Lessons Learned from Oil & Gas: The Risk Landscape for Sustainable Aviation Fuel (SAF)
Brought to you by King & Spalding
Partner, Houston
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King & Spalding
Partner, Austin/Washington D.C
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King & Spalding
Associate, Houston
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King & Spalding
Introduction
As Donald Trump prepares to take office again, the regulatory and enforcement landscape for sustainable and renewable products, including Sustainable Aviation Fuel (SAF), is expected to become more uncertain. Certain political actors, including those that wield the authority to pursue criminal and civil enforcement, view SAF in opposition to fossil fuels. In different political times, traditional oil and gas companies have faced enforcement challenges from authorities that had an unfavorable view of them. SAF providers and customers can look to those experiences to survey the changing landscape of regulation and enforcement.
This article identifies the primary law enforcement authorities and briefly describes enforcement theories they could pursue and the implications of their potential enforcement actions.
Department of Justice (DOJ)
The DOJ enforces federal criminal laws in the U.S., including laws related to fraud, antitrust, and corruption. Even news of a pending federal criminal investigation can have significant reputational consequences. Federal criminal investigations can be lengthy and expensive to defend. Resolving or settling these investigations at an early stage may be the right strategic decision in some circumstances. However, SAF companies should be aware of the potential collateral effects of resolving or settling criminal investigations, including suspension and debarment, which would prevent them from contracting with the federal government and receiving government grants.
Securities Exchange Commission (SEC)
The SEC enforces laws related to securities regulations and disclosures for publicly traded companies and foreign companies with shares listed to U.S. exchanges. Historically, SEC enforcement theories have focused on accurate and timely disclosure of information affecting financial performance, risks, and material events. The SEC has also emphasized the importance of ESG factors in investment decisions. Companies involved with SAF may need to assess and disclose their sustainability risks and opportunities that could impact their financial performance. During the Biden Administration, the SEC and other similar authorities like the Commodity Futures Trading Commission (CFTC) and Federal Trade Commission (FTC) issued regulations and pursued civil market fraud theories against various companies focused on use of carbon offsets and so-called greenwashing. Companies operating in the SAF space should closely watch actions taken by the Trump Administration related to these regulations and the potential for enforcement actions.
State Attorneys General
State attorneys general enforce state environmental laws. They are not subject to the control of federal officials, and depending on their political-party affiliation, they may have enforcement priorities that are diametrically opposed to the federal government. For example, the New York Attorney General in People v. ExxonMobil Corp., brought an action against ExxonMobil for misleading disclosures about the risks of climate change. A New York state court ultimately held that the attorney general did not prove the securities fraud claims it brought, but the court noted that nothing in the decision was intended to absolve ExxonMobil from responsibility for contributing to climate change through its production of fossil fuels. Similar enforcement actions could pose risks to companies related to their disclosures regarding SAF.
In states with Republican attorneys general, like Texas, state attorneys general may be focused on protecting traditional oil and gas companies and skeptically evaluating reliance on sustainable and renewable energy sources such as SAF. With the recent Republican victories in some states, SAF companies should be prepared for more pro-fossil fuels legislation and greater enforcement scrutiny of the SAF industry.
Congress
Another area for the SAF industry to watch is congressional committees, all of which are likely to be controlled by Republicans, for emerging investigations into alternative energy sources and incentives the Biden Administration offered to companies to pursue alternative fuels. Companies may be asked to produce documents and send representatives to testify before or report to these committees as part of investigations into these politically charged issues. Republican-led congressional committees have not shied away from these issues in the past. For example, the Republicans of the House Judiciary Committee investigated the influence of ESG on financial institutions. Their final report accused major U.S. asset managers of colluding to reduce output and raise prices in essential industries like fossil fuels, aviation, and agriculture. The report concluded that stringent enforcement of antitrust laws is needed to address these issues.
International Actors
The international regulatory landscape for SAF also continues to evolve, with several key players and initiatives shaping the future of the industry, including enforcement actions taken against adjacent companies. The EU has been forward-leaning in addressing potentially misleading green claims by airlines. Recently the EU sent letters to 20 airlines, identifying several types of potentially misleading green claims and inviting them to align their practices with EU consumer law within 30 days. The Advertising Standards Authority (ASA) in the U.K. has also taken action against misleading sustainability claims. For example, a Virgin Atlantic Airways radio ad was banned for touting a “unique flight mission” using “100 percent sustainable aviation fuel,” which the ASA deemed misleading because it failed to provide a full picture of the adverse environmental and climate impacts of the fuel.
With some international actors planning to start requiring airlines to use SAF, SAF companies in the U.S. should ensure compliance with international regulations and the Foreign Corrupt Practices Act (FCPA) when interacting with state-owned airlines and sourcing from international suppliers.
Conclusion
To mitigate the risks of enforcement and regulation challenges, SAF companies should take note of the enforcement authorities that have pursued the traditional oil and gas industry and take proactive steps now, such as developing a comprehensive compliance program, conducting regular audits, and investigating red flags to position themselves to avoid or defend investigations. With the upcoming administration change in the U.S., it is crucial for industry stakeholders to stay informed and prepared for potential regulatory and enforcement challenges.
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