In addition to the opportunities it offers, ESG is a material disputes risk that extends well beyond traditional litigation.8 min read
Pressure is emerging from multiple angles – regulation, investors, employees and communities – to have a proactive approach to ESG issues. While climate change is one of the leading issues in the ESG space, stakeholder expectations surrounding broader ESG principles are rapidly increasing, accompanied by a steady uptick in the number of ESG complaints being brought in Australia.
In this Insight, we highlight current trends in ESG disputes and outline the key strategies companies should be implementing right now to mitigate ESG disputes risk.
We are seeing ESG litigation arise in this area from an expanding suite of causes of action, from corporations law, to tort law, to consumer class actions. In Australia, ESG disputes risk is most prevalent in the climate change space.
Historically, this type of litigation risk has primarily been environmental groups and/or local communities organising to bring litigation regarding individual projects under environment and planning laws. More recently, there has been a shift towards challenging corporate and government decision-makers and funders, predominantly through allegations of greenwashing and failure to disclose climate change risk. A common thread in many of these actions is that damages are rarely sought. Instead, the complainants are seeking action in response to the anticipated challenges posed by a changing climate.
This shift in climate litigation focus mirrors a global rise in shareholder activism, accompanied by growing expectations for corporate alignment with international laws and soft law standards.
These expectations are not limited to climate change, but encompass international standards in areas such as human rights. As a result, ESG litigation is also foreshadowed in areas including modern slavery, indigenous peoples' rights and biodiversity.
Climate change case studies
Disclosure duties
A shareholder claim was brought in 2018 against Australian superannuation fund REST by one of the trust's members, in relation to the disclosure and management of climate-related risks. Late last year, the parties agreed to settle the claim. As part of the settlement, REST agreed to, among other things, implement a long-term objective to achieve a net zero carbon footprint for the fund by 2050; measure, monitor and report outcomes on its climate related progress and actions, in line with the recommendations of the Task Force on Climate-related Financial Disclosures; publicly disclose the fund's portfolio holdings; and enhance its consideration of climate change risks when settling its investments strategy and asset allocation positions. If the case had proceeded to trial, it was expected to provide guidance on the scope of superannuation trustees' duties as to the assessment, management and disclosure of climate-related risks.
Duties of care
Eight Australian children (through their litigation representative) brought an action against the Federal Minister for the Environment under the Environmental Planning and Assessment Act 1979 (NSW), seeking a declaration that the Minister owed them — and children around Australia — a duty to exercise ministerial powers under the Environment Protection and Biodiversity Conservation Act 1999 (Cth) (the EPBC Act) with reasonable care so as not to cause the children harm (Sharma v Minister for Environment). The eight children contended that the Vickery Coal Project would contribute to climate change, and consequently increase the risk of climate change-related harm to the applicants, including mental and physical injury, damage to property, and economic loss.
In May 2021, the Federal Court found that the Minister bore this duty of care. Although currently under appeal, this decision adds a new and complex overlay to environmental approvals for carbon-intensive projects under the EPBC Act, due to the liability risks attached to this novel duty of care. There is also scope for similar duties to be owed by other state and territory environmental decision-makers. If successful on appeal, the duty of care could constrain both government and private entities from undertaking projects that encompass appreciable risk of harm arising from contributing to climate change.
Most recently, First Nations Leaders of the islands of Boigu and Saibu in the Torres Strait Islands commenced class action proceedings in the Federal Court of Australia against the Government (Pabai Pabai & Anor v Commonwealth of Australia), alleging that the Commonwealth owes a duty of care to Torres Strait Islanders and has breached, and continues to breach, this duty. The alleged duty of care is to take reasonable steps to protect them, their traditional way of life and the marine environment surrounding the Torres Strait Islands from the current and project impacts of climate change. The plaintiffs are seeking an order requiring the Federal Government to take steps to prevent this harm to their communities by cutting greenhouse gas emissions. If this proceeding succeeds, future litigants may take a similar approach, to argue that a high-emitting company is contributing to foreseeable climate change impacts with every tonne of CO2 that it emits; that it is capable of determining the emissions cuts necessary to align its emissions with holding temperature rise to 1.5°C; and that it is liable in tort for failing to do so.
Growing preference for non-judicial dispute resolution
Since early 2020, the Australian National Contact Point (the ANCP) has seen more than a 58% uptick in complaints. While complaints against multinational companies to the OECD National Contact Points are on the rise around the world, 25% of new complaints worldwide were filed in Australia. In particular, the resources sector and big banks have been targeted in these complaints, but renewables are increasingly under the spotlight too.
OECD National Contact Point case study
In late January 2020, Friends of the Earth, an environmental NGO, lodged an OECD National Contact Point complaint against an Australian financial institution. It argued that a failure to disclose adequately climate change impacts prevented customers from making informed investment decisions. The complaint sought that the financial institution disclose its greenhouse gas emissions, divest its interest in fossil fuel industries, commit to greenhouse reductions, and conduct and disclose climate-related scenario analysis.
While it is not a determination on the merits of the complaint, nor an assessment of whether there was a failure to make adequate disclosures on climate-change risks, the ANCP published its initial assessment on 24 November 2020. This sets out in great detail the parties, complaint and outcomes sought, and the ANCP confirms that the complaint warrants further consideration. The final statement is currently being drafted.
The increase in government inquiries on specific ESG-related issues also has potential to create follow-on litigation for companies in Australia. In terms of receiving and handling complaints, the Australian Securities and Investments Commission (ASIC) has written to CEOs of public companies, large proprietary companies and trustees of registrable superannuation entities, urging them to review their whistleblower policies to ensure that they comply with the law.
Regulators are also responsive to the increasing demands from investors in Australia for environmentally friendly, sustainable or ethical investment options. For example, in July this year ASIC commenced a review to establish whether the practices of funds that offer these products align with their promotion of these products, or whether there has been an overrepresentation on the extent to which their practices are ESG-focused, otherwise referred to as 'greenwashing'. This focus was also included in ASIC's Corporate Plan for 2021–2022.
Government inquiry case studies
Indigenous rights and cultural heritage
The Joint Standing Committee on Northern Australian held an inquiry into the destruction of 46,000-year-old caves at the Juukan Gorge in the Pilbara region of Western Australia, and tabled its final report on 18 October 2021. The final report contains three key findings (a national framework for the protection of cultural heritage, an endorsed set of standards that set best practice in the management of cultural heritage, and the promotion of economic benefits in protecting and celebrating heritage sites) and eight groups of recommendations, which are all aimed at achieving nationally consistent and integrated approaches to Indigenous heritage protection.
Sexual harrassment
The Australian Human Rights Commission national inquiry into sexual harassment in Australian workplaces in 2018 (the National Inquiry) has resulted in tangible impacts for business. It precipitated both Respect@Work (the Sex Discrimination Commission's March 2020 report of the National Inquiry) and the Sex Discrimination and Fair Work (Respect at Work) Amendment Act 2021 (Cth) (the Act). The Act was passed on 2 September 2021, and amends both the Fair Work Act 2009 (Cth) and the Sex Discrimination Act 1984 (Cth) to, among other things, insert a new provision expressly stating that it is unlawful to sexually harass, so as to codify the position at common law. It also establishes a new anti-sexual harassment jurisdiction in the Fair Work Commission.
Below are five key strategies companies can be implementing right now to mitigate ESG disputes:
The board should understand and have the opportunity to discuss ESG issues, and set the 'tone from the top' by providing endorsement for key ESG ambitions. Boards are also expected to provide ongoing oversight of key ESG risks, as well as opportunities.
Engage with stakeholders to try to head off potential disputes at an early stage. High-water mark international law standards increasingly inform stakeholders' expectations of corporate conduct. So, consider material gaps between any ESG commitments and those prevailing standards. We have previously examined the potential to use international law frameworks as a tool to set policies on ESG issues and how to achieve this practically.
Be satisfied that the company's public ESG claims and commitments are accurate, factually based and able to be substantiated. Stress-test how well the business fulfils those representations on the ground. Have the standards to which the company committed been embedded in policies, procedures, due diligence and training?
Consider carefully the language employed in any public-facing documents such as annual reports, prospectuses, action plans and marketing materials. Make clear any material assumptions, interdependencies and contingencies.
Establish an accessible and respected speak up and whistleblower program to identify hot spots where culture may be deficient. Strong speak up or whistleblower programs are key to a healthy corporate culture, in terms of escalating issues and creating an environment of transparency. Engaging in an effective remedy with stakeholders is a central part of any risk management program.
Disclosure duties
Duties of care
OECD National Contact Point case study
Indigenous rights and cultural heritage
Sexual harrassment
The board should understand and have the opportunity to discuss ESG issues, and set the 'tone from the top' by providing endorsement for key ESG ambitions. Boards are also expected to provide ongoing oversight of key ESG risks, as well as opportunities.
Engage with stakeholders to try to head off potential disputes at an early stage. High-water mark international law standards increasingly inform stakeholders' expectations of corporate conduct. So, consider material gaps between any ESG commitments and those prevailing standards. We have previously examined the potential to use international law frameworks as a tool to set policies on ESG issues and how to achieve this practically.
Be satisfied that the company's public ESG claims and commitments are accurate, factually based and able to be substantiated. Stress-test how well the business fulfils those representations on the ground. Have the standards to which the company committed been embedded in policies, procedures, due diligence and training?
Consider carefully the language employed in any public-facing documents such as annual reports, prospectuses, action plans and marketing materials. Make clear any material assumptions, interdependencies and contingencies.
Establish an accessible and respected speak up and whistleblower program to identify hot spots where culture may be deficient. Strong speak up or whistleblower programs are key to a healthy corporate culture, in terms of escalating issues and creating an environment of transparency. Engaging in an effective remedy with stakeholders is a central part of any risk management program.