International In-house Counsel Journal
Vol. 3, No. 11, Spring 2010, 1
Greening the Corporation: Advising Companies on Compliance with
Corporate Sustainability Requirements
DANA M. NEWMAN
Partner, The General Counsel LLC, USA
For a growing number of businesses, implementing smart environmental policy aids legal
compliance and promotes competitiveness. Gone are the days when the only companies
concerned about environmental laws were heavy manufacturers. Recent developments in
both the U.S. government and private corporate sectors have ushered in a new era of
corporate sustainability, in which complying with environmental regulations is moving
from a recommendation to a mandate for a wide range of businesses. Just as
organizations must develop and enforce policies in the areas of governance, employment,
and safety, many companies and public agencies are now required to track and report
sustainability measurements to ensure legal compliance. Moreover, many forward-
thinking companies are already implementing environmental policies to stay competitive,
even though it is not yet a legal requirement. In-house counsel should be aware of the
new corporate sustainability requirements and recommendations to advise organizations
how to develop policies, avoid liability and succeed in the new green economy.
While 2010 began without a comprehensive U.S. federal climate law or legally binding
international agreement, regulatory action and negotiations are ongoing. Despite the
failure of the United Nations Climate Change Conference in Denmark last December to
produce any binding greenhouse gas emission ("GHG") reduction laws, nations will
continue working toward a global climate treaty. In the U.S., a bi-partisan bill being
sponsored by Senator John Kerry (D-Mass.) could succeed in bringing the parties
together and finally getting a new climate law passed.
In the meantime, businesses cannot afford to sit back and wait for definitive law in this
area, since a new federal Executive Order, EPA regulations, SEC guidance and private
sector programs have gone into effect which apply to a wide variety of companies and
public agencies. All organizations that are subject to these new requirements should be
incorporating them into their planning and taking steps to ensure compliance.
I. Executive Order 13514
On October 5, 2009, President Obama signed Executive Order 13514, titled Federal
Leadership in Environmental, Energy, and Economic Performance. This Executive
Order requires all federal agencies to inventory their GHG emissions, set targets to
reduce their emissions by 2020, and develop a plan for meeting a wide range of goals for
improving sustainability, such as increasing energy and water efficiency, reducing waste,
reducing fleet petroleum consumption, supporting sustainable communities, developing
and maintaining high performance buildings, and leveraging Federal purchasing power to
promote environmentally-responsible products and technologies.
International In-house Counsel Journal ISSN 1754-0607 print/ISSN 1754-0607 online
2 Dana M. Newman
Other environmental targets in the order include a 30% reduction in fleet gasoline use and
26% boost in water efficiency by 2020, and a 50% waste recycling and diversion rate by
2015. The 2030 net-zero-energy building requirement must also be implemented under
the order.
Each agency must appoint a senior sustainability officer responsible for
complying with the order. The Chair of the Council on Environment will report agency
goals and results directly to the President.
"As the largest consumer of energy in the U.S. economy, the Federal government can and
should lead by example when it comes to creating innovative ways to reduce greenhouse
gas emissions, increase energy efficiency, conserve water, reduce waste, and use
environmentally-responsible products and technologies," President Obama said in a
statement.
The Executive Order was intended to jumpstart a transition to a clean energy economy as
climate change legislation works its way through Congress, saving taxpayers money in
the process. The order will have a significant impact based on the Federal government's
sheer size: it occupies nearly 500,000 buildings and operates more than 600,000
vehicles.
Another key component of the Executive Order is a green procurement policy requiring
95% of new federal contracts and acquisitions to meet sustainability requirements which
promote environmentally responsible products and technologies. This also carries a lot
of weight due to the government's huge buying power, which exceeds more than $500
billion spent on goods and services annually. The Executive Order charges the General
Services Administration ("GSA") with exploring the feasibility of tracking vendor GHG
emissions.
Recommendations could include requiring vendors to register with a
voluntary GHG emissions registry and disclose their efforts to reduce emissions.
Preferences or other incentives could be given for "products manufactured using
processes that minimize greenhouse gas emissions."
For the purchase of electronic products and services, the Executive Order requires the
GSA to ensure that 95% of new contract actions, task orders, and delivery orders for
products and services (excluding weapon systems) are energy efficient (ENERGY
STAR® or FEMP-designated), water efficient, bio-based, environmentally preferable
(Electronic Product Environmental Assessment Tool (EPEAT) certified), non-ozone
depleting, contain recycled content, or are non-toxic or less-toxic alternatives where such
products and services meet agency performance requirements.
The GSA announced in late January 2010 that it had already drafted energy service
agreements with 18 companies to reduce its consumption through energy audits,
monitoring and use of renewable energy.
The GSA also took steps to make the federal
fleet more efficient with the purchase of thousands of new vehicles last year using $210
million in stimulus funds. Roughly 6,500 of the vehicles -- a mix of hybrids, flex-fuel
and four-cylinders -- are earmarked for the U.S. Postal Service, which operates the
country's largest fleet of alternative fuel vehicles.
In 2008, the GSA estimated its
purchase of 15,000 seats of power management software would save up to $750,000
annually.
Eventually, all federal purchasing will incorporate the measurement of GHG emissions as
a contract requirement. The first step, which is part of Executive Order 13514, is the
creation of a voluntary GHG emissions reporting system for government contractors and
Compliance 3
vendors. Contractors' (and subcontractors') ability to measure and minimize their GHG
emissions and provide energy efficient products and services will become an important
factor in winning government contracts.
II. SEC Guidance on Climate Change Disclosures
The U.S. Securities and Exchange Commission ("SEC") issued Interpretive Release No.
33-9106 on February 2, 2010 in order to provide guidance to public companies of the
agency's disclosure requirements regarding climate change issues. The guidance, which
became effective immediately, applies to all public companies.
The release doesn't create new disclosure requirements or modify existing disclosure
requirements, but rather, was issued for clarification purposes. Specifically, the guidance
addresses four areas that may trigger disclosure obligations under existing SEC
requirements:
1. whether the impact of proposed or existing climate change laws and regulations
in the U.S. and other countries may materially affect the company's financial
condition or operations;
2. whether international climate change accords or treaties will impact its business;
3. whether a company is likely to face indirect opportunities or risks arising out of
legal, technological, political and scientific developments regarding climate
change (such as changes in demand for the company's goods/services, increased
competition, or reputational damage); and
4. whether a company faces potential physical impacts of climate change on its
business (such as disruption to operations caused by weather or supply
interruptions, increased insurance, or water availability and quality).
The SEC guidance provides that these climate change disclosures may be required under
the Description of Business (Item 101), Legal Proceedings (103), Management's
Discussion and Analysis (303), and Risk Factors (503(c)) sections of companies' filings
under Regulation S-K.
The SEC noted its concern that some companies had already been providing climate
change information on a voluntary basis to third parties, and it wanted to ensure that
similar disclosures were in SEC filings as may be required under SEC regulations.
Independent organizations such as The Climate Registry and The Carbon Disclosure
Project maintain corporate climate change data, while the most dominant reporting
regulations are those of the Global Reporting Initiative (GRI). Launched in 1997 with the
goal of "enhancing the quality, rigor, and utility of sustainability reporting," the GRI
develops criteria that could eventually serve as the basis for generally accepted
sustainability reporting standards. As of 2008, more than 1,000 companies from more
than 60 countries registered with the GRI and were issuing corporate sustainability
reports using its reporting framework.
The SEC expressly indicated in the comments to the guidance that it will be focusing on
climate change disclosures in its review of company filings. As a practical matter, public
companies are well advised to treat this guidance as binding; if they haven't disclosed
climate risks in the past, they'll need to begin establishing disclosure procedures for all
future relevant filings using these measures as a roadmap.
4 Dana M. Newman
III. EPA Mandatory Greenhouse Gas Reporting Rule
Beginning on January 1, 2010, a mandatory EPA rule went into effect, which requires
that all major GHG emitters track and report their GHG emissions data under a new
system.1 The new rule applies to industries or facilities that emit over 25,000 tons of
carbon dioxide equivalent per year, of which there are currently approximately 10,000 in
the U.S. Most emitters are required to install new monitoring equipment or at a
minimum develop new GHG measurement protocols. Recognizing that not all of the
organizations would be able to comply by January 1, 2010, the rule allows them to use
their "best available monitoring methods" until April 1, 2010.
Affected entities will also need to have a written GHG Monitoring Plan, which must
address the methods used to collect GHG data, specify the quality assurance,
maintenance, and repair procedures for the GHG monitoring equipment, and assigned
roles for facility staff to gather data. In addition, the rule mandates the implementation of
GHG monitoring training and documentation procedures in line with the record keeping
requirements. While the facilities do not have to send their monitoring plans to the EPA,
they are required to maintain the plan at their facility and make it available should the
EPA request to review it.
This new EPA regulation is just one of many international, federal, state, 2 and regional
programs already enacted or currently pending to address the issue of GHG emissions.
While there is still a great deal of uncertainty regarding climate change matters and
sustainability compliance, it's not a question of whether most companies will eventually
be legally required to monitor, report and reduce their GHG emissions -- it's only a
question of when, and how.
IV. Private Sector Sustainability Programs
In the business community, despite the lack of uniform laws and regulations, the last
several years have seen a great deal of climate change momentum. In October 2009,
major corporations including Apple, Pacific Gas & Electric and Exelon left the U.S.
Chamber of Commerce over its strong position against U.S. regulation of GHG
emissions. Microsoft co-founder and chairman Bill Gates has recently been calling for
making climate change our number one priority, and advocates a global effort to lower
carbon emissions to zero by 2050 to avoid the damaging effects of climate change.
More companies are now voluntarily launching new efforts to reduce their climate
impact. The steady increase in corporate action toward energy efficiency, renewable
energy investment, carbon neutrality, and technological innovation stands in stark
contrast to the stalled political action on climate change.
Perhaps the most significant corporate action addressing climate change and
sustainability is that of Walmart, the world’s largest retailer. The company recently put
into effect the "Walmart Sustainability Index," which assesses all of its suppliers
1
40 C.F.R. Part 98.
2
Thirty-three U.S. states plus Washington, D.C. have implemented Renewable Portfolio Standards
programs, which are intended to cut GHGs by increasing the use of alternative energy sources, such
as wind and solar. The standards set a deadline by which electric utilities must generate a specified
percentage of their power from renewable energy sources.
Compliance 5
worldwide based on the lifecycle analysis and environmental impact of their
products. Over 100,000 suppliers are now highly incentivized to increase their
sustainability efforts in order to maintain a successful business relationship with Walmart
and remain competitive in the marketplace.
Working closely with the Environmental Defense Fund ("EDF"), Walmart has also
committed to reducing 20 million metric tons of carbon pollution from its products'
lifecycle and supply chain by the end of 2015. This equates to the annual GHG from 3.8
million cars -- a significant impact.
Due to its sheer size, Walmart is in a unique position to cut carbon pollution across the
globe. Its new commitments are bold because:
Walmart's supply chain is huge, so these initiatives will have widespread
repercussions. Walmart's new index encourages suppliers to reduce their
emissions - which they might not otherwise do -- resulting in positive energy
efficiency efforts by tens of thousands of companies around the world.
Walmart is prioritizing the products that create the most carbon emissions across
their lifecycles as well as top selling products, and focusing on those first.
The results are immediate, and not dependent on any particular governmental
body to act, or any specific laws or regulations, which may be appealed or
changed.
In conjunction with the Sustainability Index and other measures, it clearly
communicates a strong message from Walmart to its international network of
suppliers that they must reduce carbon pollution.
Other major global companies taking aggressive action in the area of sustainability and
climate change include Hewlett Packard, IBM, Ikea, Johnson & Johnson, Nike, Intel,
Dell and Weyerhaeuser. Given their hundreds of thousands of employees, suppliers and
customers around the world, these companies have the ability to be very influential in the
development of green business practices.
Between the federal government with its more than a half trillion dollar procurement
budget, the many companies subject to SEC climate change disclosure rules and/or EPA
GHG monitoring requirements, and the private corporate programs such as Walmart's
index which in effect guarantee preferences to vendors who implement sustainable
practices, businesses and organizations of all sizes, across virtually all industries, will
soon be facing the need to increase sustainability efforts.
Further, these developments indicate that sustainability targets, once merely an option,
will soon be mandated in both the private and public sector. Apart from the legal
compliance requirements, from a corporate perspective developing sustainability policies
now provides a competitive advantage in the marketplace and reduces costs.
V. Developing a Sustainability Compliance Program
Businesses should therefore carefully assess the legal threats and growth opportunities
presented by sustainability initiatives. This assessment requires consideration of
qualitative and quantitative information, since both strategic issues and corporate
emissions levels drive the identification of climate change-related risks and
opportunities. For example, certain issues mentioned in the SEC guidance, such as legal,
6 Dana M. Newman
technological, political, and scientific developments, can alter the competitive
marketplace by creating new business areas or threatening existing ones, thereby
triggering the need for disclosure in a company’s management discussion and analysis.
Depending on the organization's specific business area and operations, companies should
consider taking some or all of the following steps, with the goal of making sustainability
a part of the overall culture:
Establish a benchmark of your organization’s environmental performance. This
is a critical step in establishing goals and developing a comprehensive
sustainability program.
If your company manufactures or supplies products, evaluate the products’ life
cycle impacts. This can be done by completing or outsourcing a life cycle
assessment (LCA). The LCA will be a valuable tool to help make any needed
changes to the product or service and reduce environmental impacts and overall
costs.
Hire or appoint a corporate sustainability officer. Federal government agencies
are now mandated to fulfill this job function, and savvy private companies are
doing the same. One caveat: if you appoint a sustainability officer with little
expertise in this area, they should receive training or consulting services from an
experienced and credible agency (e.g., the Institute of Green Professionals).
Establish cross-functional teams to develop sustainability programs for your
organization. Pulling data from the benchmarking data should be used to assist
the teams in setting realistic and achievable goals.
Set initial sustainability goals that will achieve immediate success such as waste
reduction and recycling. This will build momentum for the program and
generate savings that can go towards the more difficult and long-term tasks.
Provide sustainability training to those who need it in your organization as it
relates to their specific job functions.
Communicate information about the sustainability program to your
shareholders, employees, customers and vendors.
There are a number of systems available to help companies assess their climate change
related risks and opportunities, calculate their quantitative emissions information, inform
them of the likelihood of potential costs from regulation, as well as highlight potential
benefits, such as profits from the sale of carbon credits and opportunities for energy
efficiency cost-savings. Participation in a voluntary reporting program such as the
Climate Registry or the Carbon Disclosure Project is one way companies can begin
gathering information on their carbon footprint and gain greater insight into where
emissions are occurring in their operations. Companies may also be able to use the
information they collect for these programs to assist them in creating other outputs,
including 10K filings. The Carbon Disclosure Project questionnaire, or the GRI reporting
system, can be used as a framework to begin internally assessing which factors within
their business create climate change risks or opportunities.
Corporations can expect to see carbon management grow in importance as domestic and
international regulatory activity continues in 2010. In tandem with this trend, the number
of products and services developed to help organizations measure and manage their
environmental impacts will expand, from startup offerings to more sophisticated
enterprise solutions from industry leaders such as SAP, IBM and Microsoft. Enterprise
carbon accounting software and sustainability consulting services sales will grow as
companies seek detailed, real-time information about their climate impacts.
Compliance 7
In addition, companies can obtain assistance in sustainability compliance from
organizations which have been formed to share environmental technology and solutions.
The Eco-Patent Commons was launched in 2008 by IBM, Nokia, Pitney-Bowes and Sony
in conjunction with the World Business Council for Sustainable Development to
contribute environmental patents to the public domain. The organization's mission is to
protect the environment and enable collaboration between businesses that foster new
innovations. There are now 100 eco-friendly patents pledged to the public domain
through this venture.
The GreenXchange was created to enable companies to share intellectual property for
green product design, packaging, manufacturing and other uses. Founded by Nike and
other companies, the group is a Web-based marketplace where organizations can
collaborate and share intellectual property, with the goal of developing new sustainability
business models and innovation.
Similarly, last year the EDF launched an Innovation Exchange to encourage companies to
share strategies related to energy, water, climate and a host of other issues. Like the Eco-
Patent Commons and the GreenXchange, it hopes to publicize new technologies and best
practices. The EDF included content in the Innovation Exchange that it developed during
its 20 years of experience in working with Fortune 500 companies including Walmart,
FedEx and McDonald's.
Business counsel should familiarize themselves with the new corporate sustainability
compliance initiatives being implemented by many of the world's largest corporations, as
well as the tools and resources available to assist businesses in developing their own
environmental policies and procedures. Soon, legal departments will regularly be called
upon to counsel management on how to handle the current and future mandatory
corporate sustainability requirements, which will not only help their companies avoid
liability but also improve their businesses and reduce environmental impact.
Dana M. Newman is a Partner with The General Counsel, LLC. She is a seasoned
business attorney with over 15 years of in-house legal experience as General Counsel and
Secretary for Moviola, an entertainment technology industry leader with offices in Los
Angeles and New York. She was a key management team member for Moviola and its
affiliates (Paskal Lighting and Magnasync Corporation), where she advised senior
management on all aspects of business and legal affairs, including contracts, human
resources, insurance, intellectual property, corporate governance, and litigation
management.
Dana holds a B.A. in Comparative Literature from the University of California at
Berkeley, and a J.D. from the University of San Francisco School of Law. She was an
extern for Hon. Robert Takasugi in the U.S. District Court in Los Angeles, and also
worked at the Office of the City Attorney in San Francisco.
The General Counsel, LLC is a new breed of legal services firm that understands how
regular, direct access to seasoned business counsel can accelerate the growth of an
organization. The General Counsel provides cost effective, full and part-time in-
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