by Sayomi Ariyawansa, Michelle Bennett, Naomi Bergman, Kim Borchard, Jillian Button, Caitlin Dagher, Darcy Doyle, Billy Hade, Tiana Macleod, Rachel Nicolson, Leighton O'Brien, Jacqui Rowell, Emily Turnbull
Elevating ESG for a just transition
As environmental, social and governance (ESG) trends evolve, the emphasis has changed to encompass a just transition. The focus now is on how clean energy projects understand and mitigate their impacts on the environment and other potentially impacted communities to ensure the benefits of the transition are shared fairly.
Companies should consider the impact of their projects on nature and biodiversity as part of their risk management. Australia plans to protect 30% of its land and oceans by 2030 and has introduced new laws, such as the Nature Repair Act 2023, to support this. Clean energy projects must also be aware of risks like modern slavery in their supply chains, as regulations in this area are tightening. It is also important for companies to work closely with First Nations peoples, respecting their rights and obtaining their consent before starting projects to avoid delays and ensure fairness.
Managing ESG risks in the energy transition requires strong governance and transparency. Large electricity buyers must ensure their suppliers meet high ESG standards. Private capital investors should align with TNFD recommendations and assess human rights risks in their investments. Developers should prepare for the Nature Repair Market, enhance human rights due diligence and verify carbon offsets to prevent greenwashing.
By incorporating these considerations into clean energy projects, we can help ensure that the benefits of the transition are widespread and equitable, reinforcing our commitment to a more sustainable and inclusive future.
What's the challenge?
The high watermark of corporate conduct that exists in international law, voluntary standards and stakeholder expectations continues to flow through to domestic law, as well as to regulatory enforcement, private litigation and non-judicial complaints. At the same time, there can be opportunities in embedding and uplifting ESG commitments and systems.
What's happening now?
We've highlighted three hot topics relevant to clean energy projects in the ESG space: biodiversity and nature-related risks and impacts; modern slavery and other human rights issues; and engagement with First Nations peoples.
Companies should be considering how they can integrate assessment of biodiversity and nature-related risks and impacts into risk management and due diligence processes. The Federal Government has announced its Nature Positive Plan, which confirms its commitment to protect and conserve 30% of the nation's land and oceans by 2030, and identifies the priorities that will guide the Government's reform agenda for 'the most comprehensive remaking of national environmental law' since the Environment Protection and Biodiversity Conservation Act 1999 (Cth) (the EPBC Act) was first introduced. The first stage of EPBC Act reforms was completed in late 2023, alongside the creation of a Nature Repair Market. To progress the second stage of reforms, the Government has also introduced into Parliament draft legislation to establish Environment Protection Australia, a new federal environmental regulator, which will administer and enforce a range of federal environment laws.
Tradeable biodiversity certificates may provide opportunities for additional value creation from clean energy projects. The Nature Repair Act 2023 (Cth) creates a national framework for a voluntary national biodiversity market and came into effect on 15 December 2023. The Act authorises the Clean Energy Regulator to issue Australian landholders with tradeable biodiversity certificates for nature-protecting and restoring projects. The Department of Climate Change, Energy, the Environment and Water is currently developing the systems and processes necessary to administer the Nature Repair Market, with a view to having it operational by 2025.
When it comes to reporting and disclosures, the final version of the Taskforce on Nature-related Financial Disclosures (TNFD) reporting framework was released in September 2023. While it is currently voluntary for Australian companies, mandatory climate change reporting is likely to come into force by January 2025, and we anticipate biodiversity reporting may follow a similar path but at a faster pace.
Clean energy systems and supply chains can carry an increased risk of modern slavery and other human rights issues because of the way certain critical minerals and metals used in solar, wind and battery systems are extracted and processed. Further, the locations where components for these systems are sourced and manufactured are associated with higher risks of modern slavery and potential breaches of other fundamental human rights. Traceability in supply chains for these components can also be an issue. This presents an opportunity for Australian critical minerals producers, where customers are seeking an ethical source and transparent and secure supply chain for critical minerals.
Australia has now established an Anti-Slavery Commissioner, whose remit includes supporting victims and survivors, increasing community awareness and assisting business to address modern slavery risk. The Government has noted that several of the recommendations from last year's statutory review of the Modern Slavery Act 2018 (Cth) align with its 'Tackling Modern Slavery' election promises, so further reforms that elevate human rights due diligence and reporting requirements may be on the horizon. Another significant international development has been the approval of the long-awaited European Union Corporate Sustainability Due Diligence Directive, which will require in-scope companies to have systems and processes in place to prevent, mitigate and remedy actual or potential environmental and human rights-related adverse impacts in their 'chain of activities'.
Efforts continue to be made to hold companies accountable for alleged connections to modern slavery, among other human rights impacts. This trend is playing out in non-judicial dispute resolution processes in particular—including Organisation for Economic Co-operation and Development National Contact Points, and regional bodies such as the Canadian Ombudsperson for Responsible Enterprise.
With many clean energy projects occurring in rural, regional or offshore areas, companies should squarely consider the rights of First Nations peoples that might be impacted. The World Economic Forum recently noted the need to shift from viewing Indigenous communities as 'stakeholders' to recognising their role as 'partners' in the energy transition.
The right to free, prior and informed consent (FPIC) requires that, in certain circumstances, the consent of First Nations peoples is obtained based on a free, prior and informed process of consultation before a project is undertaken. For this to occur in a meaningful manner, the principles of FPIC must be embedded across the project lifecycle. For example, early engagement and consultation are required before project decisions are made, and agreements should establish a clear process for obtaining and maintaining consent (ie consent should not be seen as a 'once-off' event that occurs at the start of project development). The principles of FPIC should also be embedded into buyer, investor and developer processes.
Early and meaningful engagement with First Nations peoples positions companies to minimise impacts on their rights. It also reduces project risks such as delays in obtaining project approvals, as well as challenges to existing approvals on the basis of inadequate consultation, or due to potential human rights or environmental impacts.
What's next?
Identifying and managing the ESG risks and opportunities associated with the energy transition requires a whole-of-organisation effort, and the role of robust governance (and related systems and processes) is critical. Regulators continue to highlight this point, including regarding the evolving nature of directors' duties, and the need to respond to stakeholders'—particularly investors'—calls for disclosure and transparency.
- Large electricity buyers should be mindful of the increasingly high watermark for due diligence on their current or prospective electricity suppliers. The recent approval of the EU CS3D raises the standard of ESG due diligence, including human rights due diligence, for businesses—even for out-of-scope companies in Australia, given they will likely need to meet heightened expectations of in-scope companies within their supply chain.
- In entering and negotiating power purchase agreements or carbon offset agreements, consider including counterparty representations, and warranties of compliance with recognised human rights laws and standards.
- In line with best practice offsetting principles, consider the degree to which emissions can first be reduced or avoided before relying on carbon offsets
- Private capital investors should consider aligning their reporting on biodiversity and nature with the latest developments in this space, such as the TNFD recommendations, which are quickly expected to become good practice. They should also consider how TNFD reporting by other entities can be used to inform investment decisions.
- In light of the growing sophistication of claims brought against companies, private capital investors ought to consider the potential for not only direct exposure to modern slavery and other human rights impacts through investments in their portfolio companies, but also any indirect exposure on account of the corporate structures and supply chains of their portfolio companies.
- Private capital investors should look to investment opportunities that are aligned to the Australian Sustainable Finance Taxonomy criteria, as the taxonomy is developed. This is particularly pertinent given the elevated scrutiny by investors and other stakeholders of companies' management of climate change, nature and human rights-related risks.
- With the commencement of the Nature Repair Market scheduled for 2025, developers can be identifying opportunities through which projects may be utilised to obtain tradeable biodiversity certificates.
- It is expected that developers are actively identifying their potential connections to modern slavery, as well as other human rights impacts, and are now taking meaningful steps to monitor and address their potential exposure in response, including by way of enhanced forms of human rights due diligence.
- Understanding that the principles of FPIC need to be embedded throughout the lifecycle of a project will be critical. Developers should understand how the business has agreed to embed FPIC principles and the steps it intends to take to implement these principles in practice. Developers should be undertaking human rights due diligence to ensure adequate focus is placed on the recognition of the rights of First Nations peoples and mitigation of impacts on these rights (as well as other potentially impacted rightsholders). Developers should also stay up to date with best practices concerning how principles of FPIC are being adopted across industries, as well as evolving concepts relating to recognised interests such as 'sea country'.
- If carbon offsets are being procured or generated—with the increasing adoption of net zero targets, and corresponding emphasis by regulators on greenwashing—ensure that adequate due diligence has been completed to confirm the verifiability of the offsets and that best practice offsetting principles have been applied.