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 recent developments in sustainable finance, including the Responsible Investment Association Australasia’s introduction of a new sustainability classification framework.
Key highlights
- Sustainable finance update: RIAA launches new sustainability classification framework and the Government’s sustainable finance agenda marches on
- Climate reporting gets closer: Senate Standing Legislation Committee on Economics recommends passage of climate-related disclosure legislation
- Board diversity progress still stuck in the slow lane in 2024
- ESG litigation update
- EU: Corporate Sustainability Due Diligence Directive receives final green light
- Australia further commits to reform its anti-money laundering and counter-terrorism financing laws
- The impact of climate change on health and safety at work
Sustainable finance update
RIAA launches new sustainability classifications framework
In response to growing demand for financial products that integrate a consideration of, or promote, sustainability factors, the Responsible Investment Association Australasia (RIAA) this month introduced a new sustainability classifications framework for funds. The framework builds on its existing Responsible Investment Certification Program and has been informed by regulatory developments in the EU (the Sustainable Finance Disclosure Regulation), the UK (the Sustainability Disclosure Requirements) and the US (the SEC’s naming rule).
The framework comprises three classifications: ‘Responsible’, ‘Sustainable’ and ‘Sustainable Plus’. Under the framework, funds are differentiated based on their responsible investment strategies and objectives, portfolio composition, stewardship programs and disclosures. Ultimately, the framework focuses on the approach funds take in considering ESG factors and the extent to which sustainability is a focus. For example, to be classified as ‘Sustainable Plus’, a fund must have binding and measurable sustainability objectives, and progress must be measured and disclosed.
Australia’s sustainable finance taxonomy undergoes consultation
The development of a sustainable finance taxonomy was proposed in the Australian Government’s Sustainable Finance Strategy consultation paper, released in November 2023. On 28 May 2024, the Australian Sustainable Finance Institute (ASFI), who has been leading the taxonomy project with Treasury, announced the first round of public consultation on the taxonomy. ASFI is seeking feedback on the draft headline ambitions for the taxonomy objectives and the draft climate change mitigation criteria for the first three priority sectors: electricity generation and supply; minerals, mining and metals; and construction and the built environment. The consultation period ends on 30 June 2024.
Federal Budget measures show sustainable finance is on the agenda
In the 2024-25 Federal Budget, the Government allocated $17.3 million over the next four years, and $3.1 million per year ongoing, to promote sustainable finance in Australia. This includes funding for ASIC and Treasury to consult on the design of a labelling regime to regulate the use of labels on retail investment products. RIAA has said that ASIC is “very interested” in its new sustainability classification framework for funds (discussed above), but it is not clear whether and the extent to which it will inform regulatory developments in this space.
The Budget also allocated funds to the continued development of Australia’s sustainable finance taxonomy, including its expansion to cover the agricultural sector.
Other key measures allocated funds in the Budget include the delivery of the sustainable finance framework, the development of guidance on best practices for net zero transition plans, and significant additional resourcing for ASIC to take enforcement action in respect of greenwashing and other sustainability-related financial misconduct. ASIC’s enforcement focus on sustainability-related investment labels and screening is expected to continue.
Climate reporting gets closer: Senate Standing Legislation Committee on Economics recommends passage of climate-related disclosure legislation
The Senate Standing Legislation Committee on Economics (the Committee) has recommended that the Bill introducing Australia’s mandatory climate-related financial disclosures regime (the Bill) be passed without amendment. The Bill was referred to the Federation Chamber for debate, and has now been referred back to the House of Representatives for further consideration. From proposed amendments to the Bill and submissions made to the Committee by the Greens and Independents, it is clear that the modified liability regime will be a hot topic of debate. There are also indications that scenario analysis – and in particular whether scenario analysis against a warmer future state should be mandated – will also be given particular attention as the Bill and the Australian Sustainability Reporting Standards (ASRS) progress through their respective processes.
Aside from the Bill, the other key components of the climate reporting regime – the ASRS and the assurance standards – are progressing in parallel. Consultation on the draft ASRS closed in March, and we are not expecting to see a final version until after the legislation has passed. Consultation on assurance, including a model for its phased introduction, closed in early May, with a draft assurance pronouncement expected in July or August for further consultation.
We dive into the detail of the Bill in our insight article and limited podcast series below.
Reporting for duties' limited podcast series
Board diversity progress still stuck in the slow lane in 2024
Boards need to be more inclusive – that is the call to action in the 2024 Board Diversity Index (the Index) published by Watermark Search International (WSI) and the Governance Institute of Australia.
The Index analysed the diversity of the boards of ASX 300 companies across gender, cultural background, age, skills/experience, tenure and independence. While more women have gained board positions, the Index found that other aspects of diversity remain significantly underrepresented. Statistics set out in the Index revealed that since 2023:
- First Nations and culturally diverse directors have not grown in number – over 90% of board members being from an Anglo-Celtic background;
- there remains little to no data on Australian directors with disabilities;
- only four directors openly identified as LGBTQ+;
- there has been little change in the skills/experience represented on boards, with finance sector experience rising from 32% in 2023 to 40% in 2024; and
- there are fewer directors under 50, with the average age of a director rising from 60 years in 2023 to 61 years in 2024.
- The Index's findings come amidst growing pressure from stakeholders to improve diversity initiatives at a board level. Board diversity has also been emphasised in the proposed 5th edition of the ASX Corporate Governance Council's Corporate Governance Principles and Recommendations.
For further detail on the proposed revisions for the 5th edition of the ASX Corporate Governance Council's Corporate Governance Principles and Recommendations, including in respect of diversity, see our insight article below.
ESG litigation update
Friends of the Earth & Ors v Secretary of State for Energy Security and Net Zero
In Friends of the Earth & Ors v Secretary of State for Energy Security and Net Zero [2024] EWHC 995 (Admin), the High Court in the UK has found the UK Government’s Carbon Budget Delivery Plan (the Plan) to be unlawful. The Plan formed part of the statutory process set out in the Climate Change Act 2008 (CCA) to achieve net zero by 2050. This case follows a similar finding in relation to the Government’s earlier Net Zero Strategy in 2022.
The High Court found that the Secretary of State for Energy and Net Zero (SoS) had, in preparing proposals and policies to enable carbon budgets:
- failed to take into account mandatory material considerations;
- proceeded on the basis of an assumption that all of the quantified proposals and policies would be delivered in full, and this assumption was not supported by the information as to risk to delivery with which the SoS was provided;
- unreasonably concluded that the proposals and policies would enable the carbon budgets to be met; and
- applied the wrong legal test to section 13(3) of the CCA in that the Plan only stated that the relevant proposals and plans were “likely” to contribute to sustainable development, when, under section 13(3) of the CCA, the proposals and plans must do so.
The Government is now expected to go back to the drawing board for a third time to produce a report that meets its statutory obligations in relation to climate change.
Environment Council of Central Queensland Inc v Minister for the Environment and Water
On 16 May 2024, the Federal Court rejected appeals brought by the Environmental Council of Central Queensland (Appellant) regarding proposed extensions to the operations of two existing coal mines (Proposed Actions). In 2022, the Appellant submitted reconsideration requests in respect of the Proposed Actions under section 78A of the Environmental Protection and Biodiversity Conservation Act 1999 (Cth) (EPBC Act) after the Commonwealth Minister for the Environment and Water (Minister) made controlled action decisions which found that there were no significant impacts on matters of national environmental significance (MNES) arising from the greenhouse gas emissions associated with the mine extensions. The Minister found that although the physical effects of climate change from global greenhouse gas emissions will have adverse impacts on each of the relevant MNES, the Proposed Actions would not be "substantial cause[s]" of the adverse impacts on those MNES. The Court found no error by the Minister and dismissed all grounds of appeal.
Importantly, the Joint judgement noted that the existing legislative scheme of the EPBC Act, and the associated authorities on the meaning of "indirect impact" are ill-suited to an assessment of the impacts of global environmental threats such as climate change on MNES. The inadequacy of the existing regime in this respect may be addressed as part of ongoing legal reform, which includes the establishment of national environmental standards and the overhaul of the environment approvals pathway. The Department of Climate Change, Energy, the Environment and Water began consultation on its proposed reforms in October 2023 and consultation is ongoing.
EU: Corporate Sustainability Due Diligence Directive receives final green light
On 23 May 2024, the Council of the European Union formally approved the Corporate Sustainability Due Diligence Directive (CS3D). This was the final step of the decision-making process, which involved a months-long saga of uncertainty and political reticence that almost lead to the failure of the directive. The final proposal, being a scaled-back version of the previously proposed draft released on January 30, was adopted on 24 April 2024. After its entry into force, Member States will have two years to transpose the Directive into national laws. Then, the Directive will apply on a phased basis, depending on company size.
CS3D’s due diligence and reporting obligations extend past a company’s own operations to those of its subsidiaries and business partners, meaning companies doing business with in-scope entities will increasingly be expected to support compliance efforts by identifying, monitoring and addressing their own adverse impacts on the environment and human rights.
Australia further commits to reform its anti-money laundering and counter-terrorism financing laws
On 2 May 2024, the Attorney General’s Department released the second Consultation Paper on modernising Australia’s anti-money laundering and counter-terrorism financing (AML/CTF) regime (Consultation Paper 2).
Key proposals in Consultation Paper 2 include:
- modification of the reporting entity’s responsibilities in implementing an AML/CTF program and minimum requirements for associated risk assessment measures and internal controls
- reform of the customer due diligence requirements, including the introduction of a specific obligation to undertake individual customer-by-customer risk assessments before providing any designated service
- introduction of the concept of a ‘value transfer service’ to replace ‘electronic funds transfer instruction’ and ‘designated remittance arrangement’, and extending the concept of value to go beyond money and property to include digital assets; and
- further amendment to ‘tipping off’ rules to permit disclosures for ‘legitimate’ purposes, including sharing within business groups to manage and mitigate risks in accordance with an AML/CTF program
Submissions will close on Thursday 13 June 2024.
Reforming Australia's AML-CTF Regime
Modernising Australia's AML-CTF Regime: Consultation commentary
The impact of climate change on health and safety at work
An April 2024 report from the International Labour Organization (ILO), has drawn attention to the risks that climate change is increasingly posing to the occupational safety and health of workers worldwide. The Ensuring safety and health at work in a changing climate report (Report), identifies 6 key areas of risk. Those which are particularly relevant to Australian workplaces include:
- Heat exposure: The Report includes that an estimated 22.85 million occupational injuries, 18,970 deaths and 2.09 million disability-adjusted life years are attributable to excessive heat alone every year.
- UV radiation: The Report estimates that, on an annual basis, around 1.6 million workers are exposed to solar UV radiation at work. Unsurprisingly, those who work outside (eg. in construction and agriculture) have higher UV exposure, with that exposure being of a higher intensity in countries (such as Australia) with higher levels of ozone depletion.
- Workplace air pollution: Again, those working outside were found to be most affected, with it being linked to approximately 860,000 work-related deaths globally. Australia does have legislation which covers workplace air pollution, and there is regulatory guidance material which employers can use to adequately address this risk.
The other identified areas of risk are agrochemicals, vector-borne diseases and extreme weather events.
Ultimately, the Report serves as an important reminder of the evolving nature of workplace risks and highlights the intersectionality between climate change and the safety of workers in their workplaces. Businesses, especially those with a workforce who work outside, should be alert to these changing risks, stay up to date with current guidance, and continue to review and revise, as necessary, their safety policies and risk management controls to ensure workers’ health and safety so far as reasonably practicable
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:
- 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), Emily Tang, Shiwa Waladan and Cecile Lu (Head Office Advisory Team), Rose Kethel (Disputes), and Darcy Moffatt and Rae Huang (Employment, Industrial Relations and Safety) |
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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.