Image source: The Litigation Practice Group

Honesty is the Best Policy: Greenwashing in Europe

“100% organic,” “environmentally conscious,” and “eco-friendly” are some common labels stuck onto a wide range of products today, but just how accurate are these claims? A 2021 study by the International Consumer Protection Enforcement Network examined 500 company websites and reported that 40% presented misleading claims about product sustainability. In recent years, many companies have made false claims about the supposed environmental benefits of their products as a means of attracting consumer interest and increasing sales, a tactic also known as “greenwashing.” While greenwashing has been a marketing staple for years, consumers have begun calling out large companies for their deceptive marketing strategies. Volkswagen found itself at the center of a recent greenwashing scandal when it promoted its use of “clean diesel” but was later exposed for using a special device in its cars to cheat emission tests. 

This month, the European Union passed new legislation called the Sustainable Finance Disclosure Regulation (SFDR) to combat some of the rampant greenwashing that had previously gone unchecked at the governmental level. The SFDR is one of the first greenwashing bills to ever be passed in the EU, revealing the region’s newfound commitment to addressing environmental concerns. The regulation will roll out in stages with an ultimate goal of driving $1.19 trillion into green investments in the next ten years. The SFDR will require companies and other participants in the financial market to disclose information and proof to support any and all sustainability claims. Through such requirements, the EU intends to make it more difficult for corporations “following a purely financial, profit-led strategy” to promote a deceptive “green agenda,” says Neil Robinson, a financial services partner at the law firm Katten Muchin Rosenman. 

Beginning March 10, 2021, the first phase of the SFDR will require investment firms, management companies, and funds to begin labelling themselves as articles 9, 8, or 6. Article 9 indicates that a company is completely dedicated to sustainable objectives, while articles 8 and 6 mean some or no level of sustainable objectives, respectively. Those designating themselves as either article 8 or 9 must disclose specific plans for sustainability and publish information on their websites about how they calculate and incorporate sustainability risks into company decisions. While these disclosures are on a comply-or-explain basis, the SFDR expects that companies will cooperate to preserve their public image. 

The requirement to disclose sustainability goals will become more specific and demanding in 2022. The second round of the SFDR will request companies to provide detailed methods to achieving their sustainability goals as well as share the negative environmental impacts of their investment products, including CO2 emission and water usage data. Although these demands appear manageable on paper, they may be challenging to implement as sustainability-related data does not exist for many companies. Companies that do not have this data readily available may have to begin gathering it in order to meet the SFDR standards. This additional work has raised much controversy and opposition. Such concerns will have to be addressed as the EU continues to adjust and finalize the next steps of the SFDR.

The implementation of the SFDR goes beyond European borders and will also affect companies in the United States if they hope to continue selling products within the European Union. J.P. Morgan estimates that about $7 trillion worth of US investments will have to comply with the SFDR requirements. Some American companies remain hesitant to publicly disclose their sustainability data, and it is unknown how well-enforced the SFDR will be outside the EU. 

Despite posing considerable inconveniences for corporations, the SFDR ultimately serves a higher purpose of bettering the environment. The SFDR’s potential for environmental impact may initially be limited as it concentrates more heavily on improving the transparency of current corporate sustainability objectives rather than ordering any companies to actively begin environmental action. However, the SFDR hopes to enact a trickle-down effect that eventually increases the number of companies dedicated to sustainability. By requiring companies to provide accurate information about their sustainability plans, the SFDR allows investors to better take into account and judge the environmental factors of a company. Growing public interest in the environment can thus place companies without clear sustainability goals at a disadvantage, pressuring them to formulate their own environmentally-conscious goals in order to remain competitive in the financial market. 

With a lack of current green-washing legislation worldwide, the SFDR will serve as a precedent in showing other countries if and how governments can effectively curb green-washing. One international party particularly interested in the SFDR is the United States, as the U.S. Securities and Exchange Commission has already started seeking environment-related information from American companies and will likely look toward the SFDR’s successes and failures to help inform its plans. 

 

Erin is from Baltimore, Maryland studying Environmental Science and Policy. 

 

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California Regulators Approve Wildfire Fund

Pacific Gas & Electric (PG&E), the largest utility company in the country, has been held responsible for multiple wildfires over the past few years. These fires have burned tens of thousands of acres of land, destroyed thousands of homes and structures, and killed tens of thousands of people. In January of 2019, PG&E filed for bankruptcy protection after estimating that the company faced over $30 billion in wildfire liabilities. After being found responsible for the most destructive wildfire in California history just months later in May, PG&E faced an additional $10.5 billion in liabilities. Given the severity and urgency of the issue at hand, Governor Gavin Newsom signed comprehensive wildfire legislation within a week of the fire. After hearing arguments that this bill, Assembly Bill 1054, could be unfair and unconstitutional, the California Public Utilities Commission determined that there was no constitutional issue at hand. Thus, final approval was granted to implement AB 1054 in California.

PG&E’s Bankruptcy:

PG&E has faced a long record of issues with regulators over the last 25 years. Pressure to burnish on-time results, falsified records of ground marking at excavation sites, and withholding of required information are only a few examples of the company falling “short of the high standards of integrity and ethical action to which the company is committed.” As a result of its serious safety violations, PG&E has paid more than $2.6 billion in state and federal penalties and lawsuit settlements. Despite multiple warnings and already being under federal probation for its prior actions, it seems that PG&E is still engaged in the same cycle of mismanagement and carelessness. In fact, its most recent safety violations have resulted in multiple wildfires and the loss of lives.

The North Bay fires of 2017 claimed 46 lives, scorched over 245,000 acres of land, and destroyed 8,900 residences and other structures. The California Department of Forestry and Fire Protection, or CalFire, determined that these 12 individual fires were started by PG&E-owned power lines.

The 2018 Camp Fire claimed at least 88 lives, burned at least 153,000 acres, and incinerated 14,000 residences and other structures. CalFire determined that this fire was started by PG&E-owned power lines.

While PG&E has been mostly spared criminal charges for its equipment sparking these wildfires, they still face billions in civil damages. A California law regarding inverse condemnation holdsCalifornia utilities responsible for damages if their equipment causes a fire, even if they did not act negligently. 

A number of factors, including climate change, management failure, and vision failure, have made it difficult for PG&E to keep up with its safety responsibilities. In fact, regulators found that in many instances, PG&E explicitly violated state law or could’ve done more to make its equipment safer. As a result, PG&E estimates that it faces at least $30 billion in wildfire liabilities for 2017 and 2018 fires alone. 

In January of 2019, PG&E filed for Chapter 11 bankruptcy, citing it as the only option that would allow the company to continue normal operations, while dealing with the billions of dollars in liabilities sparked by its power grid infrastructure. Interim Chief Executive John R. Simon specifically identified customer, and community, safety and reliability as PG&E’s major focuses  while the company navigates through, and attempts to exit from, bankruptcy.

Creation of the Wildfire Fund:

The bankruptcy of California’s largest utility, paired with the horrific damage of repeated wildfires over the last few years, has drawn significant legislative attention to the issue. As a result, it took less than a week for Assembly Bill 1054, a utility wildfire liability bill package, to receive approval from the California Assembly, Senate, and Governor Gavin Newsom. 

AB 1054 was criticized by some as an easy bailout for large utilities that violated safety standards, allowing them to escape real penalties for their wrongdoings. However, the fates of ratepayers, wildfire victims, and utilities are all financially dependent on each other.  If these utilities failed, then ratepayers would see spikes in their electricity bills, and wildfire victims wouldn’t receive payments. Thus, AB 1054 is intended to improve safety standards and accountability measures for California’s utilities, while simultaneously ensuring that they continue to provide power to as many customers as possible. 

The most important aspect of AB 1054 is the establishment of a $21 billion wildfire insurance fund that utilities can use if their equipment ignites damaging fires. Utilities would contribute to half of the fund based on their individual histories of safety, while ratepayers would contribute the other half through the extension of a bond from the Department of Water Resources, which essentially amounts to a surcharge of about $2.50 per month. In order for utilities to access this fund, they must first obtain a yearly safety certification and comply with new inspections of electrical equipment. A key aspect of this safety certification mandates that utilities tie executive compensation to safety performance, which  PG&E did  in the past, but has failed to continue. In order to ensure that PG&E has a timely restructuring process, PG&E is not allowed to access the fund unless it exits Chapter 11 Bankruptcy by June 30, 2020.

Furthermore, the three largest utilities in California, PG&E, SCE, and SDG&E, must pledge to spend $5 billion on fireproofing their equipment. This fireproofing can occur by insulating transmission and distribution lines, clearing surrounding tree brush, replacing wooden power poles with steel or composite ones, or providing protective covering over important infrastructure. Though utilities usually raise rates to pass on the cost of capital expenditures to their customers, they will be hindered from doing so in this case. 

Lastly, AB 1054 attempts to mitigate the impact of inverse condemnation on utility companies. Under inverse condemnation, utilities must pay if their equipment causes wildfires. However, if they prove that they acted responsibly under the circumstances, then they are able to pass off 100% of the costs to their ratepayers. Under AB 1054, the law would flip the burden of proof onto others to show that a utility company acted unreasonably. This caveat was designed to ease the financial consequences that utility companies would face in wildfire situations similar to those caused by PG&E.7

Legal Concerns Regarding AB 1054:

Supporters of the Wildfire Fund believe that AB 1054 will hold utilities accountable to new safety standards, accelerate victim settlements, and reduce overall wildfire risk in the face of increasingly harsh impacts of climate change. However, not everyone shares the same sentiments. In fact, San Diego attorney Michael Aguirre filed a lawsuit against AB 1054, on behalf of a pair of utility customers, in an attempt to stop its implementation. He argues that while the creation of the Wildfire fund might be prudent, it is unfair and unconstitutional.

Aguirre argues that the extension of the $2.50 monthly surcharge burdens California ratepayers without giving them “just compensation”, thus violating the U.S. constitution.  Ratepayers are overcharged by more than $3 billion for their portion of the fund, while companies are bailed out for their negligence. According to Aguirre, the lack of evidentiary hearings and cross examination, paired with determinations of fact without evidence, amounts to a clear violation of the due process clause of the14th Amendment. Furthermore, April Sommer, executive director of an environmental, Bay Area group called Wild Tree Foundation, also believes that the required safety certification amounts to nothing more than a rubber stamp, because the burden of proof shifts onto customer advocates instead of the company itself. 

Approval of AB 1054:
Despite such arguments, all five commissioners on the California Public Utilities Commission (CPUC) determined that the continued imposition of a $2.50 surcharge under AB 1054 to fund the Wildfire Fund was both just and reasonable. Because of the large-scale risks of wildfires associated with utilities, the multitude of ratepayer benefits that would accompany the surcharge, in terms of cost and safety, fulfill just compensation requirements. Included in the benefits are the avoidance of utility credit downgrades (which would pass higher borrowing costs onto customers) and faster payments to wildfire victims. Furthermore, utilities will be required to pay half the cost of all wildfire damages, even if they aren’t found negligible.In the past, they could pass the full burden of those costs onto ratepayers. 

Even after CPUC approval of the Wildfire Fund, Aguirre will continue to fight this law. He believes that “what [they] could not get the CPUC or the Legislature or the governor to do, [they] will get the United States District Court to do.” It remains to be seen what decision the federal court will make. 

Implications for Utilities Going Forward: 

Contrary to critics, commissioners believe that AB 1054 won’t coddle PG&E. Because PG&E won’t be allowed to join the Wildfire Fund until it exits Chapter 11 bankruptcy without raising bill costs for its ratepayers, this piece of legislation is expected to raise safety standards, hold utilities accountable for their actions, and ensure continued service to customers. 

However, a key safety precaution taken by utilities recently is the shutting off of power to combat the increase of probability of fires In October, SCE shut off 27,000 customers’ power due to Santa Ana wind conditions, while SG&E shut off 7,300 customers’ power due to San Diego wind gusts and temperatures. Similarly, PG&E denied power to nearly 800,000 customers across Northern and Central California due to dry, hot, and windy weather. Though utilities have been criticized for shutting off power, these safety measures have been seen as a part of a more advanced and strategic plan. Moving forward, these utilities will have to find a way to keep up fire prevention strategies, while still providing power to their customers. Climate change has created a new reality for the state of California. As the costs and liabilities associated with increasingly catastrophic and frequent wildfires continue to batter Californians, this wildfire fund is expected to be the first step of many to benefit and protect both utilities and customers.

Ellen Wang is a junior from Plano, Texas studying Political Science and Economics (Finance Concentration) and minoring in Biology.

Renewable Energy

Germany’s Environmental Policy: A Deeper Look

On May 11, 2011, German Chancellor Angela Merkel announced that Germany would be phasing out all nuclear energy and shutting down all seventeen of Germany’s nuclear power stations by 2022. This monumental and groundbreaking decision put Germany in the spotlight and called attention to Germany’s overarching emphasis on environmental policies. Throughout history, Germany has proven to be one of the most environmentally friendly, if not the most environmentally friendly, countries in the world both through their policies and their citizens’ commitment to sustainability.

Germany has several environmental laws that set them apart from the rest of the world and elevates their commitment to the environment. A few notable policies include the Renewable Energy Act, the Eco-tax, the Cogeneration Act, the Energy Conservation Act, the Energy Conservation Ordinance, and the Ecodesign Directive (ErP).

The Renewable Energy Sources Act

The Renewable Energy Sources Act is probably the most essential aspect of Germany’s nuclear phase out and has proven to be a vital part of Germany’s Energiewende strategy, which loosely translates to energy transition. As stated by the German Federal Ministry for Economic Affairs and Energy, “renewable energy is the most important source of electricity for Germany,” so much so, that renewable energy is one of the “central pillars in Germany’s energy transition.” The Renewable Energy Sources Act aims to transition all created energy and consumed electricity towards renewable sources. There are a few main mechanisms through which this is done, including the integration of electricity from renewable energy sources into the electricity supply grid and the direct sales of electricity from renewable sources. Additionally, the price of renewable energy-generated electricity is determined through auctions and is always kept low to encourage market sales. The Federal Ministry for Economic Affairs and Energy notes an impressive progression in renewable energy through the aid of the Renewable Energy Act, which has increased renewable energy by 30 percent from 2000 to 2017. Overall, the Renewable Energy Act has proven to be the most successful tool for boosting the growth and usage of renewables in Germany.

Ecological Tax Reform

In 1999, Germany introduced the eco-tax, a three-stage reform plan that attempts to reduce fossil fuel consumption. The first stage, implemented in 1999, put a tax on gasoline, heating fuel, natural gas, and electricity. The second stage was implemented from 2000 t o2003, and increased taxes that were instituted during the first stage. The third stage maintains the 2003 period tax levels, however requires the government to continue comprehensive studies, evaluating the effectiveness of these taxes.

The implications of this tax require that the federal finance ministry reports on their penetration of biofuels as well as the price developments of biomass, crude oil, and automobile fuels every two years. This requirement ensures that all prices are transparent to the public. Another implication of these taxes are the increased prices of fossil fuels, which have led to competition in the renewable energy technology field. These increased taxes have actually incentivized companies to create more environmentally friendly energy sources and to do so in the most efficient way possible.  

The Cogeneration Act

The Cogeneration Act, also known as the Heat-Power Cogeneration act, was adopted in 2002 in an effort to shift 25 percent of Germany’s power supply to come from cogeneration units by 2020, which combine heat and power to generate electricity and usable heat, simultaneously. By establishing this act, Germany plans to increase their power and heat efficiency through paying bonuses for each kilowatt-hour of power produced by a cogeneration unit. The only major requirement for receiving these bonuses is that the cogeneration unit must effectively reduce at least ten percent of primary energy consumption, while also accounting for the energy lost from primary energy consumption. The Cogeneration Act was updated in 2017 with two major revisions: the bonus was increased from 5.41 euro cents to 8 euro cents and the time frame for the act was changed from 10 years to 60,000 operating hours of cogeneration energy.

Energy Conservation Act

The Energy Conservation Act sets up the legal framework for promoting energy transition in the building sector. Its purpose is to implement the German Federal Government’s decisions about energy and the act is based on overall European guidelines. The act’s last amendment, enacted in 2013, specifically provides the legal basis for the Energy Conservation Ordinance. It also introduces an energy standard requirement to new buildings which involves reducing their energy consumption to nearly zero, coined as a “nearly zero-energy building.” This is done by having the building generate just as much energy as it consumes within a year.

Energy Conservation Ordinance

The Energy Conservation Ordinance was introduced in 2014 and has several key amendments that create a framework for the energy of buildings. One of the key amendments included in the ordinance is a higher efficiency standard applied to new buildings built from January 1st onward. This standard requires an approximate 25 percent reduction of energy consumption per building and 20 percent reduction of heat transfer loss. Another amendment included is the obligation to disclose important energy information and figures, when advertising real estate. The ordinance also includes an amendment clarifying and enforcing the obligation to present an energy performance certificate either to potential buyers and tenants when evaluating real estate or to the public in buildings that are frequently visited by the public. These amendments work in effort to increase transparency in the energy system and encourage “good” performance ratings to display.

Ecodesign Directive (ErP)

The Ecodesign Directive is a European directive set in 2005 that states minimum requirements for creating environmentally friendly and ecologically considerate product designs. It has been utilized by Germany often, in order to aid the sustainability of design in Germany and  drive the competition in the eco-design field. At its height of success, the Ecodesign Directive can strengthen and stimulate the market so that it is filled with environmentally friendly and sound products, while furthering incentivizing sustainable designs.

There are many other laws and policies, such as the Renewable Energies Heat Act, that act as important players in German environmental policy, aside from those described above.

Germany’s current state of environmental superiority is a testament to the real environmental improvement that may occur when all of these laws, acts, ordinances, and other regulations work in conjunction and are followed by the German people. German environmental policies can, and should, act as a guideline for other countries to follow in suit when trying to increase sustainability and decrease harmful emissions, such as fossil fuels. Additionally, it is the effort and the devotion of the German people towards the environmental cause that puts Germany’s commitment to the sustainability above and beyond all others.

Chloe Meyers is a sophomore at Duke from Los Angeles, California. She is studying Environmental Science and Policy and Psychology.