Climate change: ESG trends in Australia

Climate change is no longer a side issue. It is now a global priority which cannot be ignored by businesses and is deemed to be the greatest risk to the global economy over the next 10 years by the World Economic Forum. With governments implementing reforms to move towards a net zero world, Australia has seen important trends in environmental, social and governance (ESG) changes, which will play out further in 2023 and beyond.

Regulators

The Australian Securities and Investments Commission (ASIC) as Australia's corporate regulator, has warned businesses that it is targeting greenwashing and predatory lending in 2023, focusing on sustainable finance practices and climate risk disclosure. The ASIC chair, Joe Longo, said ”ASIC's task is to ensure that there is integrity, trust and confidence in sustainable finance-related products, services, and disclosure practices.”

In line with its commitment and enforcement priorities, ASIC issued multiple infringement notices in the past year and commenced investigations into the accuracy of sustainability-related claims by businesses. ASIC recently commenced court proceedings against Mercer Superannuation (Australia) Limited for alleged greenwashing conduct. In this case, ASIC alleges that the statements made marketed investment options as suitable for investors who ‘are deeply committed to sustainability’ on the basis that fossil fuel investments were excluded, however the investment options did include involvement in fossil fuel companies.

This is aligned with the United Nations report on net-zero commitments by businesses and financial institutions, which said non-government entities cannot claim to be net-zero while continuing to invest or be involved in fossil fuel supply.

ASIC encourages listed companies to adopt the Task Force on Climate-related Financial Disclosures (TCFD) recommendations as the framework for climate-related disclosure to prepare organisations to transition to future standards. This is aligned with the Australian Prudential Regulation Authority's guidance for financial institutions on managing climate-related financial risks.

The Australian Treasury recently closed its consultation on mandatory climate reporting in February 2023, which is part of the government's process to design and implement standardised climate disclosure requirements and sustainability reporting. Concurrently, the International Sustainability Standards Board is preparing global sustainability disclosure standards (expected to take effect in January 2024), which will guide the development of Australian requirements.

Investors

A recent survey of Australian institutional investors with combined assets under management of $2.1 trillion shows investors are accelerating towards net-zero and acting on climate change investment opportunities in Australia. The survey results by the Investor Group on Climate Change revealed that 70 per cent of investors have publicly set 2050 net-zero targets, with 57 per cent of these applying to the entire portfolio. 21 per cent of investors have set specific targets for investing into climate technology.

From a lending and investment perspective, Australian's largest banks have committed to net-zero by 2050 and signed up to the Net-Zero Banking Alliance (NZBA). Consequently, companies with strong ESG credentials and net-zero targets benefit from improved access to cheaper capital and preferred rates.

With banks publishing emissions data to comply with climate reporting and NZBA obligations including scope 3 (supply chain) indirect emissions disclosures, banks are driven to ensure the transactions financed by them will not increase their carbon footprint. Currently, there are 126 banks from 41 countries in the NZBA, representing total assets of over US$73 trillion which is more than 41 per cent of global banking assets.

Recommendations

Each company's approach to ESG depends on the industry sector, size of the organisation and the type of business, noting the board is ultimately responsible for strategic and risk decisions.

In its recent global report in January 2023, Bain and Company acknowledged that "while it remains difficult to quantify M&A activity under ESG parameters,” its report "estimates one in ten deals in diversified industrials now has an ESG component." Key trends identified are that companies are acquiring "adjacent businesses to gain quick access to greener and more favourable market segments" and companies are exploring ESG-driven acquisitions to boost their production or manufacturing capabilities.

Given the broad reach and impact of ESG on varying stakeholders across different industries, ESG is and will be a key business imperative. Taking action to develop and drive an ESG strategy will benefit each business and allow for a stronger competitive advantage, but failure to do this may adversely impact long-term business operations.

Thomas Kim is a partner and Kenneth Lee is a senior associate at HWL Ebsworth Lawyers in Australia hwle.com.au

Important Disclaimer: This publication is of a general nature and is based on Australian law as of the publication date. It is not, nor is it intended to be legal advice. If you wish to take any action based on this article, we recommend that you seek professional advice.