Global ESG themes shaping the Australian legal outlook

Business & Human Rights Climate Change Corporate Governance Disputes & Investigations Environment, Social, Governance

Here is what you need to know for the year ahead

2022 will provide a practical demonstration of the appetite for ESG-led change that governments, major corporates and financial institutions all have, and how far this will feed into smaller businesses and everyday life.

Together with our alliance partners, Linklaters, we explore key ESG themes we believe will shape the legal outlook for businesses in 2022. The full global report can be accessed here

Climate change litigation

2021 proved to be a ground-breaking year in Australian climate litigation, with an emerging trend of litigants using administrative and tort law principles to argue that government bodies owe statutory and common law duties to incorporate climate considerations into their decision-making processes. Those arguments have found traction with the courts. In one instance, a Federal Minister was found to owe a duty of care to consider climate change when deciding whether to approve a major fossil fuel project (although the decision is subject to an appeal). In another case, a court found that a State-based environmental protection authority was legislatively required to create instruments that protect the environment from climate impacts. Another State environment authority now faces a claim that it failed to consider climate change when reviewing and amending coal-fired power station licences.

Meanwhile, climate change class actions gathered momentum, with a Federal Court judge giving the all- clear to an investor class action alleging misleading or deceptive conduct by omission against the Federal Government, and members of the Torres Strait Islander community filing a duty of care tort claim against the Federal Government that echoes the hallmarks of the landmark Urgenda decision in the Netherlands. If successful, this claim may lead to the court ordering the Government to set a greenhouse gas emissions reduction target consistent with limiting global warming to 1.5°C, and to reduce national emissions in line with that target.

Greenwashing has also become a focal point for regulators and businesses alike. Australia’s chief financial regulator, the Australian Securities and Investment Commission (ASIC), recently committed to targeting misleading ESG claims relating to financial products, and public interest group, the Australasian Centre for Corporate Responsibility filed a misleading or deceptive conduct claim against an Australian energy company, challenging its statements about gas as a 'clean fuel' and its net zero strategy. The case is claimed by the strategic litigants bringing the action to be the first in the world to challenge the accuracy of a company’s net zero emissions target.

These trends are showing no sign of slowing as we head into 2022.

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Cultural heritage

In October 2021, the Federal Parliament released its final report into the destruction of two Aboriginal rock shelters located in Juukan Gorge in the Pilbara region of Western Australia. While the report and the recommendations within it are not binding on Federal, State or Territory governments, they do have the potential to become the de facto expected standard of conduct for companies.

The key recommendations most likely to become a focus point for stakeholders are:

  • project proponents’ engagement with traditional owners should reflect the principle of free, prior and informed consent (FPIC), regardless of domestic law requirements; and
  • traditional owners’ decisions and consent to certain activity can be reconsidered if significant new information about cultural heritage comes to

Other recommendations which may be picked up by stakeholders include:

  • project proponents should identify appropriate traditional owner representatives with whom to engage, based on principles of self-determination and recognition of native title or land rights statutory bodies (where they exist);
  • site surveys involving traditional owners should be conducted on country at the beginning of any decision-making process;
  • adequate buffer zones should be provided around cultural heritage sites;
  • traditional owners have a right of timely access to protected cultural heritage sites;
  • traditional owner resourcing (including funding and expert advice) for negotiations should come from an independent source (with proponents contributing to this independent source); and
  • project proponents should recognise culturally significant species of flora and fauna as part of cultural heritage management (rather than focusing only on objects).

Regardless of the official response from Commonwealth, State, and Territory governments, the report’s recommendations will likely be a crucial touchstone for engagement and activism on cultural heritage issues in the future.

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Non-judicial dispute resolution

In October 2021, the UN Human Rights Council recognised the right to a clean, healthy and sustainable environment as a human right. Shortly afterward, five young people lodged complaints to the UN Special Rapporteurs for human rights and environment, the rights of Indigenous people, and the rights of persons with disabilities, over the Australian Government’s inaction on climate change and its current 2030 emissions reduction target, asserting that the Government is in breach of the Paris Agreement and several UN human rights instruments. The complaints highlight the close relationship between climate change impacts and human rights.

There has also been an increase in complaints under the OECD Guidelines for Multinational Enterprises (OECD Guidelines) to Australia’s National Contact Point (AusNCP). The AusNCP process continues to be an attractive avenue for complainants where domestic remedies may be denied or too costly to pursue. Six complaints were received by AusNCP in the first 10 months of 2021, which is twice the number received throughout 2020 and the largest number of complaints received by AusNCP in a single year.

A significant number of complaints have been made against mining companies with respect to their operations outside of Australia. We are also seeing a focus on renewables and the energy sector more broadly. In one instance, AusNCP upheld a complaint that an electricity transmission company failed to act in accordance with the OECD Guidelines in its engagement with local Indigenous groups.

AusNCP has also taken a broad interpretation of 'multinational enterprise' – requiring companies only to have international shareholders or management to accept a complaint. This is a broader interpretation than that taken by other NCPs and increases the number of companies which may be subject to scrutiny against the OECD Guidelines in Australia.

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Investor engagement and corporate strategy

Investor activism remains firmly on the agenda for Australian boards in 2022. With growing shareholder support, global initiatives such as the 'Say on Climate' campaign have garnered corporate attention in Australia, particularly in the mining and energy sectors. The 'Say on Climate' campaign calls for boards (rather than shareholders) to voluntarily propose advisory resolutions at their annual general meetings, seeking member approval for science-based climate transition action plans.

Activists have also self-nominated for the boards of listed entities, challenging companies to do better in their ESG commitments. In September 2021, an 18-year-old university student announced a campaign to become a director of AGL Energy Ltd, Australia’s largest electricity generator. While unsuccessful, the student’s goal of shifting the company towards more sustainable practices, including a transition to a 100% renewable energy base before 2030, received considerable attention.

Growing ESG activism is also directly impacting the value of businesses in Australia. Companies failing to meet corporate governance expectations may find it increasingly difficult to access capital. For example, Australia’s 'big four' banks have committed to exiting thermal coal by 2030. The Net-Zero Banking Alliance, a group committed to net-zero investment portfolios by 2050, has also recently garnered its first Australian banking signatories.

Australian businesses are now rethinking their corporate strategies, undertaking initiatives such as refinancing their debts into sustainable loan facilities, offering ESG-based products and prioritising the consideration of corporate governance issues in future transactions.

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Our clients are increasingly focused on the impact that ESG issues have on their transactions and the opportunities that ESG best-practice presents. ESG considerations are no longer an optional agenda item for Australian businesses, becoming a pivotal factor in corporate strategy, growth opportunities and meeting the standards of both Australian and international investors.

Michelle Bennett – Partner, Mergers, Acquisitions & Capital Markets

Corporate crime

Reforms to Australia's corporate criminal responsibility laws picked up pace in 2021, following the Australia Law Reform Commission’s Final Report on corporate criminal responsibility in August 2020. The Federal Government has proposed amendments to the Australian Criminal Code which will introduce a new offence of failing to prevent bribery of a foreign public official: this is similar to the failure to prevent bribery offence in the UK Bribery Act 2010. Under this new offence, a company is automatically liable for bribery committed by an 'associate' (including a subsidiary, officer, employee, agent, contractor, or third-party service provider) for the company’s gain, unless the company can demonstrate that it had 'adequate procedures' in place designed to prevent the bribery from occurring. This amendment in essence expands the range of conduct for which a company will be strictly liable.

The Federal Government finalised its consultation of its 'adequate procedures' guidance and is expected to finalise its guidance before the new bribery offence is passed into law. Initial indications are that this guidance will largely follow similar guidance issued by authorities in the US and the UK.

The Federal Government has passed reforms to Australia’s sanctions regime, including the introduction of 'Magnitsky' style sanctions. In addition to establishing a human rights sanctions program, the Government has indicated that it may also establish sanctions programs targeting grand corruption, malicious cyber activity and the proliferation of weapons of mass destruction. Other conceivable thematic sanctions which may be introduced are programs targeting foreign interference, transnational drug trafficking and other forms of transnational crime, given these are already targets of US sanctions programs.

These changes are likely to increase the sanctions risks to businesses operating in Australia as, until now, Australia’s sanctions regime has been state-focused.

However, once Australia adopts sanctions that are issues- focused, sanctions risks will be more likely to materialise in countries not subject to comprehensive sanctions.

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Human rights and modern slavery

There are growing stakeholder expectations that companies will align their operations with international human rights standards covering everything from modern slavery to engagement with indigenous peoples. This increase in stakeholder expectations has also driven greater uptake of human rights due diligence in M&A transactions and large-scale supply agreements, which we expect to increase, given the Federal Government’s recent law reform to enable a Magnitsky style sanctions regime as discussed previously.

Modern slavery compliance continues to be a focus for corporate Australia with the Federal reporting regime entering its second round. Civil society ranking exercises have garnered significant attention and are serving to fulfil the Federal Government’s stated aim of driving a race to the top in this area.

In June 2021, the Federal Parliament recommended that the review of the Modern Slavery Act 2018 (Cth) be brought forward as soon as possible following the conclusion of the first reporting cycle on 30 June 2021, and that the review should consider provisions for strengthening and broadening the Modern Slavery Act – together with the establishment of an independent body to oversee and enforce its implementation.

New South Wales (NSW) has recently proposed amendments to its own modern slavery regime by removing the NSW-specific reporting regime and instead establishing (amongst other things) an Anti-Slavery Commissioner, and introducing new criminal offences to prohibit slavery, servitude, child forced labour and child forced marriage. It is also likely that NSW businesses with total turnover of between AUD$50 million and AUD$100 million will be encouraged by the new Anti-Slavery Commissioner to report voluntarily under the federal regime.

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The ESG megatrend continues to build in Australia due to increasing stakeholder expectations and legislative developments. It is crucial that companies actively embed their ESG policies and positions into day-to-day operations and work to forge a robust ESG risk and compliance culture.

Rachel Nicolson – Partner, Disputes & Investigations

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