President Donald Trump’s first weeks in office have brought a flurry of proclamations and activity aimed at suspending or reversing the Obama administration’s policies, particularly with respect to environmental oversight and enforcement as well as regulatory actions related to climate change.  The new administration has promised to curtail regulation and seek significant staff and budget cuts at the United States Environmental Protection Agency (“EPA”).  In addition, President Trump has appointed Oklahoma Attorney General Scott Pruitt to head EPA, a man who currently is suing the agency, challenging its signature climate change rule, the Clean Power Plan, and who describes himself as “a leading advocate against the EPA’s activist agenda.”  In this climate, one might be tempted to ask whether environmental compliance and stewardship should remain a priority for a fund or its portfolio companies.  After all, the top cop on the beat may have a limited mandate and lack the means with which to fulfill its mission for the foreseeable future, but we caution you not to lose sight of the potential importance of environmental matters for the following reasons.

  • Executive Branch Power is Limited –The Constitution denies the Trump administration unilateral authority over environmental policy and regulation.  The Executive Branch can direct EPA to revoke or amend regulations, issue new or revoke past executive orders and determine federal funding for environmental matters, but it cannot unilaterally change federal law – that is Congress’ job. As such, we find it likely that the environmental statutory regime that has been in place for decades will remain intact.  In addition, changes to EPA rules that are now in force can only occur after going through a laborious regulatory process governed by statute.  And, as we witnessed with the Obama administration’s environmental policy actions, changes to environmental policies enacted by the Trump administration, or laws by Congress, will undoubtedly be challenged in court, delaying or impeding change to environmental policy and regulation in the United States. Finally,  EPA also can be sued for failing to act where it is statutorily required to do so, which could result in court orders forcing EPA’s hand.
  • Don’t Forget About the States – To the extent EPA chooses to deprioritize civil enforcement of environmental cases at the federal level, it appears likely that states will attempt to fill the void.  We expect that states that currently place a robust emphasis on environmental compliance and enforcement, such as California and New York, will continue their efforts, while other states may consider bolstering agency capability to the extent funding allows.  Moreover, we expect that state level actions to combat climate change, such as California’s commitment to source half its electricity from renewable sources by 2030 and to cut greenhouse gas emissions to 40 percent below 1990 levels, will continue unabated.
  • Citizen Suits – Courthouses Remain Open and NGOs Know How to Find Them – A weakened EPA is likely to lead to an increase in private plaintiff environmental litigation – either against the EPA demanding that it perform its statutory obligations, or against regulated entities.  Most significant environmental laws such as the Clean Air Act, the Clean Water Act and CERCLA (or “Superfund”), contain citizen suit provisions that enable private plaintiffs to seek monetary penalties, court ordered injunctive relief and attorneys’ fees and costs.  This means private third parties can use such citizen suit provisions to enforce the law, remedy historic pollution or challenge the development of a facility.  Environmental-minded NGOs, many of whom are reporting record funding levels as a response to the Trump administration’s policies and goals, are uniquely situated to bring claims to enforce environmental laws and regulations and have ample experience litigating environmental matters.  One need only look to the controversy surrounding the Dakota Access Pipeline to understand the impact that an NGO can have on current or planned operations.  And, just last week an Alabama federal judge rejected a large manufacturer’s bid to dismiss a NGO’s RCRA suit alleging one of manufacturing plants has been discharging chemicals into the Tennessee River despite the fact that Company had entered into a remedial action agreement (“RAA”) with the state regulatory authority (Tennessee Riverkeeper Inc. v. 3M Co. et al., case number 5:16-cv-01029, in the U.S. District Court for the Northern District of Alabama, Northeastern Division).  The judge concluded that the RAA did not address all of the relief that the NGO was seeking.
  • Bad Publicity Stings and News Travels Fast – The “Newspaper” or “Front Page” test should remain an important reality check for any business deemphasizing environmental, health and safety activities.  Brand reputation is more critical than ever and investors, customers, employees and other stakeholders will continue to remain focused on these issues despite policy shifts at the federal level.
  • Don’t forget about ESG and Promises Made to Your Constituencies – Despite an apparent shift in federal policy on matters relating to the environment, and climate change, we expect that limited partner interest in the ability of private equity firms to manage ESG and sustainability investment considerations in their portfolio companies will remain prevalent.  In fact, if the federal government refrains from leading on environmental issues, including climate change, it is reasonable to assume that pressure on sponsors from certain pension funds, endowments and other institutional investors with respect to ESG concerns could increase.  Moreover, we remind our fund clients that many of them have pledged to their LPs that ESG considerations and policies will be incorporated into fund operations, as well as their respective due diligence processes, in order to better manage risk and create value.  And, portfolio companies with public debt will continue to be subject to SEC reporting obligations with respect to environmental matters.

The full impact of the Trump administration’s environmental policy decisions remains to be seen; however, as discussed above, there are several compelling reasons for our sponsor clients and their portfolio companies to continue to pay attention to environmental compliance and performance over the near and long term.