The recent IPO for Rivian Automotive Inc., the electric pick-up
truck manufacturer whose shares increased 29% on the day following
the offering, resulting in an enterprise valuation of more than $86
billion1 – more than the market values of
every other automaker except Tesla, Toyota, and Volkswagen –
is evidence that investors may place a significant premium on
certain companies that are at the forefront of addressing (and
potentially seizing opportunities resulting from) climate change
and related sustainability issues. The fact that Rivian has
only produced 156 vehicles to date and has never demonstrated the
ability to mass produce electric vehicles apparently did not faze
investors.2
The Rivian IPO and investor enthusiasm generally for companies
perceived to be at the forefront of the “green” economy
provide strong incentives for companies to promote their
sustainability bona fides. But along with marketplace rewards
there has been increasing investor and regulatory scrutiny of
whether ostensibly (or self-proclaimed) “sustainable”
companies merit the designation.
As we have recently discussed,3 there is significant
momentum in the U.S. and abroad for companies to provide
sustainability disclosure that is reliable, consistent, and
comparable. Certain members of the Securities and Exchange
Commission (“SEC” or “Commission”) repeatedly
have signaled the importance of clear, consistent, and accurate
disclosure when it comes to climate-related impacts.4
Although the SEC has not updated its corporate disclosure guidance
in more than a decade, it has solicited comments regarding the
possibility of a mandatory climate-related disclosure regime and we
expect the Commission to pursue such an approach in the near
term.5 In the meantime, the existing,
well-established materiality standard applies, whereby information
is material and must be disclosed if there is “a substantial
likelihood” that a reasonable investor would view a particular
fact as “significantly alter[ing] the ‘total mix’ of
information made available.”6 But, as
Commissioner Herron Lee and others have observed, application of
that standard in the ESG context has resulted in significant
variability in terms of the quality and quantity of disclosure
provided by issuers, yielding investor complaints, regulatory
scrutiny and issuer confusion.
These challenges are well illustrated in the context of recent
issues involving some well-known “sustainable”
companies. One such company is Allbirds, Inc., the
sustainable footwear and attire company that recently filed for its
initial public offering.7 Allbirds, a certified B
Corporation and Delaware Public Benefit Corporation,8 claims that
it manufactures its products with approximately 30 percent
less carbon impact than other shoe manufacturers. In
addition, in its IPO registration statement, Allbirds emphasized
its commitment to ESG and committed to adhere to a novel
“sustainability principles and objectives framework”
(referred to as a “SPO framework”), which included a
commitment to report the company’s climate impact and to reduce
its impact on the environment by cutting emissions and requiring
suppliers to address environmental issues.9 According to the
Allbirds website:
As a Delaware public benefit corporation and a certified B
Corporation we strive to prioritize positive outcomes, not only for
our stockholders, but for all stakeholders, including employees,
customers, the community, and the environment. The Business
Roundtable’s August 2019 statement on the purpose of a
corporation articulated that stakeholder-based capitalism will
shift from being the exception to the rule.10 We believe that
shift is already underway. That is why we believe it is
important that we clearly articulate for all stakeholders our
performance against, and commitment to, a set of environmental,
social, and governance, or ESG, criteria, which we call the
Sustainability Principles and Objectives Framework, or the SPO
Framework. We believe that stakeholders will benefit from knowing
that we have been assessed by one or more independent third parties
as having satisfied objective, clearly defined ESG criteria and
that we are committed to meeting high ESG standards across our
business. The SPO Framework was created in conjunction with, and
supported by, an Advisory Council coordinated by BSR, several
cross-sector thought-leaders, market participants, and stakeholders
from the private and public sectors.
But in an updated prospectus, Allbirds walked back its
commitment to the “SPO framework”—references to
“SPO framework” in later SEC filings were noticeably
reduced, and language that Allbirds was “conducting this
offering while following the SPO framework” was
removed.11 The amended filings followed a
lawsuit filed in the United States District for the Southern
District of New York by a consumer claiming violations of the New
York Consumer Protection Statute, breaches of express warranties,
fraud, and unjust enrichment based on Allbirds’ alleged
“misleading environmental claims.”12 Specifically,
the plaintiff alleged that Allbirds’ advertising, which is
“heavily based on its Products’ environmental
impact,” is false and deceptive because Allbirds’
disclosures related to its environmental impact were insufficient
and misleading.13 Allbirds has moved to dismiss
the case, arguing that many of the statements were non-actionable
puffery and that the plaintiff offered no factual support for her
allegations.14 Allbirds began publicly trading
on November 3, 2021. Allbirds was expected to be the first
“sustainable public equity offering,” but was forced to
drop the label15 after the SEC objected to the
phrasing.16 Allbirds’ shares surged 90%
when they hit the market, resulting in a valuation of roughly $4.1
billion.17
Like Allbirds, Beyond Meat—a plant-based food company that
went public in 2019—is facing increased scrutiny over its
climate-related disclosures. Beyond Meat strives to
“positively affect the planet, the environment, the climate
and even ourselves” by facilitating a shift from animal to
plant-based food products.18 Critics have taken issue,
however, with Beyond Meat’s failure to disclose the total
amount of greenhouse gas emissions across its operations, supply
chain, and consumer waste.19 Researchers have observed that
the plant-based industry, which purports to be sustainable and
environmentally friendly, “is really a black box.”20
The challenges associated with measuring and then accurately
reporting carbon emissions are by no means limited to Beyond
Meat. All companies most likely will have to confront having
to measure and accurately disclose Scope 1, Scope 2 and Scope 3
emissions, with the latter category posing possibly the most
difficult issues in terms of the hurdles involved in accurately
measuring emissions across any one company’s supply
chain.21
Companies like Allbirds and Beyond Meat, in touting their
sustainability bona fides, also become targets for challenges by
investors and regulators to the accuracy of such statements.
Their experiences, therefore, provide important lessons for
companies navigating increased demand for, and scrutiny of,
climate-related disclosure.
- End-to-end climate impact matters. Though U.S.
regulators have not provided formal guidance on what ESG-related
disclosures will be required going forward, companies should be
assessing their environmental impacts for a variety of purposes,
including risk management and disclosure. In so doing, as
evidenced by the Allbirds and Beyond Meat situations, companies
should be mindful that “sustainability” is an end-to-end
concept. Emissions from manufacturing, supply chains, and
consumer waste have a significant impact on the overall assessment
of whether a company operates in a sustainable fashion and should
be factored into climate-related disclosures. By most
accounts, Allbirds has been a success story—the company has
consistently promoted long-term sustainability and has been
rewarded for it, raising $300 million in its initial public
offering.22 But even well-intentioned
companies are not insulated from challenges and scrutiny. For
example, the Allbirds lawsuit alleges that Allbirds, while touting
its sustainability and lower carbon footprint, misleadingly failed
to take into account the environmental impact of its supply chain,
as well as the wool it sources from sheep in New Zealand, which
purportedly account for 90% of New Zealand’s methane
emissions. And although Beyond Meat’s mission involves
“positively affect[ing] the planet, the environment, the
climate and even ourselves,” and claims to use
“significantly less water, land and energy” and
“generates fewer Greenhouse Gas Emissions than a beef
burger,” it recently received a zero sustainability rating
from one tracking agency, which stated that “[w]e don’t
feel we have sufficient information to say Beyond Meat is
fundamentally different from JBS,” an animal-based protein
company.23 The criticism stems from the
fact that Beyond Meat does not disclose the total amount of
greenhouse gas emissions across all of its operations, supply
chains or consumer waste. Companies should consider their
end-to-end operations when assessing and disclosing its
environmental impact. - Companies can and should take certain steps to mitigate
the challenges and therefore risks arising from efforts to provide
accurate and thorough disclosure. Companies should take
precautions to ensure their climate-related disclosures are
sufficiently fulsome and accurate. Failure to do so may
result in costly litigation. While obviously important for B
corporations like Allbirds, whose corporate purpose is to produce a
public benefit, the all-encompassing nature of the risks and
opportunities presented by climate change imply that certain
disclosures in this area will be material for virtually all
companies.24 While there is no way to render
climate disclosure risk-free, adhering to an established
third-party disclosure framework can mitigate risk by providing a
rationale for, and guidance in terms of, the company’s
disclosure. We previously discussed these frameworks,25 but the
guidance provided by the Financial Stability Board’s Task Force
on Climate-related Financial Disclosure (“TCFD”) in
particular has been gaining traction with regulators and investors.
The TCFD, the mostly widely endorsed framework, recommends
that companies across all industries disclose: (i) “the
organization’s governance around climate-related risks and
opportunities”; (ii) “the actual and potential impacts of
climate-related risks and opportunities on the organization’s
businesses, strategy, and financial planning where such information
is material”; (iii) “how the organization identifies,
assesses, and manages climate-related risks”; and (iv)
“the metrics and targets used to assess and manage relevant
climate-related risks and opportunities where such information is
material.”26 For companies that tout
themselves as “sustainable,” the EU Taxonomy also
provides helpful guidance for U.S. companies considering how or
what to disclose in connection with their activities. To be
considered an environmentally sustainable economic activity under
the EU taxonomy, the activity must, among other things, contribute
to at least one of six environmental objectives—climate
change mitigation, climate change adaptation, sustainable use and
protection of water and marine resources, transition to a circular
economy, pollution prevention and control, or the protection and
restoration of biodiversity and ecosystems—and do no
significant harm to any of the other environmental
objectives.27 By defining what constitutes an
environmentally sustainable activity, the EU Taxonomy necessarily
requires companies, if they claim to engage in such conduct, to
make associated disclosures supporting that claim in line with EU
Taxonomy’s elements.28 - Companies should monitor regulatory
developments. S. regulators have made it clear that they
intend to address ESG disclosure issues. Securities
regulators in the UK and EU already have provided guidance, but
continue to update and supplement that guidance given the rapidly
evolving nature of climate-related issues and analysis.29
Companies should continue to be vigilant in monitoring updated
rules from regulators with respect to climate-related disclosures
to ensure their disclosures sufficiently detail the impact of their
operations on the environment. - Demand for ESG products is soaring—but so is
scrutiny. Consumer demand for ESG products is
exponentially increasing.30 Despite criticisms concerning
its supply chain sustainability, Allbirds closed its first day with
its price up more than 90 percent.31 After Beyond
Meat went public in 2019, its shares surged 163 percent on its
first day of trading—the “best-performing large IPO in
the U.S. in more than a decade.”32 But companies
should not take excess comfort in the apparent unwavering public
support for Allbirds and Beyond Meat, which have sustainability as
part of their core mission. Regulators are keeping a close
eye on so-called “greenwashing,” or “branding
something as eco-friendly, green or sustainable when this is not
the case.”33 Given heightened awareness
around ESG issues and the demand for sustainable products,
companies will find it increasingly difficult to make vague
statements about sustainability without substantiating the
claim. Regulators, investors, and even consumers are becoming
increasingly wary of such exaggerated claims, and holding companies
accountable.34 - Ostensibly sustainable companies are not immune from
challenges to their ESG bona fides. Companies or
industries that often are viewed as “green” are not
immune from challenges over their true environmental impact.
Some contend that “clean” energy sources such as wind,
solar, and nuclear power, for instance, have hidden carbon
footprints associated with their construction and manufacture.
Nuclear plants and wind turbines require concrete and steel
for construction, which in turn are significant contributors to
greenhouse gas emissions. In a similar vein, the batteries in
electric vehicles charge on electric power, which is often powered
by fossil fuels. The point is not that electric vehicles over
their life are less environmentally friendly than combustion engine
automobiles or that the operation of clean energy sources results
in as much carbon emission as fossil fuels. Rather, the issue
is accurate assessment and disclosure of Scopes 1, 2, and 3
emissions even for “sustainable” companies and their
products.
Footnotes
1 Peter
Eavis & Neal E. Boudette, Rivian I.P.O. Is Embraced by
Investors Looking for Another Tesla, N.Y. Times (Nov. 10,
2021), https://www.nytimes.com/2021/11/10/automobiles/rivian-stock-price-ipo.html.
2
Id.
3 Jason
Halper et al., Investors and Regulators Turning up the
Heat on Climate-Change Disclosures: Attempting to Make Sense of the
State of Play in the US, EU, and UK, Cadwalader, Wickersham
& Taft LLP (Sept. 14, 2021), https://www.cadwalader.com/resources/clients-friends-memos/investors-and-regulators-turning-up-the-heat-on-climate-change-disclosures–attempting-to-make-sense-of-the-state-of-play-in-the-us-eu-and-uk#
(discussing the increased focus on climate-change related
disclosures).
4 Allison
Herren Lee, Remarks at the PRI/LSEG Investor Action on Climate
Webinar, SEC (Oct. 20, 2021), https://www.sec.gov/news/speech/lee-remarks-prilseg-investor-action-climate-webinar-102021;
see also Jason Halper, et al., Financial
Stability Oversight Council Issues Key Report Declaring Climate
Change as an Emerging Threat to U.S. Financial Stability,
Cadwalader, Wickersham & Taft LLP (Oct. 25, 2021), https://www.cadwalader.com/resources/clients-friends-memos/financial-stability-oversight-council-issues-key-report-declaring-climate-change-as-an-emerging-threat-to-us-financial-stability#
(discussing the FSOC’s finding that climate change is an
emerging threat to U.S. financial security and noting that, among
other initiatives, financial regulators should “promote
enhanced climate-related disclosures.”).
5 Allison
Herron Lee, Public Input Welcomed on Climate Change
Disclosures, SEC (May 15, 2021), https://www.sec.gov/news/public-statement/lee-climate-change-disclosures.
6 TSC Indus. Inc. v. Northway,
Inc., 426 U.S. 438, 449 (1976); see also Basic, Inc. v.
Levinson, 485 U.S. 224 (1988) (applying the TSC Industries
Court’s definition of materiality to a Rule 10b-5 securities
fraud case); SEC Staff Accounting Bulletin No. 99, 64 Fed. Reg.
45,150, 45,151 (Aug. 19, 1999) (observing that the Supreme
Court’s definition is substantially identical to the FASB’s
definition: “The omission or misstatement of an item in a
financial report is material if, in the light of surrounding
circumstances, the magnitude of the item is such that it is
probable that the judgment of a reasonable person relying upon the
report would have been changed or influenced by the inclusion or
correction of the item.”).
7 Sanford
Stein, As Shoemaker Allbirds Files for IPO, It May Become the
First ‘Sustainable Public Equity Offering’, Forbes
(Aug. 31, 2021), https://www.forbes.com/sites/sanfordstein/2021/08/31/allbirds-may-become-the-first-sustainable-public-equity-offering-or-spo/?sh=3e504b052058.
8
Delaware public benefit corporations are for-profit corporations
created “to produce a public benefit or public benefits and to
operate in a responsible and sustainable manner.”
Michael R. Littenber et al., Delaware Public Benefit
Corporations-Recent Developments, Harv. L. Sch. F. on Corp.
Governance (Aug. 31, 2021), https://corpgov.law.harvard.edu/2020/08/31/delaware-public-benefit-corporations-recent-developments/.
9
Allbirds, Inc., Registration Statement (Form S-1), at 149-151 (Aug.
31, 2021), https://www.sec.gov/Archives/edgar/data/0001653909/000162828021017824/allbirdss-1.htm#ib1df9298e23644a2a22972a8f1925ea1_2910/.
10
See also Larry Fink, 2021 Letter to CEOs,
BlackRock, https://www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter
(last visited Nov. 29, 2021); Cyrus Taraporevala, CEO’s
Letter on Our 2021 Proxy Voting Agenda, State Street Global
Advisors (Jan. 11, 2021), https://www.ssga.com/us/en/individual/mf/insights/ceo-letter-2021-proxy-voting-agenda.
11
Nicholas Megaw and Kristen Talman, Allbirds Walks Back
‘Sustainable IPO’ Claims Ahead of Market Debut,
Financial Times (Oct. 5, 2021), https://www.ft.com/content/27dc4a15-c313-4238-90fc-9e7a2b1c8ca0.
12
Amended Complaint, Dwyer v. Allbirds, Inc., No.
7:21-cv-05238-CS, ECF No. 14 (S.D.N.Y. Aug. 25, 2021).
13
Id.
14
Motion to Dismiss, Dwyer v. Allbirds, Inc., No.
7:21-cv-05238-CS, ECF No. 18 (S.D.N.Y. Aug. 25, 2021).
15 In
Allbirds’ registration statement, it described the phrase
“sustainable public equity offering” as “an
expression of [Allbirds’] belief and commitment that [its]
environmental credentials are not in conflict with phenomenal
financial outcomes.” Allbirds, Inc., Registration
Statement (Form S-1), at 106 (Aug. 31, 2021), https://www.sec.gov/Archives/edgar/data/0001653909/000162828021017824/allbirdss-1.htm#ib1df9298e23644a2a22972a8f1925ea1_2910/.
16
Megaw, supra note 11.
17
Lauren Thomas, Allbirds Shares Surge 90% in Eco-Friendly Shoe
Maker’s Market Debut, CNBC (Nov. 3, 2021), https://www.cnbc.com/2021/11/03/allbirds-ipo-bird-to-start-trading-on-the-nasdaq.html.
18
Mission, Beyond Meat (last visited Nov. 1, 2021), https://www.beyondmeat.com/mission/.
19
Julie Creswell, Plant-Based Food Companies Face Critics:
Environmental Advocates, N.Y. Times (Oct. 15, 2021), https://www.nytimes.com/2021/10/15/business/beyond-meat-impossible-emissions.html;
see also Michael Corkery and Julie Creswell, Corporate
Climate Pledges Often Ignore a Key Component: Supply Chains,
N.Y. Times (Nov. 2, 2021), https://www.nytimes.com/2021/11/02/business/corporate-climate-pledge-supply-chain.html
(discussing the lack of climate-related disclosures related to
corporations’ supply chain).
20
Creswell, Plant-Based Food Companies Face Critics:
Environmental Advocates, supra note 19.
21
Scope 1 emissions are the direct emissions from a company’s
operations, owned or controlled sources. See Eric
Rosenbaum, Climate Experts Are Worried About the Toughest Carbon
Emissions for Companies to Capture, CNBC (Aug. 18, 2021), https://www.cnbc.com/2021/08/18/apple-amazon-exxon-and-the-toughest-carbon-emissions-to-capture.html.
Scope 2 emissions refers to indirect emissions from purchased or
acquired electricity, steam, heat, and cooling.
Id. Scope 3 emissions—which make up between
65% and 95% of a company’s carbon impact—encompass the
greenhouse gas emissions from other companies in a company’s
supply chain. Id. Scope 3 emissions are more
difficult to measure and report because it involves emissions of
entities outside the control of the reporting company.
Id.
22
Lauren Debter, Allbirds Valued At Over $4 Billion After Stock
Surges In IPO, Forbes (Nov. 3, 2021), https://www.forbes.com/sites/laurendebter/2021/11/03/allbirds-shares-soar-after-shoemaker-raises-over-300-million-in-ipo/?sh=725f43d76902.
23
Creswell, Plant-Based Food Companies Face Critics:
Environmental Advocates, supra note 19.
24 A
common argument against the SEC issuing updated climate-related
disclosure guidance is that the disclosure requirements already
cover ESG matters. See Gabriel Rosenberg, Margaret
Tahyar, and Betty Huber, Commenters Weigh in on SEC
Climate Disclosures Request for Public Input, Harv. L. Sch. F.
on Cor. Governance (July 24, 2021), https://corpgov.law.harvard.edu/2021/07/24/commenters-weigh-in-on-sec-climate-disclosures-request-for-public-input/;
Letter, U.S. Senate Committee on Banking, Housing, and Urban
Affairs to SEC, Re: Public Input on Climate Change
Disclosures (June 13, 2021), https://www.banking.senate.gov/imo/media/doc/banking_committee_republicans_letter_to_sec_on_climate_disclosures.pdf.
25
Halper, supra note 3.
26
TCFD, Proposed Guidance on Climate-related Metrics, Targets, and
Transition Plans (June 2021), https://assets.bbhub.io/company/sites/60/2021/05/2021-TCFD-Metrics_Targets_Guidance.pdf.
27
Technical Expert Group on Sustainable Finance, Spotlight on
Taxonomy, https://ec.europa.eu/info/sites/default/files/business_economy_euro/banking_and_finance/documents/sustainable-finance-taxonomy-spotlight_en.pdf.
28
European Commission, What is the EU Taxonomy?, https://ec.europa.eu/info/business-economy-euro/banking-and-finance/sustainable-finance/eu-taxonomy-sustainable-activities_en
(last visited Sept. 12, 2021).
29
Halper, supra note 3.
30
Beyond Compliance: Consumers and Employees Want Business to do
More on ESG, PwC, https://www.pwc.com/us/en/services/consulting/library/consumer-intelligence-series/consumer-and-employee-esg-expectations.html
(last visited Nov. 29, 2021).
31
Debter, supra note 22.
32
Deena Shanker, Impossible and Beyond Slash Prices as Fake-Meat
Market Heats Up, Bloomberg, (Apr. 16, 2021), https://www.bloomberg.com/news/articles/2021-04-16/beyond-meat-bynd-impossible-foods-battle-over-future-of-fake-meat-industry.
33
Beth Timmins, Climate Change: Seven Ways to Spot Businesses
Greenwashing, BBC, (Nov. 8, 2021), https://www.bbc.com/news/business-59119693.
34
Beau River, The Increasing Dangers Of Corporate Greenwashing In
The Era Of Sustainability, Forbes, (Apr. 29, 2021), https://www.forbes.com/sites/beauriver/2021/04/29/the-increasing-dangers-of-corporate-greenwashing-in-the-era-of-sustainability/?sh.
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