Keeping on top of ESG 7 min read
Environmental, Social and Governance issues continue to create a paradigm shift in the way businesses are run. 2022 looks to be another big year in the space, with those slow to adapt left behind.
Earlier this year, we looked at the global ESG themes shaping the Australian legal outlook. Here, we break down key ESG trends to watch for in 2022.
- ESG refers to the Environmental, Social and Governance issues and opportunities that businesses face.
- These considerations underpin sustainable and responsible investment – imposing evolving compliance, due diligence, financing, and reporting requirements on companies.
- It’s important to keep these trends in mind – including ESG due diligence in M&A transactions – when dealing with your stakeholders.
ESG focus is the new normal, and the world is watching. While every business will be impacted differently, here are five overarching trends to keep in mind.
- ESG licence to operate. This means satisfying stakeholders – as well as the public – on the integrity of your ESG practices. Topics in 2021 included forced labour in supply chains, net zero commitments, and FPIC. These, and issues like waste management and biodiversity, are likely to be a focus in 2022, too.
- ESG due diligence in M&A transactions. Buyers will look at a company's approach to ESG - including any past non-compliance, stakeholder complaints, regulatory risk, and general ESG philosophy. Buyers will want the target company to share their ESG standards – particularly around environmental commitments. We expect even greater attention on ESG due diligence in M&A transactions.
- Continued focus on 'just transition'. How companies engage with communities affected by their operations will be a focus. In particular, how companies treat communities when winding down major projects (such as the decommissioning of energy assets) – and on the flip side, when establishing new projects with large-scale impact.
- Continued growth in ESG-related disclosures and reporting. In recent years, disclosure of climate-related financial risks and modern slavery reporting has grown. New initiatives are now seeking to improve the quality and comparability of ESG disclosures. Notably, the upcoming Taskforce on Nature-related Financial Disclosures (TNFD)1 and the IFRS’ International Sustainability Standards Board (ISSB)2 – one of the few major developments to emerge out of COP26. As voluntary disclosure continues to gather pace, regulators and governments look to mandate such disclosures. Both the UK and New Zealand are introducing compulsory reporting in line with TCFD recommendations, while The European Commission is planning to bring in the second phase of the Sustainable Finance Disclosure Regulation next January3.
- Testing ESG integrity through litigation. We expect ESG strategic litigation to continue, especially when it comes to holding businesses accountable for their public ESG statements, such as net zero and human rights commitments.
Below, we look at specific trends appearing in E, S and G.
Unsurprisingly, the E in ESG will focus on net zero strategies in 2022, with the viability of existing commitments coming into question. Three trends to watch for are:
Continued testing of public commitments to targets
2021 saw an uptick in climate litigation, which we expect to continue. The latest wave saw increased interest in novel causes of action and claims. In particular, litigants are alleging breaches of corporate and consumer law – primarily, misleading or deceptive conduct – in claims against entities in the banking and financial services and oil and gas sectors4. Such allegations are known as 'greenwashing' –these industries should be mindful of ESG mitigation strategies. The private sector is also increasingly being asked to show sustainability practices when bidding for government procurements, and to deliver on those promises.
Companies should also expect more scrutiny from regulators. ASIC has identified greenwashing as an enforcement priority5. Speaking at the Australian Financial Review’s CFO Live Summit in December 2021, ASIC Commissioner Cathie Armour stressed that companies with net zero projections need a plan detailing how they’ll achieve those targets – as well as their ESG commitments more broadly.
We expect climate-related shareholder resolutions to feature across the board. Indeed, many companies continue to roll out such resolutions at their AGMs. This is in response to the Say on Climate initiative - a new global movement encouraging boards to seek shareholder approval of their climate action plan.
More standardised disclosure frameworks
The ISSB is developing a global baseline of sustainability disclosure standards, which will pave the way for consistency. This likely means organisations will face more reporting requirements – across scope, detail and performance – when disclosing their climate risks.
Disclosure frameworks are likely to be carried across to non-climate areas, such as biodiversity and water scarcity. (The Taskforce on Nature-related Financial Disclosures is one leading example.) Entities will need to be able to report on a wider range of sustainability metrics.
Carbon offsetting is likely to dominate the conversation
Carbon offsetting is key to transitioning to a net zero emissions economy. Behind the rising interest in (and price of) carbon offsets is the now-mainstream commitment to net zero emissions by 2050. We expect strong interest in carbon offsetting to continue beyond 2022. In Australia, the price of Australian Carbon Credit Units (ACCUs) is anticipated to remain robust. We expect the private sector – particularly, large emitters – will continue to be interested in emissions reduction partners, as they look to secure a supply of ACCUs and meet forecast needs.
Transparency in the 'S' space is trending, particularly around human rights, inclusivity, and equal opportunity. Three trends to watch for include:
Domestic legislation on modern slavery and other human rights
The private sector is under pressure to provide clarity on social impacts in operations, procurement and supply chains.
This is evidenced by greater human rights diligence and reporting legislation across Europe, and the EU's human rights and environmental due diligence law6. This legislation will affect Australian entities with operations in or supplying to Europe.
The bar will continue to be raised on anti-discrimination standards
With a focus on sexual harassment, gender discrimination, racial discrimination, and indigenous and heritage rights standards.
Stakeholders – including shareholders, employees and the public – expect companies to be proactive in tackling sexual harassment, gender discrimination and racism. Movements like MeToo and Black Lives Matter are shining a light on companies that fail to take steps to prevent and respond to such issues.
On Indigenous rights and cultural heritage, stakeholders expect companies to focus on 'FPIC' – the free, prior and informed consent of Indigenous peoples affected by the company's operations. This was underscored in a key recommendation made by the Senate Joint Standing Committee in its Juukan Gorge report: entities must prioritise engagement with traditional landowners7. The report also recommended significant legislative changes to address the gap between domestic law and international FPIC standards.
COVID-19 will continue to affect how businesses interact with employees
The first two years of the pandemic saw a shift in employment relations and the normalisation of working from home. Flexible working is forecast to continue trending. With so many people spending more time online, online privacy and data protection are key concerns. Entities are also collecting personal data, such as COVID-19 vaccination status, which is governed by strict handling protocols.
Businesses need to decide their approach to mandatory vaccinations in the workplace, if they haven’t done so already. While some businesses aligned their policies to government recommendations (or health regulations), we expect further decisions will need to be made in 2022, particularly if health regulations are relaxed.
We expect to see G double down on corporate crime, and push for increased responsibility and awareness of the digital landscape. Three trends include:
Integration of compliance responsibilities
As compliance needs increase, responsibilities are being shared. Those in 'business' roles who deal with third parties (such as government, customers and suppliers) are expected to be aware of governance issues – including developments in the bribery and sanctions space.
The decline in compliance 'siloing' is not only in governance roles. There is growing overlap between E, S and G teams needing to give enterprise-wide consideration across business functions.
Expectation of cyber literacy in boards
As cybercrime increases, along with the financial, legal and reputational costs to businesses targeted, more attention will be paid to whether directors meet their duties in this space. Boards need to be actively educated in cyber risk, and ensure the business is resilient to attack. Companies will also be expected to focus on sanctions risks, such as ransom payments to sanctioned parties, which may be exposed through cyber-attacks.
Continued momentum in corporate criminal responsibility reforms
Reforms to Australia’s corporate criminal responsibility laws picked up pace in 2021. Proposed changes to expand on overseas conduct will likely see companies revisit their anti-corruption procedures. A strengthening of Australian sanctions may increase business risk, so we also expect interest in sanctions-related controls.
If you would like to discuss any of the issues raised, please contact any of our team below.
See the Taskforce on Climate-Related Financial Disclosures (TCFD), an initiative established by the Financial Stability Board to develop recommendations for more effective climate-related disclosures.
See the International Financial Reporting Standards Foundation's release following the announcement of the establishment of ISSB at COP26 in October 2021.
See the UK Financial Conduct Authority's information page about climate-related reporting requirements. In New Zealand, around 200 entities – including all registered banks, credit unions, and building societies with total assets of more than NZ$1 billion – will be required to produce climate-related disclosures, in an effort to meet the Government's net zero carbon target of 2050. The New Zealand reporting standards will also be developed in line with the TCFD's recommendations. See the New Zealand Ministry for the Environment's update on mandatory climate-related disclosures. In the European Union, the push continues to raise the bar on ESG disclosures for asset managers, financial product manufacturers, and financial advisers. While deferred to 1 January 2023, the European Commission plans to implement the second phase of the Sustainable Finance Disclosure Regulation (SFDR), which would require certain companies to report on 18 mandatory principle adverse impact statements (or 'PAIS') targeting ESG related issues.
See eg Sharma v Minister for the Environment  FCA 560; Milieudefensie et al. v. Royal Dutch Shell PLC (decision of the Hague Court of 26 May 2021).Following from O'Donnell v Commonwealth (VID482/2020) before the Victorian Supreme Court in 2020.
A July 2021 article by ASIC Commissioner Cathie Armour summarises greenwashing and the threats associated with it.
Following the EU's guidance in 2021 on how EU businesses should address the risk of forced labour in their operations and supply chain, which foreshadowed future legislation in this area.
A Way Forward, Final report into the destruction of Indigenous heritage sites at Juukan Gorge, October 2021. See eg Recommendation 3.