Water Scarcity: A Critical Climate Change Challenge for Business
January 2010 Update: Environmental Lender Liability

A green economy: What lawyers need to know

Grayson_Lynn_COLORBy E. Lynn Grayson


A media buzz surrounds the politically charged concept of developing a green economy by investing in initiatives that are good for the environment and financially beneficial for business.

A green economy promises the creation of green jobs and efforts already are underway to improve education in STEM fields — science, technology, engineering and mathematics — where new employment opportunities are thought to be the greatest. The green economy envisioned brings together two undeniable facts: our economic viability depends on a healthy environment and environmental protection long-term requires a vibrant economy.

In this newly developing business setting, what role will lawyers play and what legal counsel and guidance can we provide our clients? The emerging issues and concerns set forth below highlight certain impacts a green economy may have on the day-to-day practice of law. These same issues also emphasize the differing knowledge we as lawyers will require to effectively represent our clients and their business interests.

Water Scarcity. Many experts now agree that water scarcity is a more significant climate change concern than other challenges such as reduction of greenhouse gas emissions. A report recently released by Ceres and the Pacific Institute, "Water Scarcity and Climate Change: Growing Risks for Business and Investors," details the risks posed by the declining availability of water throughout the world. The report stresses the importance and the urgency for businesses to take action in response to increasing water demand, existing water scarcity and non-sustainable supply issues and declining water quality

Water scarcity concerns likely are a reality most businesses currently face or will confront in the future. As a first step, companies should consider completing a water footprint analysis appropriate to its operations to better understand its overall water usage. Other recommendations companies may consider to protect against and respond to potential water scarcity threats include:

— Assess water use in order to evaluate options to reduce/reuse/recycle water;

— evaluate water supply/sustainability issues as part of any due diligence effort;

— consider arrangements for alternative water sources; and

— incorporate water use strategies into existing environmental programs.

("Water Scarcity: A Critical Climate Change Challenge for Business," by E. Lynn Grayson, Emerging Issues Commentary, LexisNexis (August 2009)).

Greenhouse Gas Emissions. On Sept. 22, 2009, the U.S. EPA issued a final rule imposing mandatory reporting of greenhouse gas (GHG) emissions. This long-awaited rule requires most covered sources to submit their first annual GHG emission report on March 31, 2011, covering emissions for the calendar year beginning Jan. 1, 2010. The U.S. EPA believes these new reporting requirements will cover 85 percent of total U.S. GHG emissions from about 10,000 facilities in 31 covered source categories.

("U.S. EPA Requires Mandatory Reporting Beginning With Next Year's Greenhouse Gas Emissions," by Gabrielle Sigel and Jennifer L. Cassel, Jenner & Block LLP Client Advisory (Sept. 23, 2009)).

While this new federal legislation simply addresses the reporting of GHG emissions, it is highly likely that this action signals one of the first steps towards a federally mandated GHG emission reduction scheme. State and local initiatives already exist throughout the U.S. mandating the reduction of GHG emissions, including limitations already required in California and through the Midwestern GHG Reduction Accord, the Western Climate Initiative and the Regional GHG Initiative. Finding an approach to curb GHG emissions without doing serious harm to the U.S. economy is a top priority for the Obama administration. U.S. businesses need to be mindful of GHG initiatives to ensure that their businesses can operate and succeed moving forward.

LEED Certification. LEED is an internationally recognized green building certification system that provides third-party verification that a building was designed and built to improve its overall environmental performance. Developed by the U.S. Green Building Council (USGBC), LEED provides building owners and operators with a concise framework for identifying and implementing practical and measurable green building design, construction, operations, and maintenance solutions. LEED focuses on green metrics that matter most including energy savings, water efficiency, GHG emissions reduction, improved indoor environmental quality and stewardship of resources and sensitivity to their impacts. See http://www.usgbc.org/LEED/.

Lawyers representing landlords and tenants need to appreciate that LEED certification imposes ongoing obligations on building owners and operators. For example, LEED 2009, effective July 1, 2009, now includes a Minimum Program Requirement (MPR) to share actual energy and water usage data with the USGBC for a period of at least five years.

The data sharing obligation applies to both general building areas and tenant spaces that are separately metered. Failure to report energy and water usage data can result in revocation of LEED Certification. ("New LEED Reporting Requirements Underscore Importance of an Effective Green Lease," by Ronald B. Grais, Jenner & Block Client Advisory (July 15, 2009))

The best way to ensure that the necessary data is available and appropriately maintained is through the use of a specifically designed green lease. More so than other leases, newly developed green leases may impose differing restrictions on an tenant's behavior addressing such issues as maintenance, cleaning, material purchases, waste disposal, use of electronics as well as other requirements often needed to support a LEED certification.

Tax Credits/Energy Efficiency Savings. A number of federal programs now exist offering tax credits, deductions, bonds and grants to encourage energy efficiency and sustainable development. Opportunities apply both to commercial and residential projects. Examples of these green initiatives are summarized below.

— Energy Efficient Building Deduction: a tax deduction of up to $1.80 per square foot is available for certain commercial and residential buildings that save at least 50 percent of the interior lighting, hot water, ventilation, heating and cooling energy costs of a comparable building. In order to qualify, the building must meet the minimum energy efficiency requirements of the American Society of Heating, Refrigerating and Air Conditioning Engineers and the Illuminating Engineering Society of North America.

— New Energy Efficient Home Credit: a new energy efficient home credit of $2,000 per home is available to home and residential condo builders.

— Advanced Energy Investment Credit: the American Recovery and Reinvestment Act provides for a tax credit of 30 percent of qualified investment in any qualifying advanced energy project that re-equips, expands or establishes a manufacturing facility that produces energy-related products or a property advancing certain climate change objectives.

— Qualified Energy Conservation (QEC) Bonds: QEC bonds are tax credit bonds funded by the federal government and issued by state or local governments to individuals or entities for a "qualified conservation purpose."

— Qualified Green Building and Sustainable Design Project Bonds: these tax-free bonds may be issued by state and local governments for certain environmentally-sustainable projects and are available until September 2012.

Overall, most newly created green incentives expire within the next few years. While they last, tax deductions, credits and improved financing opportunities provide meaningful motivation to expand or launch specific green projects. "Greening Your Business: Federal Programs Assisting Businesses in the 'Greening' of New and Existing Facilities," Baker & Hostetler LLP, LexisNexis (Aug. 29, 2009).

Corporate Social Responsibility. A number of green issues are emerging as key components in a more global initiative to hold corporations socially, and if possible, financially responsible for their actions and inactions. The concept, commonly referred to as corporate social responsibility (CSR), extends beyond compliance with legal mandates or even charitable donations and good deeds. CSR advocates charge a company has a clear duty of care to all stakeholders connected to or impacted by a company's operation.

Sustainable development, as a critical component of CSR, takes into account social, economic, environmental and natural resource issues potentially affected by business. As part of CSR, sustainable development addresses how the needs of the present can be met without compromising the ability of future generations to meet their own needs.

For businesses, being a good corporate citizen certainly is part of the CSR philosophy encouraging companies to give back in the communities where they live and work. CSR goes beyond the "good corporate citizen" approach, however, and motivates companies to develop environmental and community outreach initiatives and to establish related policies applicable not only to company personnel but downstream suppliers and other vendors.

SEC/Other Corporate Disclosures. For years the Securities and Exchange Commission has faced growing pressure to strengthen its rules regarding corporate disclosure of environmental liabilities. Critics charge that the legally-mandated disclosure framework relied upon by the SEC, based upon the Securities Act of 1933 and the Securities Exchange Act of 1934, no longer is effective in providing full and fair disclosure to investors on topics addressing environmental, social and governance (ESG) issues.

The SEC's latest attempt to respond to allegations of inappropriate and inadequate disclosure requirements is the creation of the Investor Advisory Committee in June 2009. While the Investor Advisory Committee's charter covers a broad scope of varying interests, there is a significant focus on environmental disclosures as indicated in the SEC's briefing materials prepared for the inaugural July 27, 2009 meeting including identification of the following discussion questions:

— Do investors consider environmental compliance, climate change and sustainability issues important in making investment or voting decisions?

— Are current disclosure practices with respect to environmental compliance, climate change and sustainability issues sufficient for investors to make informed investment and voting decisions, or do investors need expanded disclosure in any of the areas?

— If additional disclosure in these areas would be useful to investors, should the SEC require additional disclosure on these matters by revising its forms and regulations? Alternatively, should the SEC highlight how its current forms and regulations may require disclosure in these areas?

These inquiries to be addressed by the Investor Advisory Committee clearly reflect the conflicts confronting the SEC over the appropriate nature and scope of environmental or climate change disclosure requirements and whether or not current securities laws provide the best possible information to investors and shareholders.

U.S. businesses confront a myriad of challenges as investors seek even more information on ESG interests and the SEC struggles to determine if existing disclosure requirements are adequate or if change is needed. Lawyers will play an important role in making the hard decisions about when "enough is enough" in finalizing a corporate disclosure strategy for ESG matters.

In January 2009, the legal consulting Web site, Findlaw.com, predicted that new laws pertaining to green issues would be the fourth most important legal trend, based on its top 10 list of legal hot topics for 2009. While it is difficult to rank the importance or significance of green issues versus any other legal concerns, it is clear that lawyers must possess a working knowledge of green issues, including critical policies, laws and regulations, simply to provide effective representation to their business clients.

In a green economy, lawyers also will be well served to remain informed about the latest developments in the world of green business. (http://www.GreenBiz.com/ and http://www.sustainablebusiness.com/)