2023 has been a pivotal year for climate law and ESG reform, both in Australia and globally.
In summary, it is evident that there is heightened enforcement surrounding ESG matters, including proposed regulatory regimes, and this will persist in the business and legal sectors in the coming years as Australia takes its first steps towards a net zero finance strategy.
In this update, we highlight some of the key trends which General Counsels, boards, asset managers, and investors should know about.
On 2 November 2023, the Commonwealth Treasury released Australia’s Sustainable Finance Strategy consultation paper which is open for public consultation until 1 December 2023. The strategy aims to reduce barriers to sustainable investment by introducing a comprehensive framework to support Australia’s pathway to achieving net zero emissions by 2050.
The policy priorities centre around three key pillars: (1) improving transparency on climate and sustainability; (2) financial system capabilities; and (3) Australian Government leadership and engagement.
Three key objectives emanating from this paper are to establish a framework for sustainability-related financial disclosures, to develop a sustainable finance taxonomy, and the development of Australian issued sovereign green bonds.
Sustainability-related financial disclosures
Currently, there is no “mandatory” ESG regulatory framework for funds and asset managers in Australia. However, some statutory requirements exist which prohibit such bodies (and many others) from engaging in misleading or deceptive conduct when offering or promoting sustainability-related products. Additionally, there are proposals for a phased introduction of mandatory climate-related financial disclosure requirements to commence from 1 July 2024, with the first group of reporting entities required to publish disclosures for the financial year 2024-2025. This is particularly relevant for Australia’s largest listed and unlisted companies and financial institutions, with other businesses subject to the requirements over time.
It is expected that that disclosure requirements will align closely with the International Sustainability Standards Board’s (ISSB) recommend reporting standards, IFRS S1 and IFRS S2.
IFRS S1 and IFRS S2 require an entity to disclose all information regarding material sustainability-related and climate-related risks and opportunities that could be reasonably expected to affect the entity’s cash flows, access to finance, or cost of capital over the short, medium, or long term.
IFRS S1 provides the basic requirements for sustainability disclosures, which should be used with IFRS S2 as well as future ISSB Standards. The goal is to provide users of general-purpose financial reports with valuable insights for making decisions related to entity resource allocation. IFRS S1 outlines how entities should prepare and present sustainability-related financial disclosures, emphasising content and presentation to enhance user utility. Key disclosures include governance processes, strategies for managing and identifying sustainability-related risks and opportunity, and performance metrics towards sustainability-related goals.
IFRS S2 focuses on climate-specific disclosure requirements. This includes strategy disclosures that distinguish between physical and transitional risks, climate-related metrics and target disclosures, disclosures of climate-related response plans, and disclosures of scenario analysis on how climate-related events may impact the business.
Both reporting standards fully incorporate the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) and are effective for annual reporting periods beginning on or after 1 January 2024.
Sustainable finance taxonomy
A sustainable finance taxonomy is a set of definitions of economic activities and assets that contribute to key sustainability objectives.
The Australian Sustainable Finance Taxonomy Project is a joint industry-government initiative, led by the ASFI in partnership with the Commonwealth Treasury. The shift towards a resilient and inclusive net zero economy necessitates both solutions and capital. Sustainable finance taxonomies offer standardised definitions for sustainable economic activities, enabling the transparent and credible identification of sustainable investment opportunities. Taxonomies will support the achievement of Australia’s objectives across climate, environmental and social spheres. In addition, they will provide investors with both confidence in and assurances of sustainability claims, enabling comparability between investment products and portfolios and reducing transaction costs. Key design features are likely to include internationally recognised principles such as ‘do no significant harm’ and ‘minimum social safeguards’. The six priority sectors are: electricity generation and supply (energy); minerals, mining and metals; construction and the built environment; manufacturing/industry; transport; and agriculture.
Issuing Australian sovereign green bonds
The rapid growth of green and sustainable debt markets globally is a significant trend in sustainable finance. The increased issuance of sustainability-themed debt is attracting sustainable aligned capital, strengthening expertise in sustainability, and fostering the development of more advanced sustainable finance products and markets.
Sovereign green bond issuance has been a crucial part of this trend. Since Poland’s inaugural issuance in 2016, over 40 nations have followed suit which has resulted in over US$350 billion in sovereign green bonds globally. In Australia, each state has begun green bond programs.
A well-designed and credible sovereign green bond program has the potential to mobilise additional capital for climate initiatives, deepen sustainable finance markets, and demonstrate a government’s commitment to climate and sustainability goals.
Globally, policymakers are becoming increasingly aware of the value of nature to human well-being and a sustainable future. Recently, the Australian Government signed up to the Global Biodiversity Framework which is hailed as critical to halting and reversing nature loss. This landmark agreement contains global 2030 targets to safeguard and sustainably use biodiversity, whilst protecting the rights of local communities and Indigenous Peoples.
In December 2022, the Government released the Nature Positive Plan: ‘better for the environment, better for business’, laying down a marker for environmental law reform. This plan includes the development of National Environmental Standards and a National Nature Repair Market. These initiatives aim to achieve more efficient environmental project decision-making, legislate clearer environmental standards, improve conservation planning, encourage investment in long-term nature repair projects and, advance plans for regional development.
In September of this year, the Taskforce on Nature-related Financial Disclosures (TNFD) released its final framework. The TNFD developed a set of disclosure recommendations and guidance for organisations to report and act on evolving nature-related dependencies, impacts, risks and opportunities. The TNFD’s disclosure recommendations are centred around four key pillars: Governance, Strategy, Risk & Impact Management, and Metrics & Targets. These pillars are consistent with the TCFD and the ISSB.
Reporting under the TNFD framework is voluntary, however, for businesses who are perceived to have significant dependencies and impacts on nature, it is anticipated that stakeholder expectations will persuade such entities to report in line with the framework.
However, many organisations may find it difficult to adopt an accurate, reliable, and consistent nature-related disclosure regime due to the inherent complexity associated with reporting under the TNFD (as compared, for example, to generic climate-related reporting).
To reduce the risks connected with voluntary disclosures, businesses looking to be among the first to implement the new reporting structure will require a strong compliance program as well as strong governance and monitoring.
The ACCC has defined greenwashing as the making of “environmental claims that are false or misleading … that mak[e] a product, service or business seem better or less harmful for the environment than it really is.”
The misleading statements are generally committed to the benefit of the company. It can be used to fraudulently meet individual performance objectives or to satisfy the expectations of lenders, investors, regulators, and consumers. Greenwashing distorts relevant information that investors need to make informed investment decisions. It may erode investor confidence in sustainability-related product markets and potentially poses a threat to a fair and efficient financial system.
Examples of this include falsifying claims to meet specific executive remuneration Key Performance Indicators, manipulating ESG data to obtain ESG credits, and obtaining certain certificates of compliance by concealing relevant facts.
Both the Australian Securities and Investments Commission (ASIC) and the Australian Competition and Consumer Commission (ACCC) have highlighted ‘greenwashing’ as an enforcement and surveillance priority. ASIC has received additional funding to continue its greenwashing surveillance and enforcement over the next year, specifically in the superannuation industry and wholesale green bond market. Following an internet sweep of environmental claims in 2022 the ACCC identified key concerns which included vague, aspirational and unqualified claims, a lack of substantiating information and the use of absolute claims.
In 2023 ASIC launched its first of three legal actions, including one against the arm of investment giant Vanguard, and another against Active Super, which allegedly falsely claimed it had eliminated investments that posed a great risk to the environment.
In July 2023, the ACCC issued, in draft, guidance for businesses seeking to market their products and services using ‘environmental and sustainability claims’.
Last year, ASIC issued guidance for funds and other entities who promote financial products, on how to avoid greenwashing when offering or promoting sustainability-related products.
Greenhushing is when businesses deliberately choose to under-report or, intentionally hide or omit their ESG credentials from public view to evade scrutiny.
ASIC’s Chair, Joe Longo, recently stated that it was the regulator’s intention to address the phenomenon of ‘greenhushing’. The Chair cautioned that, in ASIC’s view, firms who remain silent and fail to engage with respect to ESG run the risk of misleading by omission, characterising greenhushing as another form of greenwashing. It is expected that more enforcement actions will be taken by ASIC with respect to this concern.
Focusing on the social (or ‘S’) domain of ESG, bluewashing refers to when a state or organisation uses humanitarian aid campaigns, such as the UN Sustainable Development Goals, to deflect attention from its harmful practices. It is anticipated that ASIC will increase its focus on ‘S’ issues as part of a broader more stringent enforcement approach. Following Australia’s recent public and corporate engagement with the Voice referendum, it is also anticipated that businesses’ commitments to First Nations Peoples will continue to be closely examined.
In addition to Indigenous rights, there is growing concern and increased stakeholder pressure on companies to disclose human rights abuses in their supply chains. The Federal Government recently released the review of the Modern Slavery Act 2018. The Act requires that organisations, with yearly consolidated revenue of A$100 million or more, to prepare an annual report outlining the risks of modern slavery in their supply chains and operations, as well as the steps taken to address such risks. Key recommendations include introducing penalties for certain non-compliance, a due diligence system requirement, new mandatory reporting criteria and a new reporting threshold.
- Organisations should determine now whether they will be subject to the mandatory reporting and disclosure requirements, as well as how the new requirements will affect their business.
- Large Australian companies and financial institutions will have to disclose information about how climate change is affecting their business, the risks it poses to their operations, and their plans to decarbonise, from 1 July 2024. The disclosure requirements will be based on internationally recognised standards, which will ensure that both local and international investors can compare data across borders.
- IFRS S1 and IFRS S2 create a global baseline for sustainability disclosures. Entities are required to apply both IFRS S1 and IFRS S2 for annual reporting periods beginning on or after 1 January 2024.
- The Federal Government is supporting the development of an Australian sustainable finance taxonomy – a set of criteria that enables investors to evaluate if, and to what extent, an investment materially contributes to sustainability objectives. A taxonomy will define true green investments and reduce the likelihood of false claims about the sustainability of investments. Key design features are likely to include internationally recognised principles such as ‘do no significant harm’ and ‘minimum social safeguards’.
- The Treasury announced that the first issuance from its green bond programme is expected in mid-2024 as part of its efforts to foster the growth of the green bond market. The purpose of these bonds is to set borrowing and lending standards for all green finance.
- Stakeholders have until 1 December 2023 to comment on the Sustainable Finance Strategy consultation paper.
- Businesses must disclose nature-related dependencies and impacts in its corporate governance statement and directors’ report if they represent a material risk of harm to the business. In order to discharge their duties of care and diligence under the Corporations Act 2001, it is recommended that directors should identify their company’s dependencies on nature and impacts upon it, while considering the potential risks this might expose the company to.
- ASIC and ACCC have highlighted ‘greenwashing’ as an enforcement and surveillance priority. ‘Bluewashing’ and ‘greenhushing’ have also been identified as concerns by ASIC.
- The TFND has developed a set of disclosure recommendations and guidance for organisations to report and act on evolving nature-related dependencies, impacts, risks and opportunities.