Different ESG subject areas are in varied phases of their progression from public opinion, through to international law and finally domestic law. Below we explore examples of relevant subjects where we see the narrative progressing strongly.
Environment – climate change
Climate change is an area in which international law is serving as a precursor to and, in a number of jurisdictions, a substitute for the development of domestic law around climate change abatement and mitigation.
The Paris Agreement sets out the global aspiration and high-water mark in relation to climate change. It will be extremely difficult to achieve the ambitious goals set by the agreement unless the private sector gets involved in a substantive and meaningful manner, but for this businesses need the right policy and finance signals in place to warrant retooling their strategies. On this front, and free of the complexities and extended timelines that often stymie or delay government regulation in Australia and elsewhere, there has been an increasing number of soft law instruments that seek to impact corporate responses to climate change.
The key development here has been the proliferation of voluntary reporting standards that companies might adopt to aid disclosure of climate change-related financial risk. Notably, in 2016, the G20 Financial Stability Board established the Task Force on Climate-Related Financial Disclosures (TCFD), which released a set of recommendations for the voluntary disclosure of climate change-related financial risks in 2017. What sets the TCFD recommendations apart is their sophistication – they require companies to disclose qualitative data, including scenario analysis, which identify risks based on differing climate change-driven scenarios.
Similar to the UN Guiding Principles, the TCFD recommendations, are a voluntary reporting initiative that that is rapidly becoming mainstream given their endorsement by major investors, regulators and many major companies worldwide.
A global perspective
There is currently no proposal to change the law in Australia to make climate-related disclosures mandatory. By contrast, the UK plans to take a phased approach to making climate-related disclosures under TCFD mandatory by 2025 for corporates, banks, asset managers and pension schemes, with premium listed companies required to report first in respect of the reporting periods starting after 1 January 2021.
In the EU, asset managers and other financial market participants will have to disclose a whole array of new sustainability data under the Sustainable Finance Disclosure Regulation, which in turn will mean investee companies will be under pressure to provide this information to their investors. The US and various other jurisdictions are also considering changes to their climate-related disclosure regimes. Closer to home, in April 2021, the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Bill was introduced in the Parliament of New Zealand, which will require certain large organisations to report on their climate-related financial risk.
Australian regulatory bodies
As the business community converged on the TCFD recommendations as the authoritative standard for climate change narrative reporting, so too did Australian regulatory bodies. At the moment, such convergence remains indirect.
- ASIC: In recent years ASIC has published a range of reports and guides concerning climate-risk disclosures and the circumstances in which a company may need to make such disclosures in its operating and financial review.1 These publications highlighted climate change as a systemic risk.
- APRA: in its 24 February 2020 open letter to regulated entities, APRA reiterated that it encourages entities to disclose under the TCFD recommendations framework. Further, in its recently published draft cross-industry prudential guidance CPG 229 Climate Change Financial Risks, APRA seeks to assist companies to take a strategic and risk-based approach to the management of climate risks through existing risk management and governance frameworks.
- ASX: In the 4th edition of the Corporate Governance Principles and Recommendations, released in February 2019, climate change is expressly mentioned for the first time. The Principles and Recommendations provide that a listed entity should disclose whether it has any material exposure to climate change risks and, if so, how it manages or intends to manage those risks. The ASX Corporate Governance Council recommends that listed entities adopt the disclosure framework set out in the TCFD recommendations.
Social – the corporate responsibility to respect human rights
The growing social reach and impact of business enterprises has sharpened understanding of the responsibility of business to respect human rights, with human rights covering the field of social impact, including engagement with labour and social stakeholders like communities and Indigenous Peoples who are either directly or indirectly affected by business activity.
There are many domestic laws that apply to business that aim to protect international human rights law standards – anti-discrimination laws, native title and cultural heritage laws and labour laws including most recently modern slavery laws, to name a few. However, it was widely recognised that these domestic laws failed to be comprehensive in their human rights protections against business impacts and, where they are in place, often set a bar that is significantly lower than the international human rights laws from which they originate.
As a consequence of these regulatory shortcomings, the UN developed the UN Guiding Principles on Business and Human Rights (UN Guiding Principles). These were endorsed unanimously by the UN Human Rights Council in 2011.
The UN Guiding Principles clarified the respective roles of states and companies regarding human rights – that it is the state's duty to protect those within their jurisdiction from human rights harms while it is the corporate's responsibility to respect the human rights of those persons it impacts directly or indirectly through its operations. The UN Guiding Principles set a baseline of standards for corporates to meet to achieve that respect for human rights. This is done by reference to:
- established international human rights laws that cover civil and political rights like the right to life or freedom from cruel, inhuman or degrading treatment or freedom of expression;
- economic, social and cultural rights like the right to education, housing and work; and
- issue-specific international human rights laws including those focused on eliminating discrimination on the basis of sex, race and disability, as well as those international laws that set out the specific rights of Indigenous Peoples, including in relation to land and cultural heritage.
The UN Guiding Principles go on to provide a roadmap for corporates to meet these international human rights law standards through practical risk and compliance mechanisms including policies, risk assessments, due diligence, training and reporting.
The UN Guiding Principles
As a guideline made at the international level, the UN Guiding Principles are not binding on business. However, they set a clear and accepted benchmark for corporate conduct regarding its social impacts. There has been widespread convergence around the UN Guiding Principles (so much so that the Hague District Court in the Netherlands in a recent decision referred to the 'universally endorsed content' of the UN Guiding Principles). In the business community the UN Guiding Principles are cited in many company policy suites and are commonly used as an audit tool to assess social impacts. They are increasingly a threshold issue for investors, and there is also increasing regulatory convergence around the UN Guiding Principles. We are seeing:
- Issue-specific human rights laws, like modern slavery laws, referring to them. For example in 2018, the Australian Government passed the Commonwealth Modern Slavery Act 2018, which established Australia's national modern slavery reporting requirement. Under this requirement, certain large entities must publish annual modern slavery statements describing the actions they have taken to assess and address modern slavery risks within their operations and supply chain. The Commonwealth Guidance to the Modern Slavery Act explicitly refers to the UN Guiding Principles as a justification for introducing the Act, as well as a tool which can assist corporates to report robustly.
- the UN Guiding Principles forming the bedrock for more comprehensive law reform in relation to business human rights impacts. The flagship proposal in this area has come in Europe where the European Commission has committed to introducing legislation in 2021 to make human rights (and environmental) due diligence mandatory for companies operating or domiciled in the EU. The Commission has noted that the proposal is meant to build on existing standards, such as the OECD Due Diligence Guidance for Responsible Business Conduct or the UN Guiding Principles on Business and Human Rights (UNGPs) – 'soft' laws that have paved the way for what 'good' looks like in this area.
Governance – bribery and corruption
A strong example of the 'hardening' of international law is found in the bribery and corruption sphere.
Bribery has long been considered inconsistent with fair and efficient economic development principles. However, despite this, for a long time the global approach to the regulation of bribery and corruption was piecemeal and at times inconsistent. Certain countries, in particular the United States, were early movers on anti-bribery measures – enacting the Foreign Corrupt Practices Act in 1977 in response to widespread payments made to foreign government officials by large US. companies. For a long time, though, other countries viewed bribery as a part of the cost of doing business in certain places and did not take steps to prohibit it.
The OECD, at the behest of the United States, began to tackle bribery more directly in the early 1990s, establishing a Working Group on Bribery in International Business Transactions (OECD Anti-Bribery Convention). The working group included member nations as well as members of civil society, including Transparency International, other international organizations such as the World Bank and prosecutors from the United States and Europe. This culminated in the adoption of the 1997 Convention on Combating Bribery of Foreign Officials in International Business Transactions (OECD Anti-Bribery Convention). The Convention entered into force on 15 February 1999 and has been ratified by 44 countries, including Australia. Australia moved relatively quickly to incorporate these international law obligations into domestic law, criminalising bribery of domestic and foreign public officials in our Commonwealth Criminal Code. The UN Convention Against Corruption was adopted in 2003 and led to many more states passing similar domestic laws that applies to conduct at home and overseas. These international laws being incorporated into domestic laws have led to a global web of anti-bribery regulation that increasingly means that anywhere on the globe, a corporation and those acting on its behalf will be subject to very similar prohibitions regarding bribery.