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Potential for Legal Peril in Real Estate Climate and ESG Claims

Potential for Legal Peril in Real Estate Climate and ESG Claims JOURNAL OF SUSTAINABLE REAL ESTATE 2023, VOL. 15, NO. 1, 2224097 ARES https://doi.org/10.1080/19498276.2023.2224097 American Real Estate Society EDITORIAL At this point, those paying attention are quite familiar 2023 survey by Norton Rose Fulbright indicated that with the United States Securities and Exchange fully one third of major firms list ESG related class Commission (SEC) proposed rule S7-10-22, The actions among their greatest concerns. Enhancement and Standardization of Climate-Related Disclosures for Investors and its sister regulation in FTC and SEC Litigation Europe, the Corporate Sustainability Reporting 1,2 The (FTC) published its most recent set of “Green Directive (CSRD). I wrote about the formation of Guides,” designed “to help marketers avoid making this rule back in 2021, long before its release, and environmental claims that mislead consumers,” in have been consistent in warning real estate industry 2012. This guide is currently being updated and just practitioners about the systemic changes ahead completed a comment period in Q1 2023. In addition (Cloutier et al., 2021). As highlighted in my numer- to the aforementioned proposed climate disclosure ous talks, firms that make climate claims based on rule, the SEC has issued several risk alerts and task metrics outside of internationally accepted standards forces to deal with potentially misleading and/or based measurement are increasingly in legal peril. unsupported ESG and climate statements; a current This Editorial briefly makes three points. First, it list may be found at the SEC website on Climate and highlights the initial set of lawsuits already filed in what will inevitably be an ensuing wave of litigation. ESG Risks and Opportunities. Second, provides some context and history of the The FTC has recently levied fines against Kohl’s and Walmart for improper environmental claims, Federal Trade Commission (FTC) and SEC’s track along with numerous smaller firms. The SEC has record of litigating environmental claims. Third, iden- publicly announced investigations (in some cases now tifies internationally recognized standards based organizations that are likely to hold up to regulatory settlements/fines) against Goldman Sachs, BNY Mellon Investment Advisers, and Vale ($55.9 million scrutiny in the U.S. and EU. fine), to name a few. The purpose of identifying these legal actions is not Lawsuits Already Filed, Signaling More to to single out any of the firms mentioned. Simply, to Come demonstrate that the U.S. Federal government is Perhaps the clearest signal of the legal peril firms may actively enforcing climate and ESG compliance. As face as a result of new climate regulation is the rules become clearer under the proposed climate rule, increasing number of lawsuits filed against prominent expect increased enforcement and ever increasing con- companies. Firms in diverse industries such as sequences for non-compliant firms. 4 5 6 Danone, Delta, and Nike already face legal action related to climate risk. These lawsuits should serve as Regulatory Standards Organizations a wake-up call for businesses, signaling environmental There is really only one way to assess climate claims claims may not be lightly made without potential consistently and accurately and that is using inter- consequences. In real estate, there are many rumblings of the law- nationally accepted standards organizations. I previ- suits to come (or possibly already underway). You will ously argued that the SEC should rely to some extent see these appear as consumer class action suits for on the International Organization for Standardization (ISO) climate reporting, and indications are they securities fraud for publicly traded firms in the resi- dential sector—especially with publicly traded home- will adopt the International Sustainability Standards builders. These will manifest in the commercial sector Board Recommendations (ISSB) recommendations initially with Real Estate Investment Trusts (REITs). through the International Financial Reporting These will likely be followed by private capital lawsuits Standards (IFRS)—this is the author’s own prediction on behalf of both consumers and capital sources. A as there are no formal announcements. Within ISSB 2 S. ROBINSON 3. Disclaimer: This article is not intended to give specific standards, almost certainly ISO 14000 series environ- legal, regulatory or compliance advice but rather to mental standards, will be an acceptable measurement provide general insights to consult with your advisors. for climate reporting. 4. https://www.foodbusinessnews.net/articles/22486- ISO and IFRS are internationally recognized stand- lawsuit-focuses-on-evians-carbon-neutral-claim ards organizations. The American National Standards 5. https://www.esgtoday.com/delta-hit-with- Institute (ANSI) and ASTM International are recog- greenwashing-lawsuit-over-carbon-neutrality-claims/ 6. https://news.bloomberglaw.com/product-liability-and- nized standards organizations frequently referred to in toxics-law/nike-hit-with-false-ad-suit-over-sustainable- real estate. In ESG broadly, the SEC ESG Risk report clothing-claims highlighted the United Nations Principles of 7. https://www.nortonrosefulbright.com/en/knowledge/ Responsible Investment (UNPRI) and the Equator publications/d3afa926/environmental-social-and- Principles as globally accepted standards. governance Importantly, building certification organizations are 8. https://www.ftc.gov/news-events/topics/truth- not recognized standards setting organizations. Self- advertising/green-guides 9. https://www.ftc.gov/news-events/news/press-releases/ proclaimed protocols may or may not ultimately be 2023/01/federal-trade-commission-extends-public- recognized by regulators and the market feedback comment-period-potential-updates-its-green-guides-use raised some issues on protocols during the first IFRS 10. https://www.sec.gov/sec-response-climate-and-esg- comment period. While these organizations have risks-and-opportunities provided signaling benefits in the absence of formal 11. https://www.ftc.gov/business-guidance/blog/2022/04/ standards, caveat emptor to businesses that rely on 55-million-total-ftc-settlements-kohls-and-walmart- challenge-bamboo-and-eco-claims-shed-light these for regulatory rigor. 12. https://www.sec.gov/news/press-release/2022-209 13. https://www.sec.gov/news/press-release/2022-86 14. https://www.sec.gov/news/press-release/2023-63 Conclusion 15. https://www.tandfonline.com/doi/full/10.1080/ The new climate regulations worldwide signify a shift- 19498276.2022.2065797 ing landscape for businesses. As firms strive to navi- 16. https://www.sec.gov/files/esg-risk-alert.pdf 17. https://www.ifrs.org/content/dam/ifrs/meetings/2022/ gate this evolving terrain, they face potential legal july/issb/ap2-overview-of-exposure-drafts-s1-and-s2- perils stemming from climate-related issues. and-feedback-received-as-at-7-july-2022.pdf 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. Reference If you make a carbon neutrality claim, if you make Cloutier, D., Robinson, S., & Sullivan, G. (2021). The com- an ESG claim, under what system are you backing it ing us regulatory oversight of, and demand for, climate up? Are you using standards that will be recognized disclosure. CRE Real Estate Issues, 45(28), 1–11. by regulatory enforcement agencies? Lastly, perhaps you think, as a private steward of Spenser Robinson capital, these rules may not apply to you. Perhaps. Departments of Finance/Law and Entrepreneurship, Unless, you happen to have a tenant who is public, Central Michigan University, Mount Pleasant, Michigan, USA are part of the value chain of a firm that makes ESG robin6s@cmich.edu claims, or manage capital from an institutional client that makes climate/ESG claims. If you fall into any of 2023 The Author(s). Published with license by Taylor those categories, the potential for legal peril applies & Francis Group, LLC to you. This is an Open Access article distributed under the terms of the Creative Commons Attribution License Notes (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction 1. https://www.sec.gov/rules/proposed/2022/33-11042.pdf in any medium, provided the original work is properly 2. https://finance.ec.europa.eu/capital-markets-union-and- cited. The terms on which this article has been published financial-markets/company-reporting-and-auditing/ allow the posting of the Accepted Manuscript in a company-reporting/corporate-sustainability- reporting_en repository by the author(s) or with their consent. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Sustainable Real Estate Taylor & Francis

Potential for Legal Peril in Real Estate Climate and ESG Claims

Robinson, Spenser
Journal of Sustainable Real Estate , Volume 15 (1): 1 – Dec 31, 2023
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Taylor & Francis
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© 2023 The Author(s). Published with license by Taylor & Francis Group, LLC
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1949-8284
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10.1080/19498276.2023.2224097
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Abstract

JOURNAL OF SUSTAINABLE REAL ESTATE 2023, VOL. 15, NO. 1, 2224097 ARES https://doi.org/10.1080/19498276.2023.2224097 American Real Estate Society EDITORIAL At this point, those paying attention are quite familiar 2023 survey by Norton Rose Fulbright indicated that with the United States Securities and Exchange fully one third of major firms list ESG related class Commission (SEC) proposed rule S7-10-22, The actions among their greatest concerns. Enhancement and Standardization of Climate-Related Disclosures for Investors and its sister regulation in FTC and SEC Litigation Europe, the Corporate Sustainability Reporting 1,2 The (FTC) published its most recent set of “Green Directive (CSRD). I wrote about the formation of Guides,” designed “to help marketers avoid making this rule back in 2021, long before its release, and environmental claims that mislead consumers,” in have been consistent in warning real estate industry 2012. This guide is currently being updated and just practitioners about the systemic changes ahead completed a comment period in Q1 2023. In addition (Cloutier et al., 2021). As highlighted in my numer- to the aforementioned proposed climate disclosure ous talks, firms that make climate claims based on rule, the SEC has issued several risk alerts and task metrics outside of internationally accepted standards forces to deal with potentially misleading and/or based measurement are increasingly in legal peril. unsupported ESG and climate statements; a current This Editorial briefly makes three points. First, it list may be found at the SEC website on Climate and highlights the initial set of lawsuits already filed in what will inevitably be an ensuing wave of litigation. ESG Risks and Opportunities. Second, provides some context and history of the The FTC has recently levied fines against Kohl’s and Walmart for improper environmental claims, Federal Trade Commission (FTC) and SEC’s track along with numerous smaller firms. The SEC has record of litigating environmental claims. Third, iden- publicly announced investigations (in some cases now tifies internationally recognized standards based organizations that are likely to hold up to regulatory settlements/fines) against Goldman Sachs, BNY Mellon Investment Advisers, and Vale ($55.9 million scrutiny in the U.S. and EU. fine), to name a few. The purpose of identifying these legal actions is not Lawsuits Already Filed, Signaling More to to single out any of the firms mentioned. Simply, to Come demonstrate that the U.S. Federal government is Perhaps the clearest signal of the legal peril firms may actively enforcing climate and ESG compliance. As face as a result of new climate regulation is the rules become clearer under the proposed climate rule, increasing number of lawsuits filed against prominent expect increased enforcement and ever increasing con- companies. Firms in diverse industries such as sequences for non-compliant firms. 4 5 6 Danone, Delta, and Nike already face legal action related to climate risk. These lawsuits should serve as Regulatory Standards Organizations a wake-up call for businesses, signaling environmental There is really only one way to assess climate claims claims may not be lightly made without potential consistently and accurately and that is using inter- consequences. In real estate, there are many rumblings of the law- nationally accepted standards organizations. I previ- suits to come (or possibly already underway). You will ously argued that the SEC should rely to some extent see these appear as consumer class action suits for on the International Organization for Standardization (ISO) climate reporting, and indications are they securities fraud for publicly traded firms in the resi- dential sector—especially with publicly traded home- will adopt the International Sustainability Standards builders. These will manifest in the commercial sector Board Recommendations (ISSB) recommendations initially with Real Estate Investment Trusts (REITs). through the International Financial Reporting These will likely be followed by private capital lawsuits Standards (IFRS)—this is the author’s own prediction on behalf of both consumers and capital sources. A as there are no formal announcements. Within ISSB 2 S. ROBINSON 3. Disclaimer: This article is not intended to give specific standards, almost certainly ISO 14000 series environ- legal, regulatory or compliance advice but rather to mental standards, will be an acceptable measurement provide general insights to consult with your advisors. for climate reporting. 4. https://www.foodbusinessnews.net/articles/22486- ISO and IFRS are internationally recognized stand- lawsuit-focuses-on-evians-carbon-neutral-claim ards organizations. The American National Standards 5. https://www.esgtoday.com/delta-hit-with- Institute (ANSI) and ASTM International are recog- greenwashing-lawsuit-over-carbon-neutrality-claims/ 6. https://news.bloomberglaw.com/product-liability-and- nized standards organizations frequently referred to in toxics-law/nike-hit-with-false-ad-suit-over-sustainable- real estate. In ESG broadly, the SEC ESG Risk report clothing-claims highlighted the United Nations Principles of 7. https://www.nortonrosefulbright.com/en/knowledge/ Responsible Investment (UNPRI) and the Equator publications/d3afa926/environmental-social-and- Principles as globally accepted standards. governance Importantly, building certification organizations are 8. https://www.ftc.gov/news-events/topics/truth- not recognized standards setting organizations. Self- advertising/green-guides 9. https://www.ftc.gov/news-events/news/press-releases/ proclaimed protocols may or may not ultimately be 2023/01/federal-trade-commission-extends-public- recognized by regulators and the market feedback comment-period-potential-updates-its-green-guides-use raised some issues on protocols during the first IFRS 10. https://www.sec.gov/sec-response-climate-and-esg- comment period. While these organizations have risks-and-opportunities provided signaling benefits in the absence of formal 11. https://www.ftc.gov/business-guidance/blog/2022/04/ standards, caveat emptor to businesses that rely on 55-million-total-ftc-settlements-kohls-and-walmart- challenge-bamboo-and-eco-claims-shed-light these for regulatory rigor. 12. https://www.sec.gov/news/press-release/2022-209 13. https://www.sec.gov/news/press-release/2022-86 14. https://www.sec.gov/news/press-release/2023-63 Conclusion 15. https://www.tandfonline.com/doi/full/10.1080/ The new climate regulations worldwide signify a shift- 19498276.2022.2065797 ing landscape for businesses. As firms strive to navi- 16. https://www.sec.gov/files/esg-risk-alert.pdf 17. https://www.ifrs.org/content/dam/ifrs/meetings/2022/ gate this evolving terrain, they face potential legal july/issb/ap2-overview-of-exposure-drafts-s1-and-s2- perils stemming from climate-related issues. and-feedback-received-as-at-7-july-2022.pdf 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. Reference If you make a carbon neutrality claim, if you make Cloutier, D., Robinson, S., & Sullivan, G. (2021). The com- an ESG claim, under what system are you backing it ing us regulatory oversight of, and demand for, climate up? Are you using standards that will be recognized disclosure. CRE Real Estate Issues, 45(28), 1–11. by regulatory enforcement agencies? Lastly, perhaps you think, as a private steward of Spenser Robinson capital, these rules may not apply to you. Perhaps. Departments of Finance/Law and Entrepreneurship, Unless, you happen to have a tenant who is public, Central Michigan University, Mount Pleasant, Michigan, USA are part of the value chain of a firm that makes ESG robin6s@cmich.edu claims, or manage capital from an institutional client that makes climate/ESG claims. If you fall into any of 2023 The Author(s). Published with license by Taylor those categories, the potential for legal peril applies & Francis Group, LLC to you. This is an Open Access article distributed under the terms of the Creative Commons Attribution License Notes (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction 1. https://www.sec.gov/rules/proposed/2022/33-11042.pdf in any medium, provided the original work is properly 2. https://finance.ec.europa.eu/capital-markets-union-and- cited. The terms on which this article has been published financial-markets/company-reporting-and-auditing/ allow the posting of the Accepted Manuscript in a company-reporting/corporate-sustainability- reporting_en repository by the author(s) or with their consent.

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Journal of Sustainable Real Estate – Taylor & Francis

Published: Dec 31, 2023

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