ESG Weekly Update – July 6, 2022

6 July 2022

U.S.: The Supreme Court Strikes Down EPA Climate Rule in West Virginia v. EPA

The U.S. Supreme Court held on June 30, 2022 that the Environmental Protection Agency (EPA) does not have the authority to mandate coal-fired power plants to reduce their production of greenhouse gas emissions. This earlier mandate, the Clean Power Plan (CPP), was enacted in 2015 during the Obama Administration under Section 111(d) of the Clean Air Act. Due to an immediate injunction by the Supreme Court and subsequent repeal and replacement by the Trump Administration, the CPP never took effect.

In this decision, the Supreme Court held that the EPA overstepped the authority granted to it by Congress when passing the CPP. Drawing on the “major questions doctrine,” the Supreme Court stated that, when passing regulations for issues of major economic and political significance, the federal agency must have explicit authorization from Congress. The Court stated that the CPP enacted a “generation shifting approach” by creating an industry-wide shift of polluting activity to cleaner sources. The Court held that the approach taken by the EPA in the CPP was too broad and beyond the authority granted by Section 111(d) of the Clean Air Act. The Court held that, for regulations of this scope and breadth, Congress must directly address the precise question or clearly delegate authority to the agency. Here, the majority found that no such direct delegation was made to the EPA.

The dissent, written by Justice Kagan, criticized the majority decision based on several grounds, including but not limited to the following: (i) the regulation of greenhouse gas falls under Section 111 of the Clean Air Act, including its direction to the EPA to regulate stationary sources that cause air pollution or “may reasonably be anticipated to endanger public health or welfare”; (ii) the Clean Air Act was not ancillary but instead major legislation designed to deal with a major public policy issue; (iii) the 2015 rule was moot as it never went into effect; and (iv) the Court should exercise judicial modesty and defer to Congressional action in giving effect to the Clean Air Act.

The Biden Administration has yet to roll out its emissions reduction plan after repealing the plan set forth by the Trump Administration. Absent additional legislative action, this decision may limit the options available to the Biden EPA for reaching the goal of running U.S. electricity on clean energy by 2035 and the U.S. reaching net zero by 2050 to comply with the Paris Agreement.

SCOTUS Decision: West Virginia v. EPA

Australia: The Australian Conservation Foundation Sues to Stop Gasfield Development

On June 21, 2022, the Australian Conservation Foundation (ACF), a non-profit environmental organization, brought a claim against Woodside Energy before the Federal Court of Australia seeking to halt Woodside Energy’s Scarborough Gas Project, a liquefied natural gas (LNG) extraction development off the coast of Western Australia. ACF’s filed documents request a court injunction halting development until the gas project’s impacts on the Great Barrier Reef are properly assessed.

Under Australian legislation, projects that would have a significant impact on the Great Barrier Reef are subject to additional scrutiny. ACF argues that emissions from the project would equal 1.37 billion tonnes of carbon over the next 25 years and lead to an increase of global temperature by 0.000394°C, causing bleaching of the corals located over 3,000 km away. Mass bleaching events have occurred on the Great Barrier Reef since 2016, including an event this year affecting approximately 91% of reefs. The legal claim filed by ACF seeks to establish a link between climate change and emissions attributable to Woodside Energy. The legal position on attribution taken by the courts could have a significant impact on future claims against fossil fuel companies.

The Supreme Court of Western Australia dismissed two prior cases brought in 2019 by the Conservation Council of Western Australia against approvals for Woodside’s Pluto offshore LNG field and North West Shelf LNG plant. A third challenge to a proposed expansion of the Pluto facility has yet to be heard.

ACF to challenge Woodside’s Scarborough gas project

Norway: Norwegian Consumer Authority Questions Legitimacy of the Higg Index Developed by the Sustainable Apparel Coalition

The Norwegian Consumer Authority (NCA), a government-appointed consumer protection agency, has issued a letter to Norrøna, a Norwegian clothing company, finding that the environmental claims published on the company’s website contravene Norway’s Marketing Control Act (MCA).

Norrøna’s claims suggested that the company’s cotton t-shirts were more environmentally friendly than the market average based on a positive score from the Higg Index, an environmental grading standard developed by the Sustainable Apparel Coalition (SAC). In its letter to Norrøna, the NCA criticized the Higg Index for being insufficiently robust and for producing results that are neither specific nor reliable, attributed to the fact that the index uses global averages in broad categories without rigorous analyses of relevant supply chains. The government agency’s letter concluded that Norrøna’s marketing of products using the Higg Index was thus misleading to consumers and prohibited, and it directed the company to change or remove the relevant marketing materials before August 14, 2022.

The NCA separately wrote to H&M, warning the company to reassess its current plans to use the index when implementing new marketing initiatives. The NCA noted that it would check that H&M is compliant with the MCA in September of this year.

Since its launch 10 years ago, the Higg Index has been used by multinationals such as Walmart and Patagonia as a system to measure their environmental and sustainability metrics. The SAC has responded by suspending its consumer-facing transparency program and encouraging users to remove scores generated by the Higg Index from their online marketing.

NCA letter – Norrøna
NCA letter – H&M

U.S.: CFTC Requests Information on Climate-Related Financial Risks

On June 2, 2022, the Commodity Futures Trading Commission (CFTC) released a Request for Information (RFI) seeking public comments regarding the financial risks posed to the derivatives and commodities markets by climate change. This request is part of a series of actions, including the establishment of the Commission’s Climate Risk Unit in March 2021, suggesting that future CFTC rulemaking related to ESG is imminent. The Commission noted that the RFI will aid next steps to “promote responsible innovation, ensure the financial integrity of all transactions subject to the Commodity Exchange Act (CEA), and avoid systematic risk.”

The RFI focuses on the following broad topics: data, scenario analysis and stress testing, risk management, disclosure, product innovation, voluntary carbon markets, digital assets, greenwashing, financially vulnerable communities and public-private partnerships and engagement.

According to Commission Chairman Rostin Behnam: “[The] intention is to focus on ensuring that America’s farmers, ranchers, manufacturers, commercial end-users, and investors are equipped to manage their risks from increasingly severe and frequent weather events as well as the transition to a net-zero, low-carbon economy. The RFI seeks to ensure that we as regulators are informed, educated, and engaged.”

CFTC Press Release
Request for Information