ESG - A standout legal & compliance risk

Overview

It’s been a busy month at Guthrie Legal.

I’ve attended and addressed some wonderful industry conferences, including ALGA’s EcoForum SustRem Conference and Ports Australia Business and Operations Conference. EcoForum’s Conference theme this year was ''Meeting the Challenges for a Sustainable Future''. The Ports Australia themes included Green Ports and Green Shipping. The sectors may be different, but the takeaway is the same: Environmental, Social and Governance (ESG) considerations are rising to take centre-stage.

What is ESG?

ESG considerations are a broad range of sustainability factors, encompassing issues such as climate change, modern slavery and stakeholder engagement, that can be used, through ESG reporting, to evaluate future corporate financial performance, ethics and risk management.

Photos courtesy of the Australian Land & Groundwater Association

ESG Strategy & Implementation - Where are we?

One of the common themes to emerge from discussions with businesses in transport, manufacturing, utilities and other sectors across corporate Australia is the present level of confusion on ESG risk and management.

I say confusion, but it might more aptly be described as a polarised spectrum of comments, ranging from the undoubtedly vanguard organisations with standout teams - showcasing their brilliant work in sustainability to, well, everyone else. And the comments I hear most frequently, describe the general sense of panic, chaos, overwhelm, under-resourcing, and lack of direction, particularly when trying to figure out where to start.

As a lawyer, I can appreciate why this is the case. It is an area of considerable complexity. Moreover, much of the important work done in the sustainability space has, until relatively recently (major listed entities excepted), been primarily the subject of voluntary action. But in recent years that has changed, and is materially about to further change in 2024.

Legal risk associated with ESG is starting to impact a broad cross-section of Australian corporations.

Law & Emerging Law

There is no single “source” of ESG law.

Many of the state and territory environmental laws recognise ESD (ecologically sustainable development) which has the potential, depending on your sector, to be relevant to the legal-risk mix. But ESG is far broader than ESD. It encompasses many aspects of environmental law, emissions, waste and circular economy.

More prominent and general key sources of ESG law in Australia are:

• the Corporations Act 2001, including directors duties to act in good faith in the best interests of the company, and with due care and diligence;

• the Australian Securities and Investments Commission Act 2001 and the ASIC Rules. This legislation, in addition to the Corporations Act contains general prohibitions against a person making statements (or disseminating information) that are false or misleading, or engaging in dishonest, misleading or deceptive conduct in relation to a financial product or financial service;

• the Australian Competition and Consumer Act 2001 (Australian Consumer Law) and influential policies such as the ACCC Guidance on Environmental and sustainability claims;

• adoption of ESG considerations, data collection and reporting into commercial contracts and government procurement contracts;

• National Greenhouse and Energy Reporting Act 2007 (NGER Act) - a single national framework for reporting and disseminating company information about greenhouse gas emissions, energy production, energy consumption and other information .

If you are an International business, or trading internationally, you will potentially have a raft of other additional legal obligations and considerations.

Importantly, in June 2023, the Treasury announced the Australian Government’s proposed introduction of mandatory climate-related financial disclosure. This will bring about standardised, internationally-aligned reporting requirements for businesses to make disclosures regarding governance, strategy, risk management, targets and metrics – including greenhouse gasses. The proposed changes will see all entities that meet prescribed size thresholds and that are required to lodge financial reports under Chapter 2M of the Corporations Act 2001 being required to make climate-related financial disclosures.

Three key considerations

1. There is a runway for mandatory reporting - but you need to take action. There is a proposed three-phased approach to “phase in” mandatory reporting, starting with a relatively limited group of very large entities in July 2024 that expands over two years to apply to progressively smaller entities. It is envisaged that this will enable smaller entities more lead time before they are subject to the mandatory requirements enables them to build the capability and skills required to meet their obligations. Given what is known about the projected reporting, you should assess whether your organisation will be required to report and when and take preparatory steps accordingly.

2. There will be a “trickle down” effect. Even smaller entities that may not be caught up in phased reporting will stand to be potentially impacted by the changing market as supply chains become progressively scrutinised and ESG considerations, risks and reporting becomes more mainstream in commercial contracts. Certainly there is a lot of work being done in this space globally, including by the Chancery Lane Project. Once included in a contract, ESG matters become an important source for legal obligations and so ESG should be subject to appropriate legal risk management to avoid breach of contract or other contractual penalties.

3. ESG can only thrive with strong environmental management. One of the biggest strategic issues I see is the common “siloing” of operational environmental management teams (in corporate environment teams, EHS, SHE teams, often at site level) and sustainability teams (often in a different part of the corporate structure).

   Has the time come to work collaboratively and break down these barriers? I think so.

   It will become progressively more difficult in the face of reporting and scrutiny to pursue an ESG agenda and “sustainability good news stories” without the integration, expanded resourcing and technical input from environmental management teams.

Defining the “what” is hard, but defining the “how” and the “how for you” is the preeminent challenge

ESG considerations, risks and laws are an emerging consideration for legal teams, C-suite and boards. One of the complexities to overcome is understanding which suite of legal obligations applies to your business (or will apply) and how it applies (i.e. through a risk of regulatory enforcement action, potential civil or consumer claim, or contractual claim).

A great starting point for ESG Strategy development is pinning down the key legal obligations, as well as other material risks, such as reputational and financial exposure.

Many parts of ESG management are already well established professional services (for example, NGER reporting and specialist data collection and reporting). So you may be able to utilise existing internal and external experts in these areas. But other parts of ESG risk, and service provision are emerging. Given the unique nature of every business and its risks, the fundamental part of effective ESG risk management and integration will be not just figuring out the “how” but the “how for your organisation” specifically.

If you have any queries in relation to this blog, or need ESG assistance please get in touch. I offer tailored legal briefings to C-suite, boards and operational teams on all aspects of ESG as well as compliance and governance systems more broadly. I can also offer legal insight and advice to support your existing sustainability and environmental practitioners.

The legal stuff

This article is aimed to be high-level, practical and thought-provoking. It is not a detailed description of environmental law in Australia. You should always seek independent legal or other professional advice on specific cases and before acting or relying on any of the content. All the information in this article and on this website and any downloads are intended only to provide a summary and general overview on matters of interest. It is not intended to be comprehensive nor does it constitute legal advice or establish a lawyer - client relationship. Whilst attempts have been made to ensure that the content is current, Gabrielle Guthrie and Guthrie Legal do not guarantee its currency. Copyright 2023