Keeping Up with ESG in Australia - November 2023

Welcome to the November 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 release of the Australian Government’s Sustainable Finance Strategy consultation paper and consideration of biodiversity loss and nature-related risks become more prevalent in the corporate context.

Key highlights

1. In the spotlight: The Australian government has released its consultation paper on Sustainable Finance Strategy
2. New Joint Memorandum of Opinion on nature-related risks and directors' duties
3. ACT Government to legislate protection of the right to a clean, healthy and sustainable environment
4. Western Australia recycles its previous Aboriginal Heritage Act
5. Climate litigation update: preliminary discovery application against a big bank for climate change and biodiversity loss risk management concerns; UK Court of Appeal has refused to hear ClientEarth’s derivative action against Shell’s board of directors

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In the spotlight: The Australian government has released its consultation paper on Australia’s Sustainable Finance Strategy

On 2 November 2023, the Australian government released its consultation paper on its proposed  Sustainable Finance Strategy (Strategy). The Strategy aims to help mobilise the private investment required for Australia’s transition to net zero, so that Australian entities can access capital and pursue business opportunities that support the transition and are aligned with positive sustainability outcomes.

The release of the consultation paper is part of a developing global focus on ‘sustainable finance’ – being, financial flows that integrate considerations of impacts on ESG. Consistent with global practice, it is intended that the Strategy will adopt a ‘climate first’ approach to sustainable finance reforms, recognising the international efforts to embed climate risks and opportunities into mandatory reporting regimes. The Strategy also considers biodiversity and nature-related issues, reflecting the steadily growing interest in this area.

The impact of the Strategy will be far-reaching and has the potential to significantly influence all Australian sectors (not just the finance sector) and the Australian economy more generally. There are a number of considerable drivers for the private sector to engage in sustainable finance, including (among other things) to:

• ensure alignment with ESG policies and targets, including the UN Sustainable Development Goals;
• meet growing investor expectations and create social licence;
• fund sustainability improvements for existing operations or the development of new green projects; and
• enable diversification of investor and/or lender-base.

The strategy is broadly split into 3 pillars:

Improve transparency on climate and sustainability ensuring that markets have access to high-quality, credible, and comparable information to enable assessment of financial risks that sustainability issues pose and the impact of firms on the climate and environment

Financial system capabilities supporting financial regulators to address the impacts of climate change on businesses and the financial system.

Australian Government leadership and engagement The Government will take a leading role in supporting the development of sustainable finance markets and shaping international developments.

The consultation paper suggests that at a minimum, Australia should have a robust sustainable finance regime that ensures Australian firms remain competitive in global capital markets. An ambitious aim would be for Australia to leverage the strengths of our financial markets and offer opportunities to invest in the industries and technologies that will underpin a prosperous, low emissions future for Australia and our global partners.

While the Strategy’s proposals are largely still in early development stages, legislative outcomes in the short term may be forthcoming. For example, the financial disclosures regime for the largest listed and unlisted companies are proposed to commence on 1 July 2024 (see our note on the release of the draft AASB climate reporting standards here). Consultation closed 1 December 2023, and will help inform ongoing policy development and regulatory engagement on sustainable finance in Australia. After considering stakeholder feedback, the Government will publish an implementation roadmap for the strategy.

For more, listen to our The Third Wheel podcast episode.

Listen here

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New Joint Memorandum of Opinion on nature-related risks and directors' duties

On 24 October 2023, Barrister Sebastian Hartford-Davis and Senior Solicitor Zoe Bush released a new Joint Memorandum of Opinion titled ‘Nature-related risks and directors’ duties’. Instructed by Climate Change Investment and Advisory Firm, Pollination Law, the Opinion states (among other things) that Directors should at least identify the company’s nature-related dependencies and impacts and consider their potential risk of harm - where “harm” is understood not just in terms of financial interests, but more broadly in relation to any of the interests of the company whether financial or otherwise (including reputational). It draws support from two international developments (the Kunming-Montreal Global Biodiversity Framework and the Taskforce for Nature-related Financial Disclosures), both which expect the proactive disclosure of nature-related risks, dependencies and impacts

The Opinion emphasises that risks to companies arising from nature-related dependencies and impacts may be regarded as foreseeable at the present time, and advises that failing to consider nature-related risks of harm could mean Directors are found liable for breaching their duty of care and diligence. The Opinion follows the ‘Hutley Opinion’, released in 2016 by Noel Hutley and Sebastian Hartford-Davis, which similarly found an obligation existed for directors when it came to considering and responding to climate-related risk. The original Hutley Opinion, and supplementary opinions that followed, heightened awareness of the implications for business of climate-related risk, and the scope of response required by company Directors.

Herbert Smith Freehills has released a toolkit for corporate actors on navigating the emerging regulatory landscape designed to protect nature and biodiversity.

Read here

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ACT Government to legislate protection of the right to a clean, healthy and sustainable environment 

The ACT has proposed the first Australian legislation recognising the right to ‘a clean, healthy and sustainable environment’ as part of its human rights framework, reflecting the UN General Assembly declaration of this as a universal human right on 28 July 2022.

The increasingly widespread recognition of a healthy environment as a human right underscores that companies should consider the interactions and interdependencies between environment protection, biodiversity, human rights and sustainable development (and in particular to consider environment-related human rights impacts) in developing their approach to regulatory compliance and human rights due diligence.

In our note at the link below, we explore potential implications of the new bill, where it fits in with the Australian and global context on the right to a healthy environment, and considerations arising for business.

Read more

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WA recycles its previous Aboriginal Heritage Act

On 15 November 2023, the Western Australian Government repealed the Aboriginal Cultural Heritage Act 2021 (WA), which came into force on 1 July this year. The repeal of the 2021 Act and reintroduction of the previous act with amendments represent a further significant change in statutory obligations for land users in Western Australia. Although there will no longer be any positive statutory obligation for land users to consult with Traditional Owners or to conduct due diligence assessments prior to commencing activities, it is recommended that the standards of engagement and consultation introduced under the 2021 Act continue to be followed.

Although legislative change in this area in Western Australia may now stabilise for some time, in the wake of the Senate Inquiry on Juukan Gorge, the Federal Government has flagged that it will be seeking to reform the federal heritage framework. We also note Commonwealth environmental laws and policy are currently undergoing a significant review and reform process, including the EPBC Act, with an objective to better protect, restore and manage Australia’s environment and heritage.

To read more on the amendments and new Guidelines to assist in understanding their operation, see our note below.

Read more

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Climate litigation update

Federal Court preliminary discovery application against major bank regarding biodiversity loss and climate change risk management concerns.

On 9 November 2023, a long-standing shareholder of a major Australian bank filed an application for preliminary discovery in the Federal Court, seeking access to the bank’s risk management frameworks. The shareholder is seeking information on the bank’s management of risks relating to climate change and biodiversity loss, which it regards as material risks that could have a ‘material impact, both financial and non-financial on the institution or on the interests of depositors and/or policyholders’.  The shareholder alleges it is unclear from the bank’s recent Annual Report whether climate change and biodiversity loss are addressed and managed as material risks.

The application could be viewed as an extension of the approach in the recently settled Federal Court class action, O’Donnell v Commonwealth, concerning disclosure of climate change risk when investing in Exchange-traded Australian Government Bonds (read more in our October update). With this new application, we understand is the first time in Australia, if not globally, a shareholder has sought access to risk management information concerning both climate change and biodiversity loss.

Key takeaways

• This proceeding reflects the increasing expectations around nature and biodiversity-related disclosures and the relationship between climate change and biodiversity.
• Biodiversity risk disclosure and management are increasingly important given entities may have widespread exposure to, and investment in, sectors posing biodiversity related-risks, producing both biodiversity dependencies and impacts. This importance is underscored by the recent release of the voluntary disclosure framework by the Taskforce on Nature-related Financial Disclosures (TNFD) (read more in our September update). See also our Toolkit why think about Biodiversity in the Corporate Context.

UK Court of Appeal has Refused to Hear ClientEarth’s Derivative Action against Shell’s Board of Directors regarding management of climate risk

On 14 November 2023, the UK Court of Appeal prevented ClientEarth continuing a derivative action against Shell Plc (Shell) under section 260 of the Companies Act 2006 (UK) (Companies Act). This appeal affirmed two High Court decisions from July 2023 and May 2023, bringing to an end a world-first action attempting to hold directors personally liable for climate risk management.

ClientEarth sought to challenge Shell’s directors’ response to climate change risks, alleging the directors breached directors duties by failing to (i) adopt and implement a climate change risk management strategy which accords with the Paris Agreement; and (ii) comply with a Dutch court order to meet group-wide emissions targets. ClientEarth were unsuccessful in the High Court. For further detail on the July 2023 High Court decision, see our here.

The Court of Appeal dismissed the appeal. It found that ClientEarth’s small shareholding and the court’s general reluctance to interfere with directors’ decision-making, warranted discontinuance of the action, in circumstances where ClientEarth had failed to adduce sufficient evidence to establish a prima facie case for either breach of duty.

Key takeaways

• Climate change risk including litigation risk remains relevant for consideration by directors globally and in Australia.
• However, the decision indicates that there may be barriers to a shareholder successfully bringing a derivative action, including onerous evidentiary burdens, and the court’s unwillingness to intervene in directors’ commercial decisions.

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For clients with a presence in the United Kingdom, South African Development Community or Asia, we also publish trackers of ESG publications and developments for these regions at  ESG Notes.

ESG thought leadership

To read more of our ESG thought leadership, please see:

• Toolkit: why think about biodiversity in the corporate context? 
  In a new series of articles, we explain how business can navigate the emerging regulatory landscape designed to protect nature and biodiversity
• 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

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Written with assistance of Paige Mortimer (Environment, Planning & Communities), Zulema Townsend and Suzannah Hewson (Head Office Advisory Team), Georgia Gee (Disputes), Sandra Nguyen and David Lim (Project Finance)

 

Key ESG contacts

Please contact your usual ESG contact or the below.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*on parental leave