Keeping Up with ESG in Australia – September 2024

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 Australia’s new mandatory climate reporting regime.

Key highlights

1. Spotlight: Update on Australia’s climate reporting regime
   Climate reporting legislation commences; AASB approves Australian Sustainability Reporting Standards; AUASB consultation on proposed Australian Standard on Sustainability Assurance; AASB consultation on uncertainty in financial statements
2. A new Net Zero Economy Authority to coordinate net zero transition
3. Federal Government releases ASFI’s sustainable finance taxonomy report
4. Work health and safety and sexual harassment remain a focus
5. ESG litigation updates
6. Follow the money – AML / CTF reforms on the horizon & Attorney-General’s Department publishes anti-bribery guidance

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Updates on Australia’s climate reporting regime

It’s official – climate-related financial disclosure obligations are now law. The legislation incorporates the Federal Senate's amendments in relation to scenario analysis: entities are now required to make scenario analysis disclosures in relation to at least two mandated temperature outcomes: 1.5°C and 2.5°C+. Soon after, the Australian Accounting Standards Board (AASB) approved the final Australian Sustainability Reporting Standards (ASRS) which set out the content requirements of Australia’s climate reporting regime. The ASRS are split into two standards, AASB S1, a voluntary standard which relates to the disclosure of broader sustainability-related information, and AASB S2, which covers the mandatory climate-related disclosure requirements. Both AASB S1 and AASB S2 closely mirror the International Sustainability Standards Board’s sustainability standards (IFRS S1 and IFRS S2).

Companies are grappling with the content requirements in the ASRS and the uplift required to underlying processes and systems, as well as the practicalities of producing the new Sustainability Report and how it fits in with existing annual reporting practices. Various consultations on sustainability assurance and climate-related uncertainties in financial statements sit alongside these developments, meaning that the climate reporting puzzle is finally coming together.

Climate reporting legislation commences

On 17 September, the Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Act 2024 (Cth) (Act) received Royal Assent, following the Senate’s amendments to Schedule 4 of the Act to incorporate requirements for scenario analysis disclosures.

The climate reporting regime will kick off in full force for Group 1 entities for financial years commencing between 1 January 2025 and 30 June 2026 (with reporting obligations later phased in for Group 2 and 3 entities).

Under the legislation, entities must disclose certain climate-related financial information in a Sustainability Report. The disclosure requirements are organised under the four pillars of the Task Force on Climate-related Financial Disclosure (TCFD) framework. Scenario analysis disclosures are required, with the Federal Senate’s amendments to the legislation specifying that at least two mandated scenarios must be used and disclosed against: a low warming scenario (1.5°C above pre-industrial levels) and a high warming scenario (greater than or equal to 2.5°C above pre-industrial levels). Reporting entities will need to compare how these mandated scenarios sit alongside their existing scenario analysis (including in terms of impairments) and should consider whether there is scope to streamline the multitude of different scenarios it could otherwise be preparing to disclose against. The remainder of the Act is consistent with the version introduced into Parliament in March.

For further information on Australia’s mandatory climate reporting regime and our insights, see our note below.

AASB approves Australian Sustainability Reporting Standards

On 20 September, the AASB formally pronounced AASB S1, which covers sustainability-related disclosure, as a Voluntary Standard and AASB S2, which covers climate-related disclosure, as a Mandatory Standard. The AASB has aligned the final ASRS to the ISSB’s sustainability standards, with certain modifications to reflect the Australian context and the mandatory or voluntary nature of the two ASRS. Some of the key modifications in the AASB S2 from IFRS S2 include:

• the removal of requirements to disclose ‘industry-based metrics’ and to consider the applicability of industry-based disclosure topics;
• where an entity additionally voluntarily reports against broader sustainability matters, the entity is required to provide integrated disclosures to avoid duplication where relevant; and
• as permitted by the Act, a parent entity of a consolidated group has the choice of preparing a Sustainability Report for either the consolidated group or the parent entity (instead of being required to prepare a consolidated report).

AUASB consultation on proposed Australian Standard on Sustainability Assurance

On 17 September, the Australian Auditing and Assurance Standards Board (AUASB) released an exposure draft of the proposed Australian Standard on Sustainability Assurance. The exposure draft outlines a proposed timeline for when information in a Sustainability Report prepared in accordance with the climate reporting regime would be subject to audit requirements. With consideration of the maturity of reporting entities’ systems and processes, the demand for assurance, and the capacity and capabilities of auditors during initial years of reporting, the AUASB is proposing a phased assurance model that broadly requires for each entity’s disclosures:

• in the first year of reporting, the auditor conducts a limited assurance review over certain sustainability-related disclosures (being governance, strategy and material risks and opportunities, and Scope 1 and Scope 2 greenhouse gas emissions disclosures);
• from the second and third year of reporting, the auditor conducts a reasonable assurance audit of Scope 1 and 2 greenhouse gas emissions, and limited review of all other disclosures in the Sustainability Report; and
• from the fourth year of reporting onwards, the auditor conducts a reasonable assurance audit of all disclosures in the Sustainability Report.

The AUASB’s consultation closes 16 November 2024.

AASB consultation on uncertainty in financial statements

Separately, the AASB is seeking comment on its Climate-related and Other Uncertainties in the Financial Statements Exposure Draft. The draft sets out examples to illustrate how to apply accounting standards when reporting on climate-related uncertainties in financial statements. It replicates the proposed amendments to the IFRS by the International Accounting Standards Board (IASB). The AASB is consulting until 4 October 2024 to assist with the AASB’s comments on the IASB’s own consultation on these examples (which closes on 28 November 2024).

For further information on the IASB Consultation, see our July 2024 note below.

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A new Net Zero Economy Authority to coordinate net zero transition

In September 2024, the Federal Parliament passed the bill which has become the Net Zero Economy Authority Act 2024 (Cth). The Act establishes the Net Zero Economy Authority within the Department of Premier and Cabinet, which replaces the interim Net Zero Economy Agency. The Authority is tasked with the challenge of achieving what can be described as a “just transition”:

• promoting an orderly and positive economic transformation for Australia to what it calls a “net zero emissions economy” (this term is undefined in the Act),
• including through ensuring Australia’s regions, communities and workers are supported to manage the impacts, and share in the benefits, of Australia’s transition,
• while also facilitating Australia reaching its GHG emissions targets. 

The Authority is tasked to do this through:

• facilitating investment in new industries and jobs, particularly in emissions-intensive regions (including by delivering economic development support to affected communities);
• supporting workers impacted by the net zero transition, particularly workers in coal or gas fired power stations and dependent mines, transition to new opportunities (including by delivering a raft of new support measures for affected workers – e.g. paid retraining, redeployment and financial assistance);
• promoting coordination of policy and program design/delivery across the various departments of the Federal Government and with State and Territory Governments to achieve these aims. We understand this will include working with each of the Federal departments to create plans to transition their functions and responsibilities to net zero by 2050.

The passing of the Act demonstrates the Government’s intention to take a coordinated approach to decarbonising Australia’s economy, both across Governments and working with emissions intensive industries.

The Act introduces obligations on certain employers when notice is given of the closure of part or all of a coal-fired power station or gas-fired power station (as well as dependent mines), of which these employers should be aware.  

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Federal Government releases ASFI’s sustainable finance taxonomy report

On 10 September 2024, the Federal Government released the Australian Sustainable Finance Institute’s (ASFI) interim report, documenting the progress of the Australian sustainable finance taxonomy project, which commenced in July 2023. The progress towards consistent and credible frameworks to support sustainable finance markets in Australia is promising – although public consultation by ASFI on aspects of the taxonomy will continue in Q4 2024, it indicates we are on our way towards common definitions and understandings for investors and participants in the sustainable finance market.

Overview of the Australian taxonomy’s development

ASFI has established a formal Taxonomy Technical Expert Group and various subject and sector-specific taxonomy advisory groups, and contracted technical experts, to provide recommendations on taxonomy issues. It has also developed draft technical screening criteria for climate change mitigation in the three sectors of electricity generation and supply, minerals, mining and metals and construction and the built environment. Additionally, the Expert Group has endorsed two methodology reports that define ‘green’ and ‘transition’ activities, environmental objectives and social considerations.

Policy alignment and stakeholder consultation

ASFI’s interim report confirms the Australian taxonomy project aligns with the Australian Government’s sustainable finance policy objectives, guided by its core principles of credibility, usability, interoperability, and prioritisation for impact. It also provides a summary of ASFI’s consultation with stakeholders including experts, government bodies, international stakeholders, first nations and the general public.

The full interim report is available here.

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Work health and safety and sexual harassment remain a focus

A recurring theme of regulatory developments in the work health and safety (WHS) space this year has been increasing requirements and expectations to take proactive action against workplace sexual harassment. The past month is no exception and we have covered a few key developments below.

These latest developments highlight the need for businesses to continue to monitor (and update, if required) their WHS policies/procedures, particularly in relation to sexual harassment, to ensure compliance with new laws and developments.

‘Toughest’ WHS provisions against sexual harassment to commence in Queensland

The Work Health and Safety and Other Legislation Amendment Regulation 2024 (Qld) has introduced new amendments which impose additional stringent requirements on employers to manage the risks of workplace sexual harassment. Commencing in early 2025, the Work Health and Safety Regulation 2011 (Qld), requires employers to have a written sexual harassment prevention plan, developed in consultation with workers, which details identified harassment risks, control measures and the consultation process. The plan must be easily accessible and understood by workers and must contain information about the complaints and investigation processes.

Additionally, Queensland employers will have a proactive duty to eliminate discrimination and sexual harassment under the state Anti-Discrimination Act 1991 (Qld), under a Bill currently before Parliament. This new obligation, if passed, will be similar to the positive duty under the Commonwealth Sex Discrimination Act 1984 (Cth).

Victorian Government seeking feedback on proposed NDA ban

The Victorian Government has undertaken a consultation process on  proposed legislation which seeks to restrict the use of non-disclosure agreements (NDAs) in the settlement of workplace sexual harassment cases. The engagement process sought feedback on various potential protections, including prohibitions on NDAs unless requested by the complainant, establishing “cooling off” periods, ensuring no attempts have been made to unduly pressure or influence a complainant to enter an NDA or that an NDA does not adversely affect others. The proposal would also enable permitted disclosures (including to legal professionals, medical and mental health professionals, prospective employers, union representatives and support people). 

The plan was implemented following a recommendation from the Victorian Ministerial Taskforce on Workplace Sexual Harassment to restrict the use of NDAs in workplace sexual harassment cases. The feedback will now be reviewed, before legislation is proposed to be developed in 2025.

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ESG litigation updates

High Court refuses special leave to hear proceedings for Mt Pleasant and Mt Narrabri EPBC Act reconsideration requests

In our October 2023 update, we reported on the Federal Court’s dismissal of the two judicial review proceedings brought by the Environmental Council of Central Queensland against the Minister for the Environment and Water. The proceedings concerned the Minister’s decision to reconsider determinations made by its delegate in relation to the Mt Pleasant and Mt Narrabri expansion proposals under the Environment Protection and Biodiversity Conservation Act 1999 (Cth) (EPBC Act).

On 8 August 2024, the High Court of Australia refused special leave to appeal (with costs). The High Court’s brief reasons state that an appeal is not “an appropriate vehicle” to determine the issue of interpretation of when an event or circumstance that is an “indirect consequence” of an action is an “impact” under s 527E(1)(b) of the EPBC Act, which was also noted to not have been decided by the Full Court.

This marks the end of the two-year landmark Living Wonders case, which dates back to July 2022. While the judgments from the Living Wonders case did not substantially establish precedent for the Federal Government’s assessment of the nature and degree of impacts to be considered in making a controlled action decision, it will no doubt inform approvals of future projects and continuing climate public interest litigation.

Federal Court orders Vanguard a record $12.9 million penalty for greenwashing

We have previously reported on ASIC’s successful landmark greenwashing proceeding against Vanguard Investments Australia in our April 2024 update, in which the Court found that Vanguard contravened the Australian Securities and Investments Commission Act 2001 (Cth) by making misleading claims about certain ESG exclusionary screens applied to investments in a Vanguard index fund. On 25 September, the Federal Court ordered Vanguard to pay a $12.9 million penalty – being the highest penalty imposed to date for greenwashing misconduct.

In determining the penalty, the Court had regard to a number of factors, including: Vanguard’s ethical fund was intentionally launched, developed and promoted in response to growing market demand for ESG-focused investment products; Vanguard received benefits from its misconduct to its enhanced reputation and by attracting ethical investors; as at February 2021, the total funds under management of the indexed fund was over $1 billion; and the Court applied a 25% discount to reflect the high level of cooperation that Vanguard showed in ASIC’s investigation and the proceeding. The Court also made an adverse publicity order.

This outcome follows the recent order from the Federal Court against Mercer Super to pay a civil penalty of $11.3 million for greenwashing.

ASIC reports on its recent enforcement action to deter greenwashing misconduct

The above developments further demonstrate ASIC’s commitment to greenwashing as an enforcement priority. ASIC’s August 2024 Report 791 ASIC’s interventions on greenwashing misconduct: 2023-2024, outlines that in the period between 1 April 2023 and 30 June 2024, ASIC made 47 regulatory interventions in relation to greenwashing. These interventions related to a broad range of conduct, including:

• offering investments which are inconsistent with disclosed ESG investment screens and policies;
• providing insufficient disclosures on the scope of ESG investment screens and methodologies; and
• making sustainability-related claims without reasonable grounds or sufficient detail.

With the looming introduction of the mandatory climate reporting regime and the additional funding allocated to ASIC from the 2024-2025 Federal Budget, businesses are encouraged to consider the impacts on their activities from the likelihood of increased regulator activity.

ASIC recommends businesses consider Information Sheet 271 and the disclosure requirements set out in the ASRS. ASIC has also set up a page on ‘Sustainability reporting’ which we expect will be updated with further guidance as ASIC firms up its position and expectations on climate disclosure.

For further information on ASIC’s recent enforcement action, read the full Report here.

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Follow the money – AML / CTF reforms on the horizon & Attorney-General’s Department publishes anti-bribery guidance 

As flagged in our May 2024 update, the Australian Government kicked off its reforms to modernise Australia’s anti-money laundering and counter-terrorism financing laws (AML/CTF). On 11 September 2024, the Anti-Money Laundering and Counter-Terrorism Financing Amendment Bill 2024 (Cth) was introduced into Parliament. The Bill seeks to reform Australia's AML/CTF regime to ensure its efficacy and to meet international standards set by the Financial Action Task Force. The key objectives of the Bill are to:

1. expand the AML/CTF regime to additional high-risk services;
2. enhance regulation of digital currency and of virtual asset and payments technology; and
3. streamline the AML/CTF regime to increase flexibility, reduce regulatory impacts and support businesses.

If passed, we expect significant changes to business processes – new reporting entities will need to undertake uplift of their processes, policies and reporting, and existing entities should take a keen eye to their existing systems and processes to ensure that they meet the enhanced requirements. Although these reforms are still before Parliament and may face further amendments, it is an opportune time to take a fresh look at your process, policies and systems in the lead up to the future reforms in this space.

Separately, in August, the Attorney-General’s Department published guidance on adequate procedures to prevent the commission of foreign bribery. As noted in our April 2024 update, in March Australia introduced a new corporate offence of failing to prevent foreign bribery, but notably a defence is if a corporation can prove it had ‘adequate procedures’ in place to prevent foreign bribery. Helpfully, the guidance outlines the steps that corporations can take to establish an effective anti-bribery compliance program and suggests types of controls to consider when implementing such a program. This guidance can serve as a useful starting point when companies (particularly multinational corporate groups) are looking at their business procedures and compliance programs through the lens of anti-bribery risks.

For more on the foreign bribery laws that took effect from March, see our Insight article here.

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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:

• The Third Wheel Podcast Series: ESG in Australia

• Stuck in the Middle? Unlocking ESG Investment in Australia 2024 report

• ESG Notes and Climate Change Notes, 

• ESG, Sustainability and Responsible Business offering

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Written with assistance of Irene Park (Environment, Planning & Communities), Emily Tang, Shiwa Waladan and Sarah MacDonald (Head Office Advisory Team), Rose Kethel (Disputes), and Courtney Van Vorsselen and Rae Huang (Employment, Industrial Relations and Safety)