Growing ESG complexity in the year ahead: what companies can expect

Implications of US exit from international climate change commitments and shift in domestic energy policy

The United States' withdrawal from the Paris Agreement introduces a new element of uncertainty for global efforts to address climate change. It remains to be seen whether the Trump Administration's decision will leave the US as an outlier in international climate and energy policy, or if it may have a broader chilling effect on global cooperation on climate change and other emerging environmental issues.

President of the European Commission, Ursula Von der Leyen, has already reaffirmed that 'Europe will stay the course' and reaffirmed the EU's commitments to the Paris Agreement. A net zero-focused bipartisan alliance of 24 State Governors has also vowed to sustain and advance climate action in the US.  

The new US administration has also embarked on a significant gear change in US domestic energy policy.

• Executive orders have been effected to declare a 'national energy emergency'.
• This expedites the permitting of oil and gas projects (specifically in Alaska) and temporarily suspends new federal offshore wind leasing pending an environmental and economic review.
• The US Federal Reserve has also withdrawn from the Network for Greening the Financial System—an international group of central banks, including the Reserve Bank of Australia, that analyses the economic fallout from climate change.
• The Office of Management and Budget also ordered a temporary pause on grant funding by federal agencies for activities implicated by the new executive orders, including renewable energy and climate and atmospheric research programs. The order was subsequently rescinded after an urgent legal challenge by non-profits successfully sought an injunction.

These changes are likely to lead to legal challenges, further adding to the uncertainties faced by businesses navigating the new energy policy environment. As the Trump Administration seeks to encourage investment in the oil and gas sectors, we also expect stakeholders to intensify their scrutiny of companies' exposure to higher-emitting projects.

Methane emissions

International initiatives to reduce methane emissions have been gaining industry and national support:

• the World Bank's Global Flaring and Methane Reduction (GFMR) Partnership is now active in over a dozen countries and has been endorsed by 57 companies.
• the Global Methane Pledge launched at COP26 in 2021 by the EU and US has received 159 country endorsements as of 2024, including Australia's.

Several countries have moved to impose stricter regulations on methane emissions. In May 2024, the EU introduced its Methane Regulation requiring increased monitoring, detection and reduction of methane emissions. Additional import restrictions will extend to gas imported into the Eurozone from 2027. In November 2024, the United States Environmental Protection Agency announced new regulations on the emission of methane from crude-oil and natural gas facilities.

New and expanded gas projects (and related infrastructure and supply chains) remain a focus of campaigning and shareholder activism on fugitive methane emissions by organisations such as Market Forces.

Biodiversity and nature

Countries are moving to implement their national commitments under the Kunming-Montreal Global Biodiversity Framework.

• Australia's Nature Repair Market is set to open for business in 2025, operating in a similar fashion to the existing carbon market, to incentivise projects to protect and restore the environment through biodiversity credits.
• The EU's Regulation on Nature Restoration entered into force in August 2024, and the Canadian Government has moved to legislate a Nature Accountability Bill as part of its 2030 Nature Strategy released in June 2024.
• However, the future of the Canadian bill is now uncertain due to the suspension of all parliamentary business after Parliament was prorogued on 6 January 2025 following the resignation of Prime Minister Justin Trudeau. While Canada's next general election is scheduled for 20 October 2025, opposition parties have foreshadowed a no-confidence motion when the next parliamentary session resumes on 24 March which, if successful, may trigger an early vote.

Several jurisdictions are also moving to address deforestation in supply chains, with measures including import restrictions and due diligence requirements.

• The EU's Regulation on Deforestation-free Products will enter into effect from 30 December 2025 and require certain commodities and derived products to be 'deforestation-free' if placed, made available on or exported through the EU common market.

The UK is also developing its own Forest Risk Commodity Regulation,² which would also impose commodity-based restrictions and due diligence requirements.

Plastics pollution and the circular economy

A growing number of jurisdictions are introducing restrictions on plastic products, including single-use and microplastics.

• The EU's Single Use Plastic Directive came into force in 2024, and the European Commission has proposed additional measures to prevent the unintentional release of plastic pellets.
• In the US, the State of California has commenced proceedings against Exxon Mobil and PepsiCo Inc in relation to allegedly misleading the public regarding plastics pollution.
• In Australia, the ACCC commenced enforcement proceedings against Clorox Australia Pty Ltd in April 2024 for alleged greenwashing over claims relating to its 'GLAD' plastic bag products.

The right to water

From the Murray-Darling Basin to the Great Barrier Reef and beyond, we expect to see preservation of, and access to, water resources increase in priority for stakeholders as an issue that crosses geographical and jurisdictional boundaries.

Access to water and sanitation is recognised as a fundamental human right by the UN General Assembly, and stakeholders are raising issues around water security, water quality, contamination by microplastics and Per- and Polyfluoroalkyl Substances (PFAS) chemicals, access to water resources for agriculture, and ensuring First Nations peoples' interests and connection to water are taken into account.

Modern slavery reporting reforms

In December 2024, the federal Attorney-General's Department (AGD) published the Government's response to the 2023 statutory review of the Modern Slavery Act 2018 (Cth) (MSA). The response follows the appointment of Australia's first national Anti-Slavery Commissioner, who is expected to lead in the implementation of modern slavery reporting reforms.

The Government has agreed (in full, in part, or in principle) to 25 of the 30 recommendations from the review, including the need to strengthen the compliance and enforcement framework under the MSA. The Government agreed in principle to the introduction of a penalty regime—details are not yet available, but the Government is expected to consult with stakeholders in 2025.

One issue that remains unresolved is the status of proposals for mandatory human rights due diligence (HRDD) by reporting entities under the MSA. The Government has 'noted' the recommendation to introduce HRDD; however, it has indicated that the AGD will engage with stakeholders on HRDD as part of the next stage of implementation.

The introduction of mandatory HRDD would align Australia with a number of jurisdictions that have introduced supply chain due diligence requirements, most notably the EU's Corporate Sustainability Due Diligence Directive adopted by the European Parliament in 2024. The Canadian Government has proposed new supply chain due diligence legislation, while a parliamentary review of the UK's modern slavery legislation has recommended the introduction of due diligence obligations.

The timeline for legislative amendments to the MSA may be complicated by the federal election, which is due to occur before 17 May 2025.

Navigating AI in the employment context

As AI technologies advance, companies will need to navigate the social issues raised due to the use of AI in the workplace.

Already, we are seeing increasing use of AI in hiring practices such as the screening of job applications. Based on how the algorithm was trained, AI can perpetuate biases, potentially leading to harmful or discriminatory outputs for individuals, groups or communities and arguably resulting in adverse human rights impacts.

In the US, we are seeing court cases alleging unlawful discrimination where AI tools have been used for hiring, insurance claims and rental applications.³ We anticipate Australian businesses may face similar claims if AI is used without accounting for the risk of inherent bias.

The rate of change brought by advancements in AI technology is not only front of mind for employers, but also for employees concerned about its implications. In October 2024, it was reported that Cbus and its employees had agreed to a first-of-its-kind enterprise agreement dealing with protections for employees if or when the super fund introduces AI technologies. The agreement contains an agreed definition of AI, and provides that Cbus must consult with staff on any changes that impact them in relation to AI.

Rights of First Nations peoples

In 2025, the Joint Standing Committee on Aboriginal and Torres Strait Islander Affairs is set to continue its inquiry into the Truth and Justice Commission Bill 2024. The Bill seeks to establish a Commission to make recommendations to Parliament on historic and ongoing injustices against First Nations Australians. The Australian Law Reform Commission is also taking submissions as part of its review of the 'future acts' regime in the Native Title Act 1993 (Cth), with a final report to be delivered by December 2025. For more, see our Insight.

There are increasing demands on industry to consult First Nations stakeholders in their decision-making and operations, and to engage in benefit-sharing with Traditional Owners, with an emerging focus on the clean energy sector. The First Nations Clean Energy Network has published Best Practices Principles to help First Nations communities in Australia to share in the benefits of renewable energy projects, including calling for Free, Prior, and Informed Consent (FPIC) standards to apply throughout the lifecycle of projects.

We expect that international, 'soft law' standards will continue to evolve. For example, the International Council of Mining and Metals (ICMM) recently updated its Indigenous Peoples and Mining Position Statement to emphasise the responsibility of mining companies to achieve FPIC through meaningful engagement and good faith negotiation with Traditional Owners. Although the new standard goes beyond the current position in the Native Title Act and many cultural heritage laws in Australia, it is possible it will become a benchmark for mining companies in Australia—see our Insight.

Addressing misconduct impacting First Nations peoples also remains an enforcement priority for ASIC.

Diversity and inclusion

Diversity, equity and inclusion policies and initiatives have also become the subject of backlash in the United States through three executive orders signed by President Trump, with one executive order foreshadowing regulatory action to 'encourage' private sector employers to dismantle diversity programs that have been based on federal anti-discrimination law.

This backlash has already placed diversity on the political agenda in Australia, and the discussion around diversity policies and initiatives is likely to increase in the lead-up to the federal election this year.

Company culture and governance issues in the spotlight

Corporate culture is an ongoing boardroom issue and recent examples underscore the importance of accountability, transparency and strong and ethical corporate governance.

• Cultural concerns: in the wake of federal Respect@Work reforms, a number of prominent Australian brands have been in the spotlight regarding whistleblower complaints on cultural issues. Widespread media reporting has led some companies to launch internal investigations to respond to shareholder concern and address reputational damage in the community.
• Regulatory scrutiny: in addition to reputational damage, there is also now a real prospect of scrutiny from regulators in relation to corporate cultural issues. In its updated enforcement priorities announced on 14 November 2024, ASIC reaffirmed its commitment to addressing governance and directors' duties failures as an enduring enforcement priority for 2025. As an example, ASIC commenced proceedings against Regional Express Holdings Limited and several of its directors for engaging in misleading and deceptive conduct and for contraventions of continuous disclosure obligations in relation to ASX announcements about the company's financial position prior to entering into voluntary administration in July 2024.

Navigating complexities in AI and ESG reporting

As ESG reporting obligations expand in Australia and overseas, AI will become an increasingly attractive tool for companies seeking to reduce the time needed for data gathering and drafting.

However, the use of AI may also present legal, regulatory and reputational risk:

• Environmental impacts associated with the training and use of AI models. This includes increased demand for electricity consumption; the water footprint associated with training and maintaining AI models; and electronic waste generation.
• Susceptibility to bias, which may result in errors that could lead to misleading statements or discriminatory outputs.
• Privacy concerns from the use of sensitive or personal information without consent. Privacy law reforms introduced in late 2024 require companies to disclose when they will be using AI automated decision-making (see our Insight).
• Human rights implications such as discrimination or potential harm to vulnerable groups such as children or workers in the AI supply chain.
• Regulatory scrutiny on the use of AI, as indicated by the increased regulatory guidance available to companies, including Australia's new Voluntary AI Safety Standard, the European Parliament's AI regulations, and ASIC's report on 'Governance arrangements in the face of AI innovation'.