Welcome to the June 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 Australian carbon crediting and Safeguard Mechanism reforms.
Key highlights
- Australia to introduce climate-related financial reporting from 2024
- In the spotlight: Carbon credit and Safeguard Mechanism reforms progress
- WA Aboriginal Cultural Heritage reforms set to commence 1 July 2023
- Science Based Targets Network releases first science-based targets for nature
- Hydrogen Headstart Program to drive Australian hydrogen industry
- Energy Transition: Net Zero Authority established
- ESG-related disclosures remain a focus for the regulators
- UK ESG litigation: consequences for Australia?
Australia to introduce climate-related financial reporting from 2024
On 27 June 2023, the long-awaited second Consultation Paper on the Government’s proposed mandatory climate-related financial disclosure regime in Australia was released.
The proposed Australian regime is expected to commence from 1 July 2024 for Australia’s largest companies, with phased implementation from thereon. The regime will be aligned with the Task Force on Climate-Related Disclosures (TCFD)’s four key themes of governance, strategy, risk management, targets and metrics, and is broadly aligned with IFRS S2 Climate-related Disclosure, the new global standard for climate-related financial disclosure issued by the International Sustainability Standards Board (ISSB), which was released a day earlier on 26 June (along with IFRS S1 Sustainability Disclosure Standard).
The consultation period is relatively short, with submissions closing on 21 July 2023.
We will be releasing a detailed briefing on the proposed Australian climate-related financial reporting regime shortly, along with other materials. In the meantime, to read more on global progress towards harmonised ESG reporting with the release of the final ISSB standards, see our update below.
In the spotlight: Carbon credit and Safeguard Mechanism reforms progress
Over the past year, we have seen significant developments in Australia’s climate change ambitions and regulatory frameworks. The Safeguard Mechanism and Australia’s carbon crediting scheme will both play key roles in Australia’s pathway towards net-zero carbon emissions by 2050.
Carbon credit reforms
We continue to see more and more Australian companies setting greenhouse gas emission reduction and net-zero targets. With many companies anticipating a need to use offsets (carbon credits) to achieve those targets, it is important for companies to understand the reforms and impacts on their business.
In December 2022, the Chubb Independent review of Australian Carbon Credit Units (ACCUs) provided its recommendations for review of the ACCU scheme. It found the scheme was fundamentally well-designed when introduced 11 years ago, however made 16 recommendations for improvement.
In June 2023, the Commonwealth Government released its Implementation Plan for the recommendations, following some initial actions undertaken in the meantime.
Between June to September 2023, the Government will consult on priority reforms, including:
- Proponent-led methodology creation: The scheme will shift to proponents leading development of new project methodologies, supported by the new Carbon Abatement Integrity Committee.
- Methodologies in; methodologies out: The Government will prioritise developing a new Savanna Fire Management method and Integrated Farm and Land Management method, as well as new/varied landfill gas methods. Beyond this, the Government does not intend to actively develop new methods. It has ceased developing the hydrogen method, the planned variation to the carbon capture and storage method, and the planned variation to the transport method to incentivise sustainable aviation fuel and renewable diesel.
- Increased transparency: including what additional ACCU information will be made public e.g. unit holdings and project information.
- Free, prior and informed consent (FPIC) of Native Title interest holders: The Government will consult with stakeholders on a recommendation to amend legislation to remove the option to conditionally register ACCU projects on Native Title lands, prior to obtaining consent of Native Title interest holders.
Safeguard Mechanism reforms commence 1 July 2023
On 1 July 2023, the reforms to the Safeguard Mechanism commence. The reforms are complex, with many aspects not yet finalised.
The purpose of the reforms is for the approximately 219 facilities covered by the scheme to contribute their proportionate share of greenhouse gas emissions reduction, as Australia progresses towards its interim emissions target of 43% below 2005 levels by 2030, and target of net zero by 2050. Every facility covered by the Safeguard Mechanism has an individually set baseline, which is the facility’s target for net Scope 1 greenhouse gas (CO2e) emissions. Baselines will reduce over time, generally at the rate of 4.9% to 2030, unless a discount rate applies for facilities determined to the Trade-Exposed Baseline Adjusted facilities. The regime includes new flexible compliance measures, including use and borrowing of Safeguard Mechanism Credits and multi-year monitoring periods to provide a grace period for implementation of emission abatement activities.
On 5 May 2023, the Government registered new Safeguard Mechanism rules, which provide further detail on the Safeguard Mechanism reforms however many aspects remain uncertain.
For further information on the reforms, please contact your usual HSF contact and see our notes on the passing of Safeguard Mechanism Bill (April 2023) and the proposed reforms (January 2023).
WA Aboriginal Cultural Heritage reforms commence 1 July 2023
On 1 July 2023, the highly-anticipated Aboriginal Cultural Heritage Act 2021 (WA) (ACHA) commence. The ACHA reforms the protection of Aboriginal Cultural Heritage in Western Australia, replacing the 1972 act under which the destruction of sacred caves in the Pilbara was approved. The ACHA:
- broadens the protection of Aboriginal cultural heritage to both intangible and tangible Aboriginal Cultural Heritage (which includes Aboriginal places, objects, cultural landscapes and ancestral remains);
- includes a risk-based approach to protection against harm, as opposed to an impact based approach which generally is the status quo across Australia; and
- has a tiered framework for authorisation of activities that may harm Aboriginal cultural heritage, which requires a person to undertake a due diligence assessment prior to commencing most activities and potentially develop a management plan in consultation with Aboriginal parties.
To read more, see our blog post below.
The Commonwealth Government is currently in the early stages of reforming its Aboriginal cultural heritage laws, which we anticipate may reflect the increased level of protection sought to be provided by the ACHA (including protection of intangible heritage).
Science Based Targets Network releases first science-based targets for nature
As major companies become familiar with climate-related risk reporting, the conversation globally and within Australia, is broadening to the consideration of a company’s impacts and reliance on the environment as a whole (with climate being only one aspect). Recent developments include the recent adoption of the Kunming-Montreal Global Biodiversity Framework, the development of Australia’s Nature Positive Plan and proposed nature repair market, and the Taskforce on Nature-Related Financial Disclosures (TNFD) framework, which is expected to be released later this year.
On 24 May 2023, The Science Based Targets Network (SBTN) launched its first science-based targets for nature, building on the existing science-based targets for climate released in 2015. The targets provide companies with the tools and guidance to assess their environmental impacts and set targets to address those impacts in five key action areas: freshwater, land, ocean, biodiversity and climate.
We continue to watch this space as regulator and shareholder expectations develop in relation to biodiversity. To read more, see our updates below.
Read more on Nature repair market
Hydrogen Headstart Program to drive Australian hydrogen industry
In the 2023 Federal Budget, the Australian Government announced a $2 billion plan to support Australia's development of the hydrogen industry. The program aims to bridge the commercial gap for early hydrogen projects by providing 2-3 large scale hydrogen projects, that are expected to deliver up to a gigawatt of electrolyser capacity by 2030. The program is expected to be open for expressions of interest in the first quarter of 2024 and will use a competitive process to select large Australian-based projects producing either hydrogen from renewable energy or derivative products made from hydrogen produced renewables. If successful, the program will receive funding as a production credit to cover the commercial gap between the cost of hydrogen produced from renewables, and its market price.
The Hydrogen Headstart Program will play a vital role in developing Australia's hydrogen industry, particularly amidst rising concerns that the release of the U.S. Government's Inflation Reduction Act may leave Australia's hydrogen industry in the dust.
Energy transition: Net Zero Authority established
The Albanese Government has committed $83.2m in the Federal Budget to establishing the Net Zero Authority, which will:
- support workers in emissions-intensive sectors to access new employment, skills and support as the net zero transformation continues;
- coordinate programs and policies across Government to support regions and communities to attract and take advantage of new clean energy industries and set those industries up for success; and
- help investors and companies to engage with net zero transformation opportunities.
The Net Zero Authority will be legislated, following detailed design in consultation with stakeholders. The Government has announced that the Net Zero Economy Agency will commence in the Department of the Prime Minister and Cabinet from 1 July 2023 to establish the Net Zero Authority and begin its core functions which include engaging with key regions, industries and investors. This is in line with the global trend of Governments across the world showing more willingness to support net zero targets, reflecting that over 150 countries have committed to net zero by 2050, including the majority of Australia’s trading partners.
ESG-related disclosures remain a focus for the regulators
FY23 was a notable year for regulatory surveillance of ESG-related disclosures. In May, the Australian Securities & Investments Commissions (ASIC) published a report, which found that between 1 July 2022 and 31 March 2023, ASIC obtained 23 corrective disclosure outcomes, issued 11 infringement notices and commenced 1 civil penalty proceeding in relation to ‘greenwashing’. ASIC have also recently highlighted a number of focus areas for directors to consider when preparing their 30 June reports. In particular, ASIC has emphasised that companies must disclose the impact of uncertain economic and market conditions including (among other things) climate change and the ‘net zero’ transition. Separately, ASIC has flagged that auditors may need to report to ASIC suspected inadequate or misleading disclosures, including where there is possible greenwashing. As FY23 reaches a close, ASIC has already made clear in its Enforcement Priorities for 2023, that greenwashing will remain a focus for the year ahead and foreshadowed an increased focus on ‘greenhushing’, where companies are not transparent about their environmental goals and interactions.
Separately, the Treasurer recently released an updated Statement of Expectations for the Australian Prudential Regulation Authority (APRA), requiring for the first time APRA to consider risks related to climate change as part of its work. This includes promoting transparency in relation to financial risks and the adoption of climate reporting standards. In response, APRA issued its Statement of Intent, noting that it would continue to promote prudent practices and transparency in relation to climate-related risks in the Australian financial system, consistent with the Government’s sustainable finance reforms.
UK ESG litigation: consequences for Australia?
ESG is also a hot topic in the litigious space, with a number of noteworthy developments coming out of the UK that may have implications in Australia and globally.
ClientEarth v Shell plc & Ors
On 12 May 2023, the UK High Court refused permission for ClientEarth to continue the derivative action against the Board of Shell. The derivative claim was a “world-first” claim against the directors of Shell for alleged breaches of their duties in relation to climate change. In refusing permission, the High Court emphasised the stringent test for derivative action, particularly the “limited and restricted circumstances” in which it was appropriate to authorise the continuation of the derivative action against directors.
Although the Court held that ClientEarth had established a prima facie case that Shell faced material and foreseeable risks as a result of climate change, this did not demonstrate a prima facie case of an actionable breach. The Court highlighted that there was no universally accepted methodology by which Shell could achieve its climate risk management and emissions reductions targets and further emphasised that the proper balancing of relevant factors is a classic management decision with which the court is ill-equipped to interfere.
The Court also considered the support Shell’s energy transition strategy received at the 2023 annual general meeting and concluded that “the level of member support for the ETS and its progress would count strongly against the grant of permission”. The decision reinforces the significant degree of discretion afforded to company directors when managing their company (especially one as large and complex as Shell). It also suggests that a court may be critical of such a claim being brought by a minority shareholder when the claim is alleged to be on behalf of members as a whole (particularly where there is little evidence of other members supporting the claim, and if the shareholder appears to have an ‘ulterior purpose’ of promoting a policy agenda).
On 19 May 2023, ClientEarth announced that they had been granted an oral hearing to seek permission to proceed with its claim, meaning that the UK High Court will be asked to reconsider its initial decision.
We discussed this decision in depth in our HSF note published last month.
United Kingdom Advertising Standards Authority’s greenwashing decisions
On 7 June 2023, the UK Advertising Standards Authority (ASA) found that various advertisements for Petronas, Repsol and Shell were misleading or amounted to greenwashing.
The ASA found that the advertisements gave the “impression” that each of these businesses offered lower emissions products overall, given the advertisements did not disclose their substantial ongoing emissions and production of oil and gas. For example, the Shell advertisements promoted the renewable electricity supplied by Shell Energy. The ASA held that the advertisements were likely to mislead if they did not include material information on the proportion of Shell’s overall business model that is made up of low-carbon energy products. In all three rulings, the ASA highlighted that emissions-intensive products still dominated the businesses of the three companies concerned.
Australian businesses should be cognisant of these decisions when promoting their “green” initiatives, particularly the risk of misrepresentation by omission.
For our Global clients, see our Tracking ESG in Asia blog (May 2023)
and our South African Development Community ESG Tracker (June 2023)
ESG thought leadership
To read more of our ESG thought leadership, please see:
- The Third Wheel Podcast Series: ESG in Australia - listen to our latest episode – Is the Australian Modern Slavery Act moving into a new phase?
- ESG Notes and Climate Change Notes,
- ESG, Sustainability and Responsible Business offering
- Unlocking ESG Investment in Australia
| Written with assistance of Paige Mortimer and Anasha Flintoff (Environment, Planning & Communities), Zulema Townsend (Head Office Advisory Team), Edward Einfeld and Jane Wang (Disputes) and Tia Liu (Project Finance) |
Key ESG contacts
Please contact your usual ESG contact or the below.
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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.