ESG and modern slavery

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.

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.

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.

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.

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.

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.

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. 

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.

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.

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'.

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.

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.

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.

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.