Welcome to the May edition of Herbert Smith Freehills’ Australian ESG bulletin, ‘Keeping Up with ESG’.
Our monthly ESG bulletin provides a targeted snapshot of key developments we see as reflecting the “must know” trends in the Australian market. In this edition, we spotlight the growth of shareholder activism and the evolution of shareholder tactics.
Key highlights
- In the spotlight: The growth of shareholder activism and the evolution of shareholder tactics
- Carbon crediting reform focuses on integrity
- Challenge to financing and investment stewardship on the basis of misalignment with ESG policies
- Credibility and clarity prioritised for sustainable investors
- A review on Modern Slavery reporting
- Gender diversity statistics show persisting impact and room for improvement
In the spotlight: The growth of shareholder activism and the evolution of shareholder tactics
Emerging shareholder activism approaches
Activism in the ESG space is continuously evolving, and so far in 2023, we have seen some unique developments in shareholder activism at Annual General Meetings (AGMs).
Earlier this year, retail shareholders of two major ASX listed oil and gas companies filed stand-alone members’ statements under s 249P of the Corporations Act 2001 (Cth) (Act). Under s 249P, 100 members or members with at least 5% castable votes, may request a company give all its members a statement prepared by the members, making a request about a resolution that is proposed to be moved at an AGM, or any other matter that may be properly considered at the AGM. Typically, a s 249P members’ statement will accompany a requisitioned resolution and set out the members’ reasons for the requisition. However, in the case of the relevant companies, some of the statements they received related to other (ordinary) items of business to be considered at the AGM, including
remuneration reporting and director elections. This is the first time in Australia that we have observed large listed companies receiving standalone members’ statements separate from requisitioned resolutions.
The standalone members’ statement with respect to the first company (led by Market Forces) urged members to vote against the resolution to adopt the company’s 2022 Remuneration Report, alleging the remuneration structure was inconsistent with the company’s claimed support for the climate goals of the Paris Agreement.
Similarly, for the second company, the Australasian Centre for Corporate Responsibility (along with institutional investors Vision Super and Betashares) led the filing of a members’ statement calling on members to vote against the re-election of three existing directors on climate-related grounds. However, the statements did not meet the requirements for validity under the Act so were not included in the Notice of Meeting.
In addition to these standalone statements, this year’s AGM season has seen more familiar activist approaches. As with previous years, the relevant companies received requisitioned resolutions (together with accompanying members’ statements) calling on each company to disclose how its capital allocation to oil and gas assets will align with a scenario in which global energy emissions reach net zero by 2050.
Shareholder activism increasing
This steady growth in shareholder activism is reflected in the latest statistical analysis report by Insightia, which provides a snapshot of global trends of shareholder activism in the first quarter of 2023. The report found that:
- Globally, the level of shareholder activism has risen compared with the same period last year, with the number of companies publicly targeted by activists increasing from 386 to 409 (approximately +6%).
- The most targeted industries are industrials and financial services, with financial services seeing a 33% increase from Q1 2022. This included 4 Australian-based financial services companies (an increase from 2 in Q1 2022).
With shareholder climate activism here to stay, companies should remain alert to new and emerging activism approaches on the horizon. It is important for companies that may receive activist attention to be prepared in the event they receive requisitions and/or members’ statements and consider how these will be approached, including in relation to assessing the validity of such statements and responding to them.
Carbon crediting reform focuses on integrity
Under the May 2023 full budget, the Government will provide $18.1 million over 2 years from 2023-24 to reform the Australian Carbon Credit Units (ACCU) scheme. The funds are to implement priority reforms following recommendations from the Chubb Independent Review of ACCUs. A key theme from the Chubb Review recommendations was to improve integrity of ACCUs. Of the $18.1 million, $3.5 million is allocated to establish a Carbon Abatement Integrity Committee to ensure method integrity for ACCUs.
Businesses using carbon crediting should continue to watch this space as the Government implements the findings of the Chubb Review and the associated Safeguard Mechanism reforms.
We discuss the role of carbon and biodiversity offsets in meeting net zero and nature positive goals in our latest episode of the Third Wheel Podcast Series: ESG in Australia.
To listen – It's an Onion! Australia’s carbon market
Challenge to financing and investment stewardship on the basis of misalignment with ESG policies
On 4 April 2023, seven Tiwi Islands and Larrakia Traditional Owners made human rights grievance complaints against twelve Australian and international banks. The complaints relate to the loaning of US$1 billion for offshore gas projects, alleging breaches of international human rights standards and the banks’ own policies. Similar complaints have also been filed against superannuation funds regarding their investment in the projects.
We anticipate that this increased scrutiny of alignment of financing and investment activities with publicised ESG policies will continue.
Activist group Market Forces have been particularly vocal in this space, publishing a recent report criticising Australia’s largest super funds for failing to, essentially, ‘walk the talk’. The report states that super funds are claiming to engage with fossil fuel companies to drive climate action, without demonstrating the adoption of any effective engagement. It claims that this misalignment of messaging and action can expose companies to legal risk.
Credibility and clarity prioritised for sustainable investors
ISSB focusses on climate-related disclosures for first reporting year
On 4 April 2023, the International Sustainability Standards Board (ISSB) announced transitional relief, including that companies in their first year of ISSB reporting will only need to focus on applying the first two Standards—S1 (sustainability) and S2 (climate). Focussing on climate-related risks and opportunities aims to help companies prioritise high-quality reporting practices, providing investors with better information for decision-making. Full reporting on sustainability-related risks and opportunities will be required from the second year onwards.
Australian government to co-fund sustainable finance taxonomy
In our April edition, we noted that the Australian Sustainable Finance Institute (ASFI) released its final taxonomy recommendations report. Under the May 2023 full budget, the Government will now provide $1.6 million in 2023–24 to support the initial development of a sustainable finance taxonomy, in partnership with industry through ASFI. The Government intends the taxonomy will bring 'credibility and clarity' to attract more sustainable investment in Australia.
To read our recent thought leadership on sustainable finance in Australia, please see our snapshot below.
A review on Modern Slavery reporting
Several independent reports have been published in anticipation of the Australian Modern Slavery Act 2018 (Cth) (Act) statutory review, which is soon to be tabled in Parliament.
In April 2023, the Australian Council of Superannuation Investors (ACSI) released a report 'taking stock' of ASX200 companies' third year of modern slavery reporting under the Act. The report indicates that the Act has successfully driven action to implement the foundations of modern slavery risk management. However, it notes that most companies are not moving past a ‘compliance-focused mindset’, and consequently, statements are still lacking meaningful and detailed disclosure.
Also last month, the Business and Human Rights Centre released a report based on business surveys and focus groups, finding that there is a 'strong appetite for reform' of the Act, including establishment of an Anti-Slavery Commissioner, harmonisation with international standards, mandatory due diligence requirements, and introduction of financial penalties. These findings are consistent with some of the issues raised in the Australian Government’s issues paper released in August 2022 for public comment.
Under the May 2023 full budget, the Government will provide $8 million over 4 years from 2023–24 (and $2.0 million per year ongoing) to establish an Anti-Slavery Commissioner to work across Government, industry and civil society, to support compliance with the Act, to improve transparency in supply chains, and to help tackle modern slavery in Australia and overseas.
We anticipate that along with legislated reforms, investors will continue to expect improvements in modern slavery disclosure statements. To read more about the Act's public consultation process held in 2022, please see our legal briefing below.
Gender diversity statistics show persisting impact and room for improvement
A number of reports released in April 2023 have highlighted gender diversity gaps in the workplace and call out the role of policy in reducing the identified gaps and their impact on working women.
- The Australian Institute of Company Directors’ ‘Gender Diversity Progress Report’, and the Governance Institute’s ‘2023 Board Diversity Index’, show statistics of gender diversity among boards of ASX-listed companies. While there has been improvement in the number of women on board seats over the past year (up to 35%), the reports highlight that there remains gap between non-executive directors on ASX 300 boards who are women, compared with executive directors.
- The Australian Government’s Treasury Working Paper, the ‘Children and the Gender Earnings Gap: Evidence for Australia’, identifies an existing ‘motherhood penalty’ from which women's earnings fall by an average of 55% in the first five years of parenthood, while men's earnings are ‘not significantly affected’. Part of the findings included that while mothers with workplace flexibility prior to having children are less likely to cease working after the fact, these women are more likely to experience a higher financial penalty after having children, with the Working Paper positing that this may be due to them being in lower paying jobs or reduced opportunities for promotions.
These published statistics align with the current legislative and stakeholder focus on measures to address the gender pay gap. They also provide further examples of the continuing need for businesses to focus on improving gender diversity at the highest levels of the organisation. As identified in both publications, this focus should include the adoption of policies that involve active steps which seek to support working women and increased gender diversity in the workplace.
ESG thought leadership
To read more of our ESG thought leadership, please see:
- The Third Wheel Podcast Series: ESG in Australia
- ESG Notes and Climate Change Notes,
- ESG, Sustainability and Responsible Business offering
- Unlocking ESG Investment in Australia
| Written with assistance of Paige Mortimer and Shi-Mei Ewing (Environment, Planning & Communities), Zulema Townsend and Anna Coroneo (Head Office Advisory Team), Georgia Roy (Disputes), Marin Zubonja and Darcy Moffat (Employment, Industrial Relations & Safety) and Tia Liu (Project Finance) |
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Disclaimer
The articles published on this website, current at the dates of publication set out above, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action.