Australia

Contributing law firm: Gilbert + Tobin
Contact: Ilona Millar, Partner

ESG in APAC - Australia by Gilbert + Tobin

Please click on the podcast above for a snapshot of the three key themes of ESG reporting, transition planning and greenwashing risks in respect of Australia. Scroll down for further information on each key theme.

A. ESG Reporting

1. Are there legal or regulatory requirements for companies to make ESG disclosures in your jurisdiction?

Yes.

2. What are the key legislative and regulatory sources for ESG disclosure requirements and to whom do they apply?

ESG disclosure requirements are primarily aimed at large companies and listed companies:

(a) The National Greenhouse and Energy Reporting Act 2007 (Cth) (NGER Act) requires companies that meet certain thresholds relating to GHG emissions and production and consumption of energy to provide yearly reports relating to the GHG emissions from particular sources, energy production and energy consumption.

(b) The Modern Slavery Act 2018 (Cth) requires entities based, or operating, in Australia, which have an annual consolidated revenue of more than AU$100 million, to report annually on the risks of modern slavery in their operations and supply chains, and actions to address those risks.

(c) For listed companies on the Australian Securities Exchange (ASX), the ASX Listing Rules require all listed entities to publish annually a corporate governance statement disclosing the extent to which the entity has followed the recommendations set by the ASX Corporate Governance Council during the reporting period. Recommendation 7.4 of the ASX Corporate Governance Council’s Principles and Recommendations states that “a listed entity should disclose whether it has any material exposure to economic, environmental and social sustainability risks and, if it does, how it manages or intends to manage those risks”. The ASX Corporate Governance Council is currently consulting on a fifth edition of its Corporate Governance Principles and Recommendations, which refers to the impact of climate change-related risk and advises entities to consider ongoing developments in sustainability standard setting when making disclosures under Recommendation 7.4.

In addition, Australian regulators have released guidance that incorporates ESG-related disclosures:

(a) Australian Securities and Investments Commission (ASIC) has published the Regulatory Guide 228 Prospectuses: Effective disclosure for retail investors, and Regulatory Guide 247: Effective disclosure in an operating and financial review. This ASIC guidance incorporates physical and transitional climate-related risks, as identified by the TCFD, into the list of examples of common risks that may need to be disclosed in a prospectus, and highlighted climate change as a systemic risk that could impact an entity’s financial prospects for future years and that may need to be disclosed in an operating and financial review.

(b) Australian Prudential Regulation Authority (APRA) has released the Prudential Practice Guide: CPG 229 Climate Change Financial Risks, which outlines prudent practices in relation to climate change financial risk management. Specifically, the guide provides guidance, sets out examples of better practice and aims to assist institutions in managing climate-related risks and opportunities.

3. Are the requirements mandatory or do they apply on a comply-or-explain basis?

The NGER Act contains mandatory disclosures in relation to GHG emissions and energy consumption.

The disclosures required by the Modern Slavery Act are also mandatory.

If a listed entity does not follow a particular recommendation of the ASX Corporate Governance Council, it is required to disclose that fact and provide the reasons why.

4. Which aspects of ESG do the requirements focus upon?

For listed companies, environmental, social and governance aspects are all covered.

For companies covered by the NGER Act, the focus is on climate.

For companies covered by the Modern Slavery Act, the focus is on social risks.

The regulatory guidance that has been released primarily focuses on the environment, and in particular climate change.

5. Are the disclosure requirements based on international standards? If so, which one(s)?

The reporting requirements under the NGER Act have been developed to be consistent with IPCC 2006 Inventory Guidelines.

The ASX Corporate Governance Council’s Principles and Recommendations encourage entities to disclose any material exposure to environmental risks by reference to the TCFD recommendations.

6. How do the disclosure requirements approach materiality (e.g. single or double materiality)?

The forthcoming climate-related financial disclosure regime (as outlined in section A.11 below) adopts a single materiality approach in line with the ISSB Standards. If there is no impact on the company from climate-related issues, then the company is required to state that in their sustainability report.

A double materiality approach can be considered but is not currently required.

7. Are there requirements for the disclosure of GHG emissions? If so, please specify the scope (e.g. Scope 1, Scope 2 and/or Scope 3), to whom they apply and whether there are requirements on the measurement methodology.

Yes, the NGER Act requires companies that meet certain thresholds relating to GHG emissions and production and consumption of energy to provide yearly reports relating to Scope 1 and Scope 2 GHG emissions from particular sources, energy production and energy consumption. The National Greenhouse and Energy Reporting (Measurement) Determination 2008 provides the methods and criteria for calculating GHG emissions and energy data under the NGER Act.

The forthcoming climate-related financial disclosure regime in Australia will require in-scope entities to disclose any metrics and targets relating to climate that are required to be disclosed by the forthcoming Australian Sustainability Reporting Standards (ASRS), including Scopes 1, 2 and 3 GHG emissions (and financed emissions). The bill introducing the climate-related financial disclosure regime aligns the definitions of Scopes 1, 2 and 3 GHG emissions with the ASRS and ISSB Standards. It also provides that Scope 3 GHG emissions disclosures are to include details of financed emissions, being the portion of GHG emissions of an investee or counterparty attributed to the loans and investments made by an entity to the investee or counterparty.

In relation to Scope 3 GHG emissions, the draft ASRS provide that entities will not be required to disclose exact data or detailed information that cannot be easily provided by their customers or supplies. Entities will also only be required to disclose Scope 3 emissions from their second reporting year onwards.

However, approximately half of the top 50 ASX listed entities have set targets and are already reporting on their Scope 3 GHG emissions with varying degrees of detail.

8. Are there requirements to obtain independent assurance of any ESG disclosures? If so, what is the scope of such requirements?

The bill introducing the forthcoming climate-related financial disclosure regime proposes that sustainability reports will be subject to mandatory audit requirements, in accordance with the Auditing and Assurance Standards Board (AUASB) auditing standards. A phased-in approach is proposed for the auditing of sustainability reports, with a progressive assurance phasing-in regime until 1 July 2030.

9. For companies not subject to mandatory or comply-or-explain ESG reporting, are voluntary ESG disclosures customary?

Many companies make ESG disclosures in their annual reports which are made against the TCFD recommendations, ISSB Standards or other international standards (such as the SASB standards or the GRI standards).

10. Has your jurisdiction issued or adopted a taxonomy on sustainable activities? Is it mandatory and what is its scope of application?

In May 2024, the Federal Government released a public consultation paper on the Australian Sustainable Finance Taxonomy (Taxonomy), which is being developed by the Australian Sustainable Finance Institute (ASFI) in partnership with the Australian Government. This is the first public consultation, which will be followed by further consultations later in 2024.

The Taxonomy will initially comprise technical screening criteria addressing climate change mitigation for six priority economic sectors: electricity generation and supply; minerals, mining and metals; construction and the built environment; manufacturing and industry; transport; and agriculture and land.

The adoption and use of the Taxonomy will not be compulsory. However, ASFI has recommended that reporting on taxonomy alignment should be mandatory where users are seeking to make claims regarding the sustainability objectives covered by the taxonomy.

11. Are there plans to adopt or incorporate the ISSB’s IFRS S1 and/or S2 standards? If so, please indicate the extent of alignment, to what extent the standards will be mandatory, to whom they will apply and the timeline.

Yes, in March 2024, the Australian Government introduced the Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024 (Cth), which proposes a new mandatory climate-related financial disclosure regime. As part of the proposed regime, the Australian Accounting Standards Board is developing the ASRS. These standards align as far as possible with both the IFRS S1 and IFRS S2.

The proposed regime will be mandatory for entities that are required to prepare financial reports under Chapter 2M of the Corporations Act 2001 (Cth) and meet certain thresholds in relation to consolidated revenue, gross assets and full-time equivalent employees, or report under the NGER Act. The largest entities (Group 1) will be required to submit sustainability reports for their financial years commencing from 1 January 2025, whilst other in-scope entities (Groups 2 and 3) will be progressively phased into reporting obligations in 2026 and 2027 respectively.

The Bill is currently still being considered by the Australian Parliament. It is anticipated to be enacted in late 2024, with the regime to commence at the beginning of 2025.

12. Other upcoming developments / direction of travel

Climate vulnerability assessments (CVA) could also play an increasing role in Australia’s ESG reporting landscape, particularly for businesses in the financial sector. In 2021, APRA launched a CVA of Australia’s five largest banks to assess the nature and possible impact of climate-related financial risks on banks’ lending. The CVA focused on transition and physical climate risks arising in Australia which could directly impact Australian lending. APRA also announced that it will consider extending the CVA to include insurance and superannuation sectors in the future.

In addition to climate-related disclosures, we expect to see an increasing focus on nature-related disclosures. The Taskforce on Nature-related Financial Disclosure (TNFD) has developed a global nature-related risk management and disclosure framework to help businesses and financial institutions identify and act on nature-related impacts, risks, dependencies and opportunities. In September 2023, the TNFD released its recommendations on its nature-related risk management and disclosure framework in September 2023.

The Australian Department on Climate Change, Energy, the Environment and Water (DCCEEW) has expressly announced its support of the TNFD framework, including as a strategic funding partner. In 2023, DCCEEW published TNFD Pilots – Australian case study report and value chain deep-dive specific industry guidance for Australian businesses.

B. Transition planning

1. Has your jurisdiction set decarbonisation targets and strategies?

Yes, Australia has a legislated target to reduce its GHG emissions to 43% below 2005 levels by 2030 as well as to reach net zero by 2050.

The Australian Government has also set a renewable energy target of 82% by 2030.

2. Has the government or any regulator in your jurisdiction launched compliance and/or voluntary carbon trading schemes or carbon taxes? If so, please give details. If not, are there plans to do so?

Carbon Trading Scheme

Yes, Australia’s Emissions Reduction Fund enables landholders, communities and businesses to voluntarily run projects that avoid, reduce or remove GHG emissions from the atmosphere. Such projects can generate tradeable Australian carbon credit units (ACCUs) which represent one tonne of carbon dioxide-equivalent emissions stored or avoided by a project.

Australia has also recently made amendments to the Safeguard Mechanism, which commenced on 1 July 2023. The Safeguard Mechanism requires large facilities to keep their Scope 1 GHG emissions at or below their set baseline. Under the reforms to the Safeguard Mechanism, Safeguard Mechanism Credits (SMCs) will be issued to a facility whose GHG emissions are below its baseline. Each SMC is also equal to one tonne of carbon dioxide equivalent and may be traded to other large facilities to reduce their net emissions in order to meet their baseline.

Carbon Taxes

No, Australia does not currently have a carbon tax or carbon price. Whilst a carbon tax was introduced in Australia in 2012, it was the subject of divisive political debate and was ultimately removed by a subsequent government in 2013. Neither major party has proposed to re-introduce a carbon pricing scheme since then. In the absence of an economy-wide carbon price, and any indication that one may be forthcoming in Australia, a shadow carbon price has recently been proposed by the Australian Energy Market Commission (AEMC).

In March 2024, a report released by the AEMC on “How the National Energy Objectives Shape Our Decisions” announced that its future decisions will be based upon a shadow price on carbon, which will be set initially at AU$70 per tonne. A shadow price is not a cost to be paid by emitters, like a carbon price or tax. Rather, it is an estimate of how much each tonne of CO₂equivalent costs the world, collectively. This cost will be included in the AEMC’s calculation of benefits and costs of energy-related rule changes, for example, transmission network rules to make it easier for new wind and solar projects to connect to the electricity grid. The shadow price is expected to increase to AU$420 per tonne by 2050, in line with Australia’s target to achieve net zero emissions.

3. Are there mandatory requirements for companies to have in place and/or disclose climate-related transition plans? If so, please give details (including whether there is any standard or guidance on transition plans and/or requirement to consider the social impact of the plan). If not, are there plans for such requirements?

It is not mandatory to have a transition plan. However, under the forthcoming climate-related financial disclosure regime, entities will need to include details about their strategy for managing climate-related risks and opportunities, including information about their transition plans (if any), within their sustainability report. The Australian Treasury has also announced in its recently published Sustainable Finance Roadmap, that it will develop and publish best practice guidance for the disclosure of corporate transition plans by the end of 2025.

4. Are there mandatory requirements to set, meet and/or disclose climate-related targets? If so, please give details. If not, are there plans for such requirements?

Companies are not required to set, meet or disclose climate-related targets. However, under the Safeguard Mechanism, covered facilities have an obligation to keep their Scope 1 GHG emissions at or below their set baseline (as mentioned in section B.2 above). The reforms to the Safeguard Mechanism have introduced “baseline decline rates” for standard and landfill facilities, which have been set at 4.9% per year for most covered facilities. This means that those facilities’ baseline emissions, being their maximum level of permitted Scope 1 GHG emissions, will decline by 4.9% each financial year through to 30 June 2030.

Carbon credits can be surrendered by entities to manage any excess emissions to stay within their baseline. There are currently no limits on facilities’ ability to surrender ACCUs or SMCs to meet their declining baselines.

Entities and individuals, both within and outside the scope of the Safeguard Mechanism, may also choose to voluntarily purchase and cancel ACCUs and other types of carbon offsets, to meet social responsibility and sustainability goals, or other targets.

If the proposed mandatory climate-related financial risk disclosure framework is introduced to align with the ISSB Standards, it would require information on how climate-related targets are set, met and disclosed.

5. Other upcoming developments / direction of travel

Although transition plans are not currently mandatory, we expect there to be an increasing focus on transition plans. As noted, the Australian Government has announced that it will prepare separate guidance on transition plans.

C. Greenwashing risks

1. Are there any recent examples of legal proceedings, regulatory actions or investigations against or into greenwashing in your jurisdiction?

Yes.

In March 2024, the Federal Court of Australia found that Vanguard Investments Australia Ltd made false or misleading representations and engaged in conduct that was liable to mislead the public in relation to an “ethically conscious” fund offering in breach of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act). ASIC alleged, and the Court upheld, that Vanguard had made false or misleading representations that one of their funds was of an ethically conscious standard, with securities screened against specific ESG criteria before inclusion in the fund. This was ASIC’s first successful greenwashing civil penalty action and puts ASIC towards the top of the list of financial regulators globally taking enforcement action to combat greenwashing.

In June 2024, the Federal Court of Australia found that LGSS Pty Ltd, as the trustee of the superannuation fund known as Active Super, made false or misleading representations and engaged in conduct liable to mislead the public in relation of its ESG credentials. Specifically, ASIC alleged, and the Court found, that Active Super made false or misleading representations by claiming in its marketing materials that it would not invest in companies associated with gambling, tobacco, oil tar sands, coal mining or in Russian companies, where there was evidence to the contrary.

In both cases brought by ASIC, it remains to be seen what the Court will order in terms of pecuniary penalties and adverse publicity orders, which will be the subject of a further hearing in both matters.

There is a third civil penalty proceeding that has been brought by ASIC in the Federal Court of Australia, alleging greenwashing conduct by Mercer Superannuation (Australia) Limited, in relation to statements on Mercer’s website about its “Sustainable Plus” investment options.

The Australian Competition and Consumer Commission (ACCC) also recently initiated its first greenwashing proceedings in the Federal Court, against Clorox Australia Pty Ltd for allegedly making false or misleading representations that its GLAD branded kitchen tidy and garbage bags are made of 50% ocean plastic.

In 2021, the Australasian Centre for Corporate Responsibility commenced court proceedings against gas company, Santos Limited, alleging greenwashing in relation to Santos’ strategy for achieving “net zero” for Scopes 1 and 2 GHG emissions by 2040. This was the first court proceeding globally to challenge a net zero target and is ongoing.

There have been various other complaints made to the ACCC to investigate green claims made by companies. For example, Victorian Forest Alliance has lodged a complaint with the ACCC against a Victorian government agency, VicForests, for greenwashing over its advertisements and claims with messages such as “Sustainability is at the heart of everything we do.”

2. Are there any laws or regulations specifically dealing with greenwashing?

In Australia, there are laws prohibiting the making of false and misleading statements which may include greenwashing:

(a) The Corporations Act 2001 (Cth) prohibits 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.

(b) The Australian Consumer Law prohibits engaging in misleading or deceptive conduct in trade or commerce and also prohibits a person from making false or misleading representations about goods or services.

(c) The ASIC Act also prohibits engaging in misleading or deceptive conduct in trade or commerce in relation to financial services.

(d) In addition, ASIC has also published guidance for responsible entities of managed funds, corporate directors of corporate collective investment vehicles, and trustees of registrable superannuation entities, outlining key factors to consider when promoting a financial product or investment strategy as environmentally friendly, sustainable or ethical.

The ACCC also released in December 2023 a guidance for businesses on making environmental claims, enshrining eight principles to help businesses ensure their environmental marketing and advertising claims are clear and accurate, and not misleading.

3. What are the likely grounds on which such proceedings, actions or investigations can be instigated?

Likely grounds include:

(a) misleading or deceptive conduct under the Corporations Act, the Australian Consumer Law or the ASIC Act.

(b) breaches of directors’ duties.

4. Other upcoming developments / direction of travel

Both the ACCC and ASIC have announced that greenwashing is one of their key enforcement priorities for 2024. The ACCC has also announced that it will investigate a number of businesses for greenwashing, following an “internet sweep” of 247 businesses across eight sectors that identified 57% of those businesses as making what the ACCC considered to be “concerning environmental claims”.

In light of this, we expect to see an increasing number of legal proceedings and regulatory actions or investigations against companies operating in Australia which allege greenwashing.