Seizing opportunities in the energy transition

ESG and modern slavery

by Emily Turnbull, Amy Oliver, William Gordon and Billy Hade

Elevating ESG in the transition

Expectations continue to develop in the environmental, social and governance (ESG) space regarding how energy projects engage with, and influence, the wellbeing of local communities and supply chains, as well as their effects on the environment.

What's the challenge?

Increased stakeholder and regulatory scrutiny is being reflected in legislation, as well as in regulatory enforcement, litigation and complaints. Amid these complexities, there are fresh possibilities for those participating in the energy transition.

Below, we highlight three areas of increasing focus:

  1. biodiversity risks and impacts
  2. modern slavery in operations and supply chains
  3. free, prior and informed consent in regards to First Nations people (FPIC).

Jill-Button.jpgI hope to see greater connection between the transition to net zero and the cultural authority, capabilities and aspirations of First Nations people, and that government and organisations will continue getting better at articulating that connection and embedding it in transition strategies.

– Jillian Button, Partner and Head of Climate Change

What's happening now?

Biodiversity and nature-related risks and opportunities

With biodiversity jumping to the global centre stage in late 2021 at the Glasgow COP26, we continue to see substantial change in legal requirements and stakeholder expectations regarding companies' engagement with biodiversity and nature. Australia, as a global leader in biodiversity loss, has recently announced its intention to be world leading in its response to nature-related risks, creating new risks and opportunities for the energy transition.

Nature Repair Market Bill

The Nature Repair Market Bill 2023, which will create a national framework for a voluntary national biodiversity market, is currently being considered by the Senate. The Bill flows from the Federal Government's commitment in its Nature Positive Plan to protect 30% of Australia's lands and seas as natural areas by 2030. The Bill authorises the Clean Energy Regulator to issue Australian landholders with tradeable biodiversity credits for nature-protecting and restoring projects. It is anticipated the Nature Repair Market, if established, will commence in the second half of 2024. Tradeable biodiversity credits may provide opportunities for additional value creation from clean energy projects.

Taskforce on Nature-Related Financial Disclosures (the TFND)

The final version of the TNFD's reporting framework was released in September 2023. The TNFD reflects growing expectations by stakeholders that entities will assess, manage and disclose nature-related risks and opportunities. Under it, potential adverse biodiversity impacts of clean energy projects may need to be disclosed by project funders, creating new risks and challenges for project developers. The Sustainability Standards Board (the ISSB) has announced its intention to draw on the TNFD's nature-related risk management and disclosure approach, to develop a global baseline for sustainability reporting. With mandatory climate change reporting to come into force in July 2024 in Australia following the widespread uptake of the Task Force on Climate-related Financial Disclosures and the ISSB guidance on climate change reporting, we anticipate biodiversity reporting may follow a similar path.

Modern slavery risks in supply chains

While renewable energy systems will be key to the clean energy transition, these systems can carry inherently higher risks of modern slavery. At the same time, the high-water mark is increasing for how companies assess and address human rights impacts in their operations and supply chains.

Modern slavery risks in renewable energy systems

The extraction of certain minerals and metals used in solar, wind and battery systems may occur through forced labour, including by way of debt bondage and under threat of violence. Allegations of forced labour have been linked to particular geographical regions in which key components for these systems are manufactured. Complicating matters further is that attempting to trace the supply chain of solar panels, wind turbines, batteries or battery components within certain parts of the world can be fraught with difficulty.

Push for mandatory human rights due diligence and penalties

Alongside these risks, governments overseas and in Australia have introduced (or have proposed to introduce) legislation aimed at increasing companies' responsibilities when it comes to identifying and addressing human rights impacts, including modern slavery. The first statutory review of the Modern Slavery Act 2018 (Cth) (the Act) was finalised in May this year, and culminated in a number of recommendations: eg that the Act apply to companies with annual revenue of at least $50 million (currently it is $100 million), and that companies be required to implement a due diligence system to identify and assess modern slavery risk (or be penalised should they fail to do so). Another recommendation is that companies be required to account for certain high-risk locations, products and supply chains when preparing their modern slavery statements. Similar requirements have been proposed or introduced in the United States, Canada, the European Union and the United Kingdom.

Novel impacts claims

Against this backdrop, there is an increasing trend of workers and civil society organisations taking novel legal action against companies for alleged involvement in forced labour, including in relation to global supply chains. Ways to manage this risk are, for example, adequate human rights due diligence, contractual clauses and effective grievance mechanisms. 

Focus on engagement with Indigenous peoples

As the energy transition expands the footprints of existing projects—and, in many cases, encourages the development of new ones in areas that may not have previously had major infrastructure—ensuring Indigenous rights are upheld should be a focus for developers and government. With many energy projects occurring in rural, regional or offshore areas, care is needed to understand the relevant risks and opportunities that may emerge in this space.

Operationalisation of international standards

The principle of FPIC refers to the international human rights principle that Indigenous peoples should be provided with an opportunity to consent to actions that may affect them, in a free manner and before any action occurring.

FPIC through the business lifecycle

As the energy transition spurs new projects and incentivises the augmentation of existing developments, there is a heightened focus on alignment with FPIC principles across the project lifecycle. These principles have come to the forefront of the energy transition in Australia through recent judicial recognition of First Nations peoples’ interests in 'sea country'.

Rise in bluewashing complaints

Civil society groups and strategic litigants in Australia and abroad are bringing novel complaints against companies, including alleging that they have engaged in 'bluewashing' by failing to align with public commitments on human rights, such as FPIC. In particular, there has been an uptick in complaints to non-judicial disputes resolution processes, such as the Organisation for Economic Co-operation and Development National Contact Points.

Integrity of governance and related processes

As companies navigate the energy transition, often with goals of achieving net-zero emissions, integrity in governance mechanisms remains an important issue. In particular, focus on transparency, accountability and stakeholder engagement will be critical as economic and environmental conditions continue to influence changes in investment patterns and appetites for risk.

Operationalising commitments

As companies continue to adapt to the energy transition, it is not uncommon to make aspirational targets as to reduction in greenhouse gas emissions or the existence of certain qualities within the supply chain. Ensuring that internal policies are aligned with achieving those commitments or targets is critical in reducing the risk of green or bluewashing, but also for maintaining positive corporate reputations.

Risks associated with carbon offsets

The implementation and adoption of carbon offsets within business can give rise to integrity risks. These products serve as a means by which companies compensate for their greenhouse gas emissions to decrease the total emissions attributable to them. However, ensuring credibility and transparency of these offsets is critical to ensure that claims of attributable total emissions are accurate and to avoid undermining genuine emissions reductions.

What's next?

Large electricity buyers, private capital investors and developers should be alert to the ESG risks and opportunities of the energy transition. Below is a summary of key areas to watch.

Large electricity buyers
  • Large electricity buyers should consider conducting targeted and enhanced due diligence on their current or prospective electricity suppliers. This is aimed at assessing and addressing modern slavery risk regarding electricity generated from renewable sources—including in relation to the manufacture of components in solar panels, wind turbines or batteries, as well as the extraction of minerals and metals that go into those components.
  • Electricity customers should also be alert to the risks of 'greenwashing' or 'bluewashing'. In embracing renewable energy resources such as wind and solar, buyers must ensure any representations correctly identify the limitations or risks of these technologies, especially as to both potential nature-related and human rights impacts.
  • In entering and negotiating power purchase agreements or carbon offset agreements, consider including counter-party representations and warranties of compliance with recognised human rights laws and standards.
Private capital investors
  • Private capital investors should be seeking to align their reporting on biodiversity with the latest developments in this space, including the final version of the TNFD (released in September 2023). While the TNFD is not yet mandatory in Australia, we are aware that the Federal Government has proposed mandatory climate-related reporting and we expect biodiversity reporting will ultimately follow the same pathway.
  • In addition to carrying out due diligence when making investment decisions, private capital investors should consider how they can reduce the risk of modern slavery in their portfolio companies, including by using their leverage to bring about organisational change and engaging with companies on a long-term, collaborative basis. Further, specific regard should be had to assessing the alignment between public commitments to voluntary standards such as the United Nations Principles for Responsible Investment, and the underlying existence and implementation of policies operationalising those standards; in particular, in the context of Australian Securities and Investments Commission scrutiny.
  • With the emergence of the nature repair market scheduled for 2024, developers should be identifying opportunities through which projects may be utilised to obtain biodiversity credits.
  • They should be seeking to understand their potential connections to modern slavery, including through their suppliers, contractors and materials used in projects, and to uplift their risk assessment processes and controls in response.
  • Understanding the standard of FPIC to which the business has committed, and implementing that standard, will also be critical to de-risking projects in the energy transition. Developers should be undertaking human rights due diligence to ensure that there is adequate focus on understanding the interests of First Nations peoples regarding the area over and around the project or development. Particularly, care should be taken to consider the manner in which principles of FPIC are being adopted across industries. It will also be important to stay well informed about evolving concepts relating to recognised interests, such as judicial acknowledgment of ‘sea country’.
  • With increasing adoption of net-zero targets and corresponding emphasis by regulators on greenwashing, make certain that adequate due diligence has been completed on carbon offsets to ensure their verifiability.