Keeping Up with ESG in Australia – April 2024

Welcome to the April 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 progress towards mandatory climate-related financial reporting.

Key highlights

1. Australian Government tables climate-related financial reporting legislation into Parliament
2. ASIC publishes early guidance on the climate-related financial reporting regime
3. Australian Assurance Standards released for consultation
4. United States: SEC pauses implementation of climate disclosure rules
5. EU: Corporate Sustainability Due Diligence to become mandatory across the European Union and will apply to some foreign companies
6. Australia toughens foreign anti bribery and corruption laws
7. The results are in and there is a gender pay gap
8. ESG litigation update

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Australian Government tables climate-related financial reporting legislation into Parliament; early ASIC guidance on the climate-related financial reporting regime published; Australian Assurance Standards released for consultation

The Australian Government has tabled the highly-anticipated Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024 (Cth) into the House of Representatives, with Schedule 4 of the Bill dedicated to amending the Corporations Act 2001 (Cth) to introduce Australia’s new climate-related financial disclosures regime.

Much to the relief of many, the Bill has pushed back the phased implementation of the regime to 1 January 2025. We dive into the detail of the Bill in our article and limited podcast series below, as the mandatory climate-related financial disclosures regime continues its march towards becoming law.

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Reporting for Duties’ limited podcast series

On 23 April, ASIC published a keynote speech by ASIC Chair Joe Longo in which early guidance on the climate-related financial reporting regime was set out. Unsurprisingly, a key takeaway is that ASIC expects that entities should now be putting in place the systems, processes and practices needed to comply with the regime. This includes developing the necessary organisational and governance structures, gathering data, keeping the necessary records, and ensuring the necessary support and capabilities are available. ASIC will develop further regulatory guidance and resources and undertake surveillance of the first reporters (the largest firms) to identify learnings that can be shared with the market. ASIC also recognises the momentum that is gathering on other ESG-related topics beyond climate – and indeed the Bill allows the Minister to make legislative instruments to require additional disclosures on other environmental sustainability-related financial matters – and so encourages entities to ensure that any systems and processes developed for the climate reporting regime be agile enough to incorporate broader sustainability disclosures in coming years.

The Bill also provides that the audit and assurance requirements of the incoming mandatory regime will be phased in, in accordance with standards to be developed by the Auditing and Assurance Standards Board (AUASB). Assurance is important and necessary under the incoming mandatory regime because it helps to enhance the credibility of information that is being disclosed.

In March 2024, the AUASB released a consultation paper to gather feedback on a potential assurance pathway, which will close on 3 May 2024.  Our above linked insight article and limited podcast series ‘Reporting for Duties’ discuss the role of assurance under the incoming mandatory regime.

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United States: SEC pauses implementation of climate disclosure rules

While progress toward mandatory climate reporting remains on track in Australia, the United States has suffered a setback in its implementation of the Securities and Exchange Commission’s (the SEC) Climate Disclosure Rules.

Shortly after the Rules were adopted, a federal court temporarily halted its implementation on the application of two oil and gas companies that claimed that the Rules were costly and arbitrary, and that the SEC does not have the authority to ‘effectively regulate the controversial issue of climate change’. Since then, there has been a wave of criticism including a number of other proceedings filed by industry groups such as the United States Chamber of Commerce. As a result of the criticism and legal challenges, the SEC had stayed the implementation of the Rules while it awaits the court’s review. In its statement, the SEC said the agency would continue ’vigorously defending’ the Rules and that a stay would allow ‘the orderly judicial resolution of those challenges and allow the court of appeals to focus on deciding the merits’.

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EU: Corporate Sustainability Due Diligence to become mandatory across the EU and will apply to some foreign companies

Following months of controversy, questions and speculation, on 24 April 2024 the European Parliament passed a plenary vote to adopt the Corporate Sustainability Due Diligence Directive (the CS3D). It followed a 15 March 2024 vote of the European Union Council to finally adopt a scaled-back version from that previously proposed. Subject to receiving a formal approval by the European Council, Member States in the EU will have two years to transpose its provisions into their national laws.

Under CS3D, large companies domiciled in the EU and foreign companies generating significant revenues in the EU will be obliged to comply with the new sustainability due diligence obligations. The CS3D has two key objectives:

• to require companies to carry out due diligence to avoid adverse environmental and human rights impacts; and
• to ensure accountability in case of actual adverse impacts being caused.

We step through some of the key features and revisions of CS3D in our article below.

Read more

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Australia toughens foreign anti bribery and corruption laws

Parliament has passed significant reforms to Australia's foreign bribery laws. The law comes into force in the second half of 2024, giving companies a relatively short period of time to ‘get their house in order’. Under the new laws, companies could be criminally liable if an associate – defined as any officer, employee, agent, contractor, or subsidiary – commits foreign bribery for the company’s profit or gain. The reforms also provide for a complete defence if companies can prove that they had ‘adequate procedures’ in place to prevent associates from committing foreign bribery. Companies should be using this time to carefully consider their risk-exposure, assess the effectiveness of their existing anti-bribery and corruption procedures, and make necessary changes. Companies should also be considering their use of third parties, such as agents, channel partners and lobbyists, and whether existing contractual arrangements are adequate. For further detail, see our note below.

Read more

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The results are in and there is a gender pay gap

Ignore the gender disparity at financial and reputational peril – that is a key takeaway for employers following the response to the first-of-its-kind publishing of gender pay gap data in Australia. The data was published in March 2024 by the Workplace Gender Equality Agency (WGEA) following mandatory reporting being completed by nearly 5,000 Australian private sector employers. The published data revealed 50% of the group of responding employers had a gender pay gap of more than 9.1%. The WGEA data can be explored online with other published statistics revealing that:

• 62% of median employer gender pay gaps are over 5% and in favour of men, with 8% being less than 5% and in favour of women;
• there is a near even split in relation to the gender composition across all occupations in the workforce (51% women and 49% men);
• gender disparity on boards persists with 69% of board members and 81% of chairs being men; and
• only 29% of reporting employers having a formal policy and/or strategy to support the gender equality of their governing bodies’ composition.

The release of this data received significant media attention, making it clear that there are reputational risks for employers who fail to take steps to reduce the pay gaps identified as existing in their workforce. It also comes at a time when gender pay disparity is a key Commonwealth Government focus, with March 2024 also seeing the release of the Government’s national strategy for gender equality, an announcement that Commonwealth-funded paid parental leave will attract 12% superannuation from July 2025, and the setting of a Government policy position which will require large employers to commit to and meet gender equity targets in order to allocate Government contracts.

Gender equality more broadly is also a theme of revisions proposed for the ASX Corporate Governance Council’s 5^th Edition of the Corporate Governance Principles and Recommendations (see our note at link below), and follows other measures introduced previously, including:

• adding gender equality as an objective of the Fair Work Act 2009; and
• legislating the Respect@Work report recommendations, including the new positive duty to prevent sexual harassment and related conduct.

Viewed holistically, these developments put renewed focus on organisations approaching gender equality, like other ESG issues, through a proactive governance, due diligence and transparent lens and taking concrete steps to reduce gender and related pay disparity, or risk both reputational and financial detriments.

Read more

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ESG litigation update

ASIC successful in its first greenwashing proceeding: ASIC v Vanguard Investments Australia

On 28 March 2024, the Federal Court handed down judgment in ASIC’s greenwashing proceedings against Vanguard Investments Australia, finding that Vanguard contravened the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) by making misleading claims about certain ESG exclusionary screens applied to investments in a Vanguard index fund (the Fund). One such ESG screen was (to put it simply) that securities in the Fund were based on the Bloomberg SRI Index, and that the Index excluded companies with business activities in a range of industries, including, e.g., fossil fuels.

ASIC alleged that Vanguard made various statements in several forms of communications (including in PDSs, a media release, on its website, on YouTube and in a presentation that was published online) which represented that:

• the Fund offered an ethically conscious investment opportunity;
• before being included in the Fund, securities were researched and screened against applicable ESG criteria; and
• securities that violated applicable ESG criteria were excluded or removed from the Fund.

ASIC alleged that the representations were false or misleading (contravening the ASIC Act) because:

• the research and screening of securities for inclusion in the Fund against the applicable ESG criteria had significant limitations;
• a significant proportion of securities in the Fund were from issuers that were not researched or screened against applicable ESG criteria; and
• the Fund included issuers that violated applicable ESG criteria.

Vanguard admitted to engaging in conduct that was liable to mislead the public and to making representations that were false or misleading. However, the parties remained in dispute in respect of whether the statements made in the PDSs and on its website conveyed representations that all securities included in the Bloomberg SRI Index and the Fund were screened against ESG criteria (as alleged by ASIC), or whether those materials conveyed that only securities issued by companies were screened against ESG criteria (as alleged by Vanguard). The Court decided this point in Vanguard’s favour.

Although the Court did not need to consider in any detail why the representations were misleading due to the admissions by Vanguard, when outlining the applicable legal principles on misleading or deceptive conduct, the Court accepted the principles from leading cases in other contexts as applicable principles in this case. This suggests (as expected) that a court will apply the same principles in greenwashing cases as it does in other contexts.

ASIC sought declarations, adverse publicity orders and pecuniary penalties. The Court will decide on the appropriate penalties and costs on 1 August 2024.

Native Title Claimant successfully challenges gas extraction operation on climate change basis, under ‘future act process’ under Native Title Act

On 6 March 2023, the Full Court of the Federal Court allowed an appeal by native title claimants, finding that the National Native Title Tribunal (Tribunal) had erred in failing to consider climate change when making a determination in relation to new petroleum production leases for a gas project.

1. Background to the claim

A gas project proponent was required to follow the ‘future act process’ under the Native Title Act 1993 (NT Act), in respect of the proposed grant of petroleum production leases on country claimed by the native title claimants (the Applicant).

On 19 December 2022, the National Native Title Tribunal (Tribunal) made a determination that the proposed of petroleum production lease applications be granted, in the absence of the parties reaching agreement under the future act process.

The Tribunal found that the grant of the lease applications would be in the public interest under section 39(1)(e) of the NT Act. The Applicant argued the Tribunal was obliged to take into account the public interest of the mitigation of climate change. The Tribunal rejected this argument, on the basis that s 39(1) prohibits the Tribunal from considering environmental matters, except where there is a particular effect on native title. It found there was no such effect in this case. Accordingly, the Tribunal did not have regard to expert climate change evidence relied on by the Applicant. In January 2023, the Applicant appealed the decision.

2. Decision of the Federal Court

The Full Court of the Federal Court allowed the appeal, finding the Tribunal erred in law by failing to have regard to expert climate change evidence because it considered that section 39 excluded consideration of environmental impacts, other than those which directly affected native title.

The Full Court indicated that climate change implications of high greenhouse gas emitting activities can be characterised as a ‘public interest in the doing of the act’, which would make climate change implications a mandatory consideration for the Tribunal under s 39(1)(e) of the NT Act.  The Court found the public interest does not need to be connect to a particular impact of climate change on the relevant native title rights, but rather a general public interest.

The Court has remitted the matter to the Tribunal to be determined in accordance with law.

Sustainable packaging: ACCC brings proceeding against kitchen and garbage bag manufacturer for false or misleading description of ‘ocean plastic’ bags

On 18 April 2024, the ACCC announced it has brought civil penalty proceedings against Clorox Australia Pty Ltd, for allegedly making false or misleading representations that its GLAD-branded kitchen and garbage bags were 50% comprised of recycled ‘ocean plastic’ collected from the ocean or sea. The ACCC alleges the plastic used is partially collected from communities in Indonesia up to 50km from a shoreline, and as such not from the ocean or sea. In announcing the proceeding, ACCR Chair Gina Cass-Gottlieb commented on the ACCC’s ongoing enforcement priority against businesses making false or misleading environmental claims, including in packaging.

The ACCC’s Concise Statement filed with the Federal Court of Australia is accessible here.

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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 and Irene Park (Environment, Planning & Communities), Zulema Townsend, Michael Tran and Shiwa Waladan (Head Office Advisory Team), Rose Kethel (Disputes) and Darcy Moffat and Rae Huang (Employment, Industrial Relations and Safety)