Keeping up with ESG in Australia - March 2024

Welcome to the March 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 new ‘right to disconnect’ for Australian employees, and Australian mandatory climate-related disclosure developments.

Key highlights

1. The new right to disconnect: Your employee can’t come to the phone right now, they’ve disconnected
2. Herbert Smith Freehills’ submission on exposure draft legislation for the Australian mandatory climate-related disclosure regime
3. EU fails to pass EU corporate sustainability due diligence law
4. Analysis of ASX200 board charters reveals increase in companies with a Sustainability Committee
5. Release of ASX Corporate Governance Principles and Recommendations (5th edition) for consultation
6. Climate change litigation update: The Supreme Court of New Zealand overturns Court of Appeal’s decision in Smith v Fonterra and ExxonMobil proceedings against activist investors

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The new right to disconnect: Your employee can’t come to the phone right now, they’ve disconnected

What is the RtD?

Australian employers will soon have to think twice before contacting employees outside of their working hours, with the impending commencement of the right to disconnect (RtD). The RtD passed Parliament on 12 February 2024, as part of the Federal Government’s most recent suite of workplace relations reforms and is due to commence operation on 26 August 2024. Small business will be exempt for the first 12 months of its operation. At a high-level, the RtD gives employees a positive right to reasonably refuse to monitor, read or respond to work-related contact which is outside of their working hours. This means that calls and emails from employers and other work related parties such as clients and suppliers, may be able to go unchecked outside of working hours unless that contact is:

• reasonable;
• required under a law of the Commonwealth, State or Territory; or
• relates to matters involving Australia’s defence, national security or an operation of the Australian Federal Police.

Whether contact is ‘reasonable’ will require consideration of various factors, including the reasons for the contact (or attempted contact), the method of the contact and disruption that it causes the employee, the employee’s remuneration and whether it compensates them for their availability to be contacted, the employee’s personal circumstances, and their role and responsibilities.

What else will the RtD change?

Significantly, the RtD will constitute a protected attribute under the Fair Work Act 2009 (Cth). This means that employees who ignore unreasonable outside of hours contact from their employer cannot be subjected to a detriment. Key areas of risk may arise in the context of:

• the promotion (or non-promotion of employees);
• the giving of pay increases and bonuses; and
• performance management.

Employers should take care and seek legal advice in relation to any such decisions, particularly given the reverse onus in the general protections jurisdiction.  Additionally, employees will have the ability to make an application to the Fair Work Commission (FWC) for a ‘stop order’ to prevent employers penalising them for disengaging outside working hours.

What are other jurisdictions doing?

The RtD is not a new concept. It already exists in some enterprise agreements in Australia and other countries, including France, Belgium and Portugal, which have implemented similar, yet different, rights. Belgium, for example, passed a law in February 2022 allowing civil servants to switch off work-related contact that is received out of hours, without fear of repercussions. In France, the RtD laws include a requirement for certain employers to try and reach agreement with unions in relation to the operation of the RtD, or prepare related guidelines for their workforce if there is no relevant union.

What other changes have been introduced?

The Federal Government has continued its recent trend of workplace legislative reform, with the most recent tranche also including:

• a new statutory definition of ‘employee’ and ‘employer’ impacting independent contractors;
• casual employment changes;
• protections and minimum standards for digital platform and road transport workers; and
• changes to intractable bargaining powers.

For further information, see our detailed summaries of the RtD and the entire suite of the Closing Loopholes reforms below.

Read more

Read more on reforms

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Herbert Smith Freehills’ submission on exposure draft legislation for the Australian mandatory climate-related disclosure regime

In our January 2024 edition of Keeping up with ESG in Australia, we reported that Treasury had released its policy position and exposure draft legislation for the Australian mandatory climate-related disclosure regime. Consultation on the draft legislation closed on 9 February 2024. Herbert Smith Freehills made a submission to Treasury on the following key issues:

• The directors’ declaration should be phased in to reflect the lack of (reasonable) assurance during the initial transitional period.
• The modified liability regime should be expanded to include protection for broader forward-looking statements, namely transition plans, and disclosures reproduced outside of the sustainability report.
• Labelling of the “sustainability report” should be reconsidered given the implications for broader reporting on sustainability-related matters.
• Revisions to the draft legislation should be made to clarify applicability to foreign entities.
• Extending the proposed commencement date should be considered to allow for adequate preparation and to facilitate quality reporting.
• Safeguards should be included with respect to the Minister’s ability to expand the regime, most relevantly to ensure appropriate industry consultation and due process.

Public submissions made to Treasury (including our own) will be published on its website in due course.

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EU fails to pass EU corporate sustainability due diligence law

In our January 2024 edition, we provided an update on the European Council and European Parliament reaching a provisional agreement on the content of the Corporate Sustainability Due Diligence Directive (CS3D).

However, following a number of last minute abstentions and voting delays, on 28 February 2024 the CS3D failed to pass the European Council. CS3D, which establishes a corporate due diligence standard on sustainability issues for businesses operating in the EU (not only to the direct actions of the company, but also to their subsidiaries and supply chain), has faced criticism in relation to its scope, application and establishment of civil liability. Given the European Parliament has a deadline for approval of 15 March 2024 before the June elections, the timing – and future – of CS3D is currently uncertain.

For more on CS3D, read our notes below.

Read more

Read more

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Analysis of ASX200 board charters reveals increase in companies with a Sustainability Committee

In January 2024, Herbert Smith Freehills undertook analysis of ASX200 board charters, together with the Australian Institute of Company Directors (AICD), which revealed a 10 per cent increase in the number of dedicated Sustainability Committees within Australia’s largest listed companies since our last analysis in 2021. 82 of ASX200 companies now have a Sustainability Committee, up from 61 companies in 2021.

The increase in the number of dedicated Sustainability Committees indicates that environmental and sustainability-related issues are becoming core governance priorities among more ASX-listed companies and across various industries, including mining, energy, property, software, retail and transportation.

Our analysis also found that:

• 74% of the ASX50 companies reference “environmental impact” or consider the “environment” in their board charters;
• 20% of the ASX50 companies reference “climate” or “climate change” in their board charters;
• 68% of the ASX50 companies reference “sustainability”, “environment” or “ESG” in their board skills matrices; and
• 28% of the ASX50 companies reference “climate” in their board skills matrices.

Overall, our analysis points to a broader trend towards deeper integration of sustainability and ESG principles within corporate governance structures. The analysis will be published as part of the AICD’s second Climate Governance Study, scheduled for release in March 2024.

Read the analysis

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Release of ASX Corporate Governance Principles and Recommendations (5th edition) for consultation

On 27 February 2024, the ASX Corporate Governance Council released the highly-anticipated draft 5th edition of the ASX Corporate Governance Principles and Recommendations (5th edition) for consultation. The consultation period is open until 6 May 2024.

Consistent with Australian and overseas trends, updates to the 5th edition show a shift towards:

• recognising the importance of a company’s relationship with its stakeholders;
• focussing on Board capabilities needed to safeguard the future oversight of the business;
• the importance of diversity on the Board and throughout the workforce; and
• the increasing prominence of climate and sustainability reporting in Australia.

The 5th edition is currently anticipated to be issued in early 2025, to take effect for financial years commencing on or after 1 July 2025. You can read our article about the key changes from the 4^th edition (released in February 2019) and the potential impacts below.

Read more

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Climate change litigation update: The Supreme Court of New Zealand overturns Court of Appeal’s decision in Smith v Fonterra and ExxonMobil proceedings against activist investors

• The Supreme Court of New Zealand overturns Court of Appeal’s decision in Smith v Fonterra
• ExxonMobil proceedings against activist investors

Smith v Fonterra

On 7 February 2024, the Supreme Court of New Zealand handed down its decision, allowing the novel climate change claims to proceed to trial (judgment available here). This is a significant decision, as it is one of the first times that a court has recognised a possibility that tort law (and nuisance in particular) might be used to challenge the GHG emissions of a company.

Background to the claim

The claim was commenced by an elder of Ngāpuhi and Ngāti Kahu, Mike Smith, against seven corporate defendants, who the applicant claims are substantial GHG emitters across sectors such as dairy, energy and manufacturing, and therefore, contribute materially to climate change.

The applicant alleges the defendants’ emissions have, and continue to, cause damage to his Whenua, and sites of cultural and historical significance for him and his Whānau and brought claims in: (1) public nuisance, (2) negligence and (3) breach of a proposed new “climate system damage” duty to cease contributing to damage to the climate system.

The applicant is seeking a declaration that the defendants’ emitting activities are unlawful and an injunction that either requires a peaking of net GHG emissions by 2025 and linear reductions to net zero by 2050 or immediate cessation of net GHG emissions.

In October 2021, the Court of Appeal found that all claims should be struck out.

Supreme Court’s decision and next steps 

The Supreme Court unanimously overturned the decision of the Court of Appeal and held that each of the applicant’s claims should be reinstated and proceed to trial. The Supreme Court focused on the public nuisance claim and found that the applicant had tenably pleaded interference with an actionable public right (e.g. public rights to health, safety, comfort, convenience). The Court did not accept that the difficulties in directly attributing the harm claimed by Mr Smith to the emissions of the defendants was fatal to the continuation the claim. The court did not separately consider the negligence and new climate duty claims, instead allowing those claims to proceed on the basis that their continuation would be unlikely to add materially to the cost, hearing time and judicial resources required to consider the primary public nuisance claim.

The next step is for the applicant to file an amended statement of claim and we expect it will still be some time until a trial.

ExxonMobil proceedings against activist investors

In January 2024, ExxonMobil filed proceedings in the US, blocking a climate resolution proposed by activist investors, Arjuna Capital and Follow This, from being put to a vote at Exxon’s May shareholder meeting. It is unusual for companies in the US to resort to Court proceedings to block a shareholder resolution, so the case is being followed closely.

In summary:

• The proposed resolution required Exxon to set Scope 3 emissions targets and dramatically accelerate the pace of its emission-reduction plans.
• Exxon alleged that activist investor groups have abused the process of proposing shareholder votes and that the proposal is "calculated to diminish the company's existing business".
• Exxon argued that the resolution violates SEC rules for investor petitions, because it is substantially similar to a proposal filed within the past five years, referring to proposals made by Follow This at past Exxon shareholder meetings, which were rejected by 72% of shareholders in 2022, and 90% of shareholders in 2023.

In February 2024, the activists withdrew the resolutions and promised not to resubmit the proposal in the future. However, Exxon is still proceeding with the claim and the activists have now filed motions to dismiss the complaint.

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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

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Written with assistance of Paige Mortimer (Environment, Planning & Communities), Zulema Townsend and Michael Tran (Head Office Advisory Team), Georgia Gee (Disputes), and Darcy Moffat and Rae Huang (Employment, Industrial Relations and Safety)

 

Key ESG contacts

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