ESG regulatory trends: in-house counsel front and centre as ESG regulation proliferates

2024 has so far been the year of environmental, social and governance (ESG) implementation as organisations respond to the increasing regulation of ESG issues, both in Australia and overseas.

Organisations with global value chains and operations across numerous jurisdictions are facing a complex web of ESG regulatory requirements. While those regulations often have similar objectives the standards and obligations imposed on in-scope entities often differ. The implementation of those regulations into risk and compliance frameworks means that the regulatory impact can flow across the value chain.

What are the key developments in the shift towards greater ESG regulation?

Disclosures and reporting

Mandatory disclosure of climate-related financial risks

Described by Australian Securities and Investments Commission (ASIC) Chair Joe Longo as “the biggest change to financial reporting and disclosure standards in a generation”, the Federal Government’s climate-related financial disclosure regime will soon be incorporated into the Corporations Act 2001 (Cth). Group 1 entities could be required to disclose their climate-related risks and opportunities as early as 2026. As well as focusing on the information required to be disclosed, organisations should have a robust understanding of the legal requirements of the regime, in particular what organisations should do to enable their directors to give the ‘reasonable steps’ declaration.

Modern Slavery Act reforms: when not if?

The Anti-Slavery Commissioner, established in May, will strengthen work done across government, business and civil society to prevent and respond to modern slavery. The Federal Government’s response to the recommendations of the statutory review of the Commonwealth’s Modern Slavery Act 2018 are expected by the end of this year and the Anti-Slavery Commissioner is expected to play a role in implementing those reforms. Recommendations of last year’s statutory review included expanding mandatory reporting requirements to require the description of actions taken under a due diligence system and to report instances of modern slavery. The recommendations also included lower thresholds for reporting, which would result in more businesses being captured by the reporting requirements, and introducing financial penalties for non-compliance.

Voluntary ESG frameworks

Nature-related financial disclosures may soon become the subject of regulatory expectation

Voluntary reporting under the Taskforce for Nature-Related Financial Disclosures (TNFD) has commenced. The Federal Government is progressing a suite of nature-related initiatives including the allocation of A$4.1 million in the current budget to support the voluntary uptake of nature-related financial reporting. In parallel, ASIC is monitoring emerging frameworks for the disclosure of nature-related risk and opportunities. These frameworks include the TNFD, and the International Sustainability Standards Board’s development of standards for biodiversity, ecosystems and ecosystem services, as well as human capital. ASIC has encouraged entities to consider how the systems and processes adopted for climate reporting can be sufficiently agile to incorporate additional sustainability topics in future years including nature and biodiversity.

With Australia’s climate-related financial disclosure regime developed to provide for expansion to other sustainability issues over time, businesses should expect that nature-related financial disclosures will become the subject of regulatory expectation sooner rather than later.

Australia’s sustainable finance taxonomy to commence with climate mitigation objectives

Australia’s sustainable finance taxonomy will provide common definitions for sustainable economic activities to enable investors to direct capital towards assets and activities that meet environmental objectives. Focused initially on climate change mitigation objectives, the taxonomy will define eligibility for ‘green’ and ‘transitional’ activities across sectors including energy, resources, construction, manufacturing, transport and agriculture. The taxonomy will also introduce criteria for do no significant harm to other environmental objectives (such as biodiversity) and meeting minimum social safeguards in alignment with the United Nations Guiding Principles on Business and Human Rights (UNGPs).

Given the taxonomy is intended to assist investors to identify and therefore allocate capital to sustainable business activities, investors will no doubt look to rely on climate-related financial disclosures in annual reports to assess alignment of potential investments to the taxonomy’s climate mitigation objectives. Though voluntary, the taxonomy will assist businesses to access premium green financing through using compliance with taxonomy criteria to demonstrate their sustainability credentials. With the Government’s consideration of the taxonomy’s use cases within the financial and regulatory architecture due in mid-2025, it may be that ultimately Australia follows in the EU’s footsteps, making reporting against the taxonomy mandatory.

The ‘G’ in ESG

ASX Corporate Governance Guidelines proposed updates

Earlier this year, the ASX released its Consultation Draft on the Fifth Edition of its Corporate Governance Principles and Recommendations. Various proposed recommendations reflect the growing recognition of ESG as an integral aspect of good corporate governance. Increasing emphasis is placed on the regard an organisation should have to the interests of its stakeholders, including having processes to engage with them and to report material issues to the board.

The draft commentary explains that it is in the best interests of an organisation to have regard to its impact and interaction with key stakeholders to support creation of long-term sustainable value for security holders. It also explains all the different ways Aboriginal and Torres Strait Islanders might be ‘stakeholders’ of an organisation, including as business partners, land owners, host communities, employees, customers or by other relationships. Examples of board activity included in the draft update include overseeing due diligence on an organisation’s stakeholder relationships, including human rights impacts.

The UNGPs are the agreed international standard for human rights due diligence to identify an organisation’s human rights impacts. More broadly, the OCED Guidelines on Responsible Business Conduct (which incorporate the UNGPs) provide a sound reference point for ethical and responsible conduct. Organisations that have in place robust human rights due diligence and stakeholder engagement practices will be well placed to meet the revised guidelines.

The ASX is targeting early 2025 for the release of the final version of the Fifth Edition, to be effective for financial years from 1 July 2025.

Failure to prevent foreign bribery is now a corporate offence

In the most comprehensive amendment of Australia’s foreign bribery regime in almost 30 years, corporations will be criminally liable for failing to prevent foreign bribery if they do not have ‘adequate procedures’ to prevent foreign bribery by their ‘associates’ (including employees, officers, contractors and owned and controlled entities). Existing foreign bribery offences have also been simplified and expanded to assist authorities in prosecuting bribery offences. All organisations that operate internationally should ensure their current anti-bribery and corruption prevention program is sufficiently robust to meet the ‘adequate procedures’ defence.

Nature to benefit from increased investment

Australia’s Sustainable Finance Roadmap

Released in June, Australia’s Sustainable Finance Roadmap adopts a ‘climate first but not only approach’, signalling a range of nature-related initiatives already underway to enable the integration of nature-related financial risks and opportunities into investment and corporate decision-making.

Nature markets

Nature markets will gather pace as Australia’s world-first Nature Repair Act 2023 (Cth) is gradually implemented. Designed to reward landowners for protecting biodiversity and channel private investment toward nature, biodiversity certificates can be issued for activities that protect, establish or restore existing habitat for voluntary nature markets (not environmental offsets in approvals). The Clean Energy Regulator will be responsible for overseeing the market, which is planned to open in 2025.

What next for Australia’s regulators?

Collaboration between competitors to achieve sustainability objectives

The Australian Competition and Consumer Commission’s (ACCC) recently released Draft Sustainability collaborations and Australian competition law guide provides welcome but limited guidance to businesses on sustainability collaboration. It could be improved through increased guidance about how the ACCC will apply its enforcement powers to sustainability collaboration, consistent with the approach taken in other jurisdictions, as well as by expanding the definition of ‘sustainability’ to positive environmental outcomes and social objectives. Businesses wishing to pursue collaborations that are aimed at promoting nature positive or net zero outcomes or preventing the prevalence of modern slavery in supply chains would likely benefit from this approach. It could also provide greater certainty as to when the ACCC will streamline the authorisation process. The ACCC expects to publish a finalised guide on its website in late 2024.

ASIC signals potential to expand greenwashing claims beyond misleading or deceptive conduct

After obtaining an $11.3 million penalty in its first greenwashing case, ASIC will continue to pursue greenwashing as an enforcement priority, with a focus on sustainable finance and the superannuation sector and scrutiny of net zero statements and targets, use of terms like ‘clean’, ‘green’ or ‘carbon neutral’ made without reasonable grounds and the use of vague terms or inaccurate labelling in sustainability-related funds. ASIC’s most recent enforcement activity reminds us that its scrutiny of greenwashing practices extends well beyond the finance sector.

Earlier this year, ASIC’s former Deputy Chair Sarah Court signalled the potential for ASIC to expand greenwashing claims from misleading and deceptive conduct to a range of other obligations including licence obligations and directors’ and officers’ duties. The Government’s proposed mandatory climate-related financial disclosure regime may provide the opportunity for ASIC to expand its greenwashing enforcement into corporate reporting and directors’ duties.

‘Black cladding’: the exploitation of Indigenous businesses

The subject of media reports throughout 2023, the exploitation of Indigenous businesses has remained in focus with ASIC’s enforcement priorities continuing to include misconduct impacting Aboriginal and/or Torres Strait Islander people. What Supply Nation refers to as ‘black cladding’ occurs when a business that is not majority owned and controlled by Aboriginal and/or Torres Strait Islander people represents itself as an Indigenous-owned business, usually to take advantage of otherwise inaccessible Indigenous procurement programs.

Earlier this year, the Full Federal Court upheld ASIC’s appeal in its case against ACBF Funeral Plans Pty Ltd which found that ACBF had misrepresented that it was Indigenous-owned or-managed to its Aboriginal customers when in fact no members of management or shareholders identified as Aboriginal. With state and federal Indigenous procurement targets set to increase, businesses entering into procurement or joint venture contracts with Indigenous organisations should conduct adequate due diligence to ensure they avoid the reputational, legal and financial consequences of engaging with a ‘black cladded’ business and promote Indigenous ownership.

ACCC ramping up greenwashing enforcement

Having spent 18 months conducting internet sweeps and undertaking investigative activities, late last year the ACCC published its green claims guidance and took enforcement action against a yoghurt manufacturer for representations that its yoghurt containers were made 100% from plastic collected directly from the ocean when the plastic was collected from coastal areas in Malaysia. The ACCC’s concerns were that the representations deprived customers of the opportunity to make informed purchasing decisions. We expect the ACCC will continue its scrutiny of sectors the subject of last year’s internet sweeps.

EU-based ESG legislation

The proliferation of EU-based ESG legislation will impact Australian businesses that are exposed to EU markets through their operations, supply and value chains. Impacts include heightened standards for ethical business conduct, including human rights and environmental due diligence, ‘ecodesign’ product standards and the imposition of carbon tariffs.

Whether directly or indirectly in scope of the EU’s raft of sustainability regulations, Australian businesses with a high dependence on supplying to or trading in EU markets should assess their readiness by understanding the scope of uplift required to existing practices. Doing so early may also provide a competitive advantage, allowing Australian businesses to remain attractive as suppliers and business partners. Conversely, delay will mean limited time within which to design new or adapt existing processes to meet the new standards which may ultimately expose the business to potential loss of EU generated revenue streams.

For more on how key EU regulations are affecting Australian businesses, see ESG regulatory trends: the likely impact of the EU’s extensive ESG laws on Australian businesses.

Key takeaway

In-house legal teams have a critical role in supporting organisations through this transition period. It is imperative that in-house legal teams understand the requirements of Australian ESG regulation as well as international regulatory developments across a range of ESG issues that will have legal, commercial and operational implications.