Environmental update: March 2022

Environmental update: March 2022

February 28, 2022 | By Andrew Skroback in New York

Hamstrung at the legislative level, the Biden administration is looking for other ways to press banks to prepare for potential threats to the nation's financial system from climate change.

Lenders should expect pressure to come in a variety of ways from an array of agencies, including the Securities and Exchange Commission, the Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, among others.

Debate will focus on the scope of any new regulatory obligations to mitigate climate change and whether that is part of the mandate of federal regulators to protect the financial system.

The SEC is expected to propose broad rules that would require banks and other public companies to disclose more information about financial exposure to risks driven by climate change and about their own contributions to climate change.

Lenders will be pressed to measure how their investments could be threatened by flooding, wildfires and other forms of extreme weather.

Agencies may ratchet up scrutiny of investments in fossil fuel projects like oil and gas. Federal Reserve Chairman Jerome Powell promised action on climate issues recently, but also suggested that it is not the central bank's job to pick and choose which industries get financing.

Phase I Site Assessments

The standard for conducting most phase I environmental site assessments of industrial and commercial properties was updated in late 2021.

ASTM International released a new standard, ASTM E1527-21, to replace the version that has been widely used since 2013, ASTM E1527-13.

Phase I site assessments are almost always required before closing financings, commercial or industrial real estate purchases, or mergers and acquisitions involving real property.

ASTM E1527-21 now makes crystal clear when a phase I site assessment is too stale. The revision confirms — what most environmental counsel have long understood — that the date on the report cover is irrelevant for that purpose. Instead, each specific diligence inquiry required by the standard — the site visit and visual inspection of adjoining properties, interviews with occupants, owners and operators, searches for environmental cleanup liens and governmental records searches — must each have been completed within 180 days before closing the transaction for the report to meet the standard.

A report older than 180 days may still provide valuable diligence information, but it is considered too stale to meet US Environmental Protection Agency standards for making "all appropriate inquiries" when evaluating a property's environmental condition. Parties follow the EPA regulations not only to assess risk and meet best practices, but also to preserve the ability to claim a defense to CERCLA liability as an innocent landowner, contiguous property owner or bona fide prospective purchaser by having conducted what EPA considers "all appropriate inquiry."

ASTM E1527-21 also now updates the necessary historical records review to require that aerial photos, topographic maps, city directories and fire insurance maps all be reviewed, or the consultant must explain why the review was not possible. More detailed site reconnaissance requirements were also added to confirm what is considered good commercial and customary practice.

The ASTM E1527-21 standard defines what is considered good commercial and customary practice for conducting an environmental site assessment of a property on which there may be contaminants that are regulated as hazardous substances under the Comprehensive Environmental Response, Compensation & Liability Act, or CERCLA, or there may be petroleum products.

A phase I requires a qualified environmental professional to assess potential environmental risks from those substances by physically inspecting sites, observing adjacent properties, interviewing knowledgeable persons, reviewing government regulatory data bases and considering certain historical information that may yield information relevant to site conditions. Although a phase I requires the inspection of a property to look for visual evidence of contamination or risk of such contamination, no invasive sampling is typically performed.

The new ASTM E1527-21 standard makes changes that are intended to reach more consistent results when consultants apply the updated standard to the information gathered about underlying properties. Important changes and clarifications in the updated standard are discussed below.

The key goal of a phase I is to identify what are referred to as recognized environmental conditions, or "RECs." A REC includes not only the presence of hazardous substances or petroleum products on a site, but also the "the likely presence" of such "due to a release or likely release."

The new standard now clarifies what consultants should consider "likely" contamination. "Likely" contamination "is neither certain nor proved," but contamination that "a reasonable observer" would expect "based on the logic and/or experience and/or available evidence." The phase I must now provide the logic behind the consultant's assessment of a "likely presence" of contamination, but does not have to show proof.

The goal of a phase I is also to disclose lesser issues of potential environmental concern and to distinguish them from current RECs. Thus, the new standard revises current definitions distinguishing among a REC as opposed to a controlled recognized environmental condition, or "CREC," or a historical recognized environmental condition, or "HREC." The updated standard adds a new section that provides guidance on how a consultant should determine whether a particular issue qualifies as a REC, CREC or HREC. It also includes a helpful flow chart and provides examples of each type of condition to achieve greater uniformity.

If releases of hazardous substances or petroleum have been addressed to the satisfaction of the regulatory authority such that the site meets unrestricted use criteria, then an HREC label is warranted because the contamination is purely historical with no current obligatory control. Properties with releases of hazardous substances or petroleum that have been addressed to the satisfaction of regulators but with an obligation to maintain certain controls — such as use restrictions — can be characterized as CRECs.

ASTM E1527-21 also creates the new term "property use limitation," or "PUL," and explains its relationship to the term "activity and use limitation," or "AUL," in qualifying certain circumstances as controlled RECs. The new standard now allows a site condition to be characterized as a controlled REC in certain circumstances where either AULs are in effect or PULs are in place to restrict use. Specifically, a controlled REC is now "a recognized environmental condition affecting the subject property that has been addressed to the satisfaction of the applicable regulatory authority or authorities with hazardous substances or petroleum products allowed to remain in place subject to implementation of required controls (for example, activity and use limitations or other property use limitations)."

One example of a situation where the new standard more clearly requires consultants to classify a condition as a current REC involves cases where the regulatory standards have tightened over time. If a site previously achieved approved regulatory closure by meeting the unrestricted use standards in effect at the time of the release or subsequent cleanup, then the condition may nevertheless be classified as having a current REC in a new phase I if the available data show that site conditions do not meet applicable new, stricter regulatory standards. In other words, consultants will have to confirm whether the available cleanup data satisfy the standards that are currently in effect even if a site was cleared earlier by the regulators.

Complicated scenarios may arise for users of phase I site assessments in cases where current standards are stricter than in the past, but where a particular state regulatory program did not impose a "reopener" triggered by new regulatory requirements and state frameworks do not necessarily require further action in light of the prior approved regulatory closure.

The revised standard encourages more comprehensive research as to the use of adjoining properties in line with what was already required of the site itself, where such information is available.

ASTM E1527-21 also specifies that a report's user must have a title search conducted to determine whether there are any environmental liens or activity and use limitations on the subject property. The title search must review the relevant records from 1980 through the present. This should be coordinated with whatever real estate due diligence work being conducted.

Finally, it is important to note that, though the new ASTM standard now specifically explains that a gap exists in phase I coverage of certain new contaminants of concern, it still does not close that gap.

While the scope of hazardous substances regulated under CERCLA overlaps broadly with most other environmental laws, the overlap is not 100%. Because the ASTM standard only requires assessment of hazardous substances already regulated under CERCLA, plus petroleum products, phase I assessments are not required to consider known or suspected releases of contaminants that do not currently fall within that scope. This is true even if a particular contaminant found on a property is already being regulated under state law or it is already receiving increased regulatory scrutiny at the federal or state level.

The poster child for this limitation on phase I reports is the emerging contaminants class known as per- and polyfluoroalkyl substances, or PFAS (pronounced "PeeFAS"). PFAS are sometimes referred to as "forever chemicals" due to their durability and reported persistence in the environment. They are a large group of fluorinated chemicals that have been widely used since the 1940s in hundreds of industrial applications and consumer products. Historical activities suggesting possible PFAS use include carpets and textiles, airport and other firefighting using certain foams, leather tanning and leather production, metal plating, cosmetics, furniture, food paper products and cosmetics. This list is incomplete.

PFAS are under increasing regulatory scrutiny at both the federal and state levels, with many states already having taken steps to regulate in advance of federal action. Congress is actively considering action, including whether to classify some PFAS as hazardous under CERCLA.

Despite that scrutiny, PFAS remain non-scope substances falling outside of the obligatory scope of a phase I assessment because they remain outside the CERCLA regulatory sphere — for the moment.

The new E1527-21 standard simply clarifies the status quo that, until an emerging contaminant is specifically regulated as a federal CERCLA hazardous substance, a phase I is not required to flag even a known release of such a substance on a site. The new standard merely notes the obvious, that consultants can be asked to include such substances in their assessment as a "non-scope consideration."

Many consultants flag in their phase I assessments the possibility that there may be PFAS or other emerging contaminants of concern on a site, but a buyer or financier cannot count on the consultant to do this, particularly in cases where it is merely a relying party who did not actively engage the consultant to do the assessment.

With the failure of ASTM to close the gap, expect counsel for lenders and buyers to take contractual action to require the phase I site assessments on which they are being asked to rely to confirm coverage of such emerging contaminants as within the scope of the reports. While broader regulation is likely at state and federal levels, this is already an obvious data gap for assessments performed in states that have already adopted or are considering adopting regulatory standards.

The new standard now awaits final EPA sign-off, expected later this year. In the interim, ASTM E1527-13 remains in place.

Waters of the United States

The US Army Corps of Engineers posted new guidance on its website in January that could affect hundreds of projects.

The guidance states that the Army Corps and the EPA "will not rely on" determinations made under a Trump-era rule governing whether a project affects federally protected waters and thus needs a federal permit.

Projects that affect federally protected "waters of the United States" must go through a federal permitting process under the US Clean Water Act. The Army Corps determines on a case-by-case basis whether waters of the United States are affected. The definition of what does or does not qualify as a regulated water changed multiple times under President Obama, then Trump and now Biden.

The new guidance is intended to clarify the impact of recent court decisions that set aside the Trump-era regulation, called the navigable waters protection rule.

Going forward, pre-2015 standards for what constitutes a regulated water will control agency decision-making while the Biden administration comes up with a replacement for the Trump rule.

The open question has been what happens to those projects that received jurisdictional determinations or actual permits from the Army Corps based on the narrower parameters of the Trump rule, now that the rule is no more.

The Army Corps said it will not reconsider permits already granted under the Trump rule, but at the same time, it will not accept any jurisdictional determinations made pursuant to the Trump rule.

In other words, those projects holding a determination of no impact made under the Trump rule will probably require a new determination under the pre-2015 rules until a new rule is issued by the current administration.

Approved jurisdictional determinations are supposed to remain valid for five years after being issued. Many projects may now be in an uncertain position. Proponents may be required to reconfigure project footprints to avoid areas still protected under the pre-2015 rules even if those areas were not considered waters of the United States under the narrower Trump rule.

What happens at a particular project site will turn on the facts. Permit applicants will be asked whether they would like to receive a new jurisdictional determination under the pre-2015 rules.

An approved jurisdictional decision requires a site visit by the Army Corps to determine which waters on the site are federal protected waters while a preliminary jurisdictional decision presumes that all waters and wetlands are federally protected and does not require a site visit.

Clean Water Act Limits

While the EPA and the Army Corps consider replacing the now vacated Trump rule that specified a narrow definition of federally protected waters, the US Supreme Court has agreed to hear a case that may limit the reach of the Clean Water Act.

The court will hear an appeal this fall from Chantell and Michael Sackett, an Idaho couple waging a 15-year long battle to build a house on land that regulators say is protected wetlands.

The Sacketts' appeal asks the court to revisit a 2006 Clean Water Act case, Rapanos v. United States, that failed to produce a majority decision. Antonin Scalia and three other justices said the law covers wetlands only if they have a continuous surface connection to a river, lake or other major waterway.

A fifth justice, Anthony Kennedy, created his own test, explaining the Clean Water Act covers wetlands with a "significant nexus" to one of those larger bodies of water.

Justice Scalia is now deceased, and Justice Kennedy is now retired.

The Sacketts are hoping the current court will adopt the narrower Scalia view of the scope of the Clean Water Act.

The Biden administration maintains that the Scalia approach would create a regulatory gap:

The agencies would lack authority to protect wetlands separated from a navigable river by a small dune or other natural barrier, even if overwhelming scientific evidence showed that the wetlands significantly affect the river's chemical, physical, and biological integrity.

The EPA says that the Sacketts' land is connected to a lake through a subsurface flow of water.

The administration also told the justices they should wait to hear the case until after the EPA and Army Corps finalize a proposed revision to the federal Clean Water Act regulations.

The legal fight began in 2007 when the EPA issued an administrative compliance order requiring the Sacketts to restore land they had already begun preparing for construction.

The case is Sackett v. Environmental Protection Agency.