ESG class actions that have come into sharp focus with a rapidly expanding investment ethos that evaluates investment opportunities through the lens of criteria that are not necessarily quantifiable. 

Environmental factors, the “E” in ESG, are typically concerned with calculating the direct and, in some cases, indirect impact of a company on the natural environment, which may include the company’s efforts to conserve or improve the natural environment.

Here are two emerging trends in environmental ESG class actions being filed:

Piggybacking on Changing Administrative Estimates

The U.S. Environmental Protection Agency (EPA) undertook the 2014 National Air Toxics Assessment (NATA) as a screening tool to help state, local, and tribal air agencies identify which emission sources they may wish to study further.1 Despite the EPA’s disclaimer that NATA does not estimate any person’s individual risk and that NATA should not be used as a definitive means to pinpoint specific risk values or compare risks at local levels or between states,2 a plethora of putative class-action complaints do just that. Since the EPA released the 2014 NATA results on 22 August 2018, plaintiffs have filed hundreds of lawsuits nationwide (including multiple putative class actions) against defendants in multiple industries.

As the EPA explained, NATA is a screening assessment with uncertainties that vary by location, emission type, and emission source that uses rapidly changing inputs for modeling and perceived health risks. This was quickly borne out in the EPA’s 2017 Air Toxics Screening Assessment (AirToxScreen),3 released 2 March 2022, which estimated risk levels in some locations orders of magnitude lower than NATA only a few years earlier.

Since NATA and AirToxScreen use the EPA’s National Emission Inventory (NEI) as a starting point, companies with facilities that have emissions tied into NEI should consider measures to ensure their emissions are as low as reasonably practical and reporting is accurate. For example, increased leak detection and repair (LDAR) testing may reveal that fugitive emissions are lower than estimated and thereby reduce fugitive emissions reporting.

Additional Reporting Requirements on the Horizon

The Securities and Exchange Commission (SEC) created the Climate and ESG Task Force in its Division of Enforcement in March 2021,4 and the SEC’s then-acting chair instructed its Division of Corporate Finance to “enhance its focus on climate-related disclosure in public company filings.”5 

Since then, the SEC has issued a proposed rule on “The Enhancement and Standardization of Climate-Related Disclosures for Investors”6 “intended to enhance and standardize climate-related disclosures to address these investor needs,” in part because “many issuers currently seek to provide this information, but current disclosure practices are fragmented and inconsistent.”7 

Further, the SEC on 25 May 2022 proposed amendments to existing rules and reporting forms that, if adopted, would modify ESG-related disclosure requirements that apply to all investment companies and business development companies registered under the Investment Company Act of 1940 (as amended), investment advisers registered under the Investment Advisers Act of 1940 (as amended), and certain advisers exempt from regulation.8 

If these proposed disclosure requirements become effective, the current trend of securities class actions based on sustainability disclosures is likely to accelerate its pace. Over the past decade, consumer and investor plaintiffs have focused on companies’ voluntary sustainability disclosures. With these additional disclosure requirements on the horizon, it is increasingly critical for a company’s disclosures to be complete and accurate. Companies should assess their processes for gathering information pertinent to disclosures and ensure those processes are prepared to meet the proposed disclosure requirements in case they become effective.


FOOTNOTES

See U.S. Env’t Prot. Agency, National Air Toxics Assessment

See U.S. ENV’T PROT. AGENCY, 2014 NATIONAL AIR TOXICS ASSESSMENT: FACT SHEET

3 See U.S. Env’t Prot. Agency, Air Toxics Screening Assessment

See Press Release, U.S. Sec. & Exch. Comm’n, SEC Announces Enforcement Task Force Focused on Climate and ESG Issues (4 March 2021), 

See U.S. Sec. & Exch. Comm’n, Statement on the Review of Climate-Related Disclosure (24 February 2021), 

See U.S. SEC. & EXCH. COMM’N, THE ENHANCEMENT AND STANDARDIZATION OF CLIMATE-RELATED DISCLOSURES FOR INVESTORS

7 Press Release, U.S. Sec. & Exch. Comm’n, SEC Proposes Rules to Enhance and Standardize Climate-Related Disclosures for Investors (21 March 2022), 

 For more on the SEC’s 25 May 2022 proposed rule on ESG disclosures by investment managers and investment funds, see this U.S. Asset Management and Investment Funds Alert published by our colleagues: SEC Takes First Step Toward Standardized ESG Disclosures for Funds and Investment Advisers.

Copyright 2023 K & L GatesNational Law Review, Volume XII, Number 158
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About this Author

Melissa J. Tea Complex Commercial Litigation K&L Gates Pittsburgh, PA
Practice Area Leader - Litigation

Melissa Tea is a practice area leader for the firm’s global litigation and dispute resolution practice. She maintains an active litigation and counseling practice representing public and private companies primarily in the manufacturing/technology and health care industries in a wide variety of complex commercial disputes. Ms. Tea serves as a strategic adviser to her clients, developing creative solutions to complex legal issues that align with business priorities and efficiently resolving disputes through negotiated settlements, mediations, arbitrations, or trials. Ms. Tea also has...

412.355.8385
Jacquelyn S. Celender, KL Gates, Domestic Arbitration Lawyer, Document Collection Attorney
Associate

Jacquelyn (“Jackie”) Celender is an associate in the firm’s Pittsburgh office. She concentrates her law practice in the area of commercial litigation, with a particular focus in the insurance coverage and construction practice areas. Ms. Celender is experienced in all stages of litigation and in domestic and international (AAA and ICDR) arbitrations. Her experience includes fact investigation, managing e-Discovery matters and complex document collections and productions, preparing witnesses for and conducting fact and expert witness depositions and examinations at trial...

412-355-8678
Wesley A. Prichard Litigation Attorney K&L Gates Pittsburgh, PA
Associate

Mr. Prichard focuses his practice on complex commercial litigation and disputes, including oil, gas & resources and construction & infrastructure. Mr. Prichard has diversified litigation and alternative dispute resolution experience, ranging from initial investigation, discovery, appeal, and settlement. He has prepared pleadings, taken depositions, prepared and argued motions, and negotiated settlements.

Oil, Gas & Resources. Mr. Prichard has assisted in matters involving trespass, conversion, royalty disputes, construction disputes, lease construction,...

412-355-8969
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