The ASX50 is reported to be the most exposed securities exchange in the world to stranded asset risks due to having the highest level of embedded emissions in proven and probable fossil fuel reserves and the greatest percentage of revenues derived from coal-based activities.² It is therefore unsurprising that companies’ management and disclosure of environmental, social and governance (ESG) risks and opportunities have been a major focus of Australian ESG litigation. Indeed, Australia has emerged as somewhat of a leader in the space. The Australian Competition and Consumer Commission (ACCC) has regulated potentially misleading environmental claims since at least 2007,³ and Australia was the first jurisdiction in the world in which a claim challenging the veracity of a company’s net zero emissions target was filed.⁴ This article considers how evolving regulatory requirements and market expectations may influence the focus of such litigation in the future.

Nature-related litigation

Australian ESG litigation has to date been dominated by climate-related claims. However, recent developments regarding the transition to a ‘nature positive’ economy suggest that companies’ management and disclosure of nature-related risks and opportunities will be an increasing focus of future litigation.

Among those developments is the publication of the Taskforce on Nature-related Financial Disclosures’ (TNFD) draft framework for nature-related risk and opportunity management and disclosure, which is expected to be finalised in September 2023^.5 An important aspect of the TNFD framework is its focus on nature-related risks and impacts.⁶ That is, unlike current corporate disclosure obligations under Australian law, the TNFD is premised on the concept of ‘double materiality’. In addition to disclosing material nature-related impacts on a company (i.e., single materiality), double materiality requires the disclosure of a company’s material impacts on nature, regardless of whether those impacts then materially impact the company.

The draft TNFD framework is already resulting in increased legal scrutiny of companies’ nature-related disclosures. In August 2022, an ANZ shareholder expressed concern that the bank may have breached its disclosure obligations under the Corporations Act 2001 (Cth) by failing to disclose material nature-related risks in its directors’ report.⁷ The framework has also prompted consideration of directors’ duties in relation to nature-related risks and opportunities,⁸ and raised queries about how these duties might be influenced by the incorporation of double materiality.⁹

Greenwashing

Misleading or deceptive conduct claims regarding entities’ environmental statements, also known as ‘greenwashing’ litigation, have been a prominent aspect of Australian ESG litigation. The conclusions of the ACCC’s recent ‘internet sweep’ of businesses’ environmental claims suggest that greenwashing litigation will remain a feature of Australia’s litigation landscape – of the 247 businesses reviewed, the ACCC considered 57% were making ‘concerning’ claims about their environmental credentials.¹⁰ The Australian Senate is currently conducting an inquiry into greenwashing,¹¹ and the Federal Government recently announced an additional $4.3 million for the Australian Securities and Investments Commission to increase its surveillance of suspected greenwashing by listed companies, superannuation funds, and investment managers.¹²

A particular hot-spot has been greenwashing in net zero emissions plans. The focus of these claims is likely to be influenced by recent standards regarding emissions reduction targets, such as the Science Based Targets Initiative’s Corporate Net Zero Standard and the United Nations’ High-Level Expert Group on the Net Zero Emissions Commitments of NonState Entities’ recommendations for net zero commitments. Those standards state that entities’ net zero commitments must, among other things, be consistent with limiting warming to 1.5°C, cover all greenhouse gas emissions (that is, Scope 1, 2 and 3 emissions and all seven greenhouse gases covered by the Kyoto Protocol), and be premised on actual emissions reductions rather than offsets.¹³

There is evidence to suggest this is already occurring. Last year, environmental groups commenced proceedings against oil and gas company TotalEnergies, claiming that it engaged in misleading commercial practices contrary to the European Unfair Consumer Practices Directive by stating that it aimed to be net zero by 2050. The claimants allege that, contrary to ‘scientific guidelines and recommendations’ for achieving net zero by 2050, TotalEnergies plans to increase natural gas production, did not disclose its reliance on offsets to achieve its net zero target, and did not include Scope 3 emissions, which account for 80-90% of its emissions, in that target.¹⁴

There has not yet been a claim for damages for alleged greenwashing in Australia, but such claims are emerging in other jurisdictions. In November 2022, investors in the wood pellet production company Enviva Incorporated commenced a shareholder class action against the company and two of its directors for allegedly misrepresenting the environmental sustainability of its wood pellets. The shareholders claim these misrepresentations contravened the Securities Exchange Act 1934 (US) and caused them ‘significant loss and damages’ due to a 13% share price drop allegedly related to the publication of information challenging the veracity of those representations.¹⁵ The loss quantification issues that may arise in a similar Australian claim are discussed in Sebastian Hartford Davis’ contribution to this Special Edition.

Greenhushing

A somewhat countervailing trend is the emergence of ‘greenhushing’ – entities not publishing or removing information about their ESG-related impacts, risks and targets due to perceived liability risks. This may result in increased enforcement of entities’ disclosure obligations or, where voluntary disclosure frameworks have not yet been adopted into Australian law, novel claims to enforce those voluntary frameworks.

McVeigh v Retail Employees Superannuation Trust Pty Ltd (NSD1333/2018) is an example of the latter. In that matter, a member of the Retail Employees Superannuation Trust claimed that the fund had breached its duties under the Superannuation Industry (Supervision) Act 1993 (Cth) by, among other things, failing to disclose its climate-related risks in accordance with the recommendations of the Taskforce on Climate-related Financial Disclosures.¹⁶

It is foreseeable that claimants may seek to enforce more recent and comprehensive voluntary disclosure frameworks in a similar manner. For example, claimants that are concerned by an entity’s failure to adopt climate-related targets may consider novel means to enforce the International Sustainability Standards Board’s forthcoming framework for climate-related disclosures, which is expected to come into effect in January 2024 and will require covered entities to disclose climate related targets and how those targets compare with the Paris Agreement.¹⁷

‘Anti-ESG’ litigation

Recent developments in the United States signal the potential for ‘anti-ESG’ claims against companies and/or directors that may be perceived as inappropriately pursuing ESG-related objectives. These developments have primarily been legislative or concern the statutory authority of government entities. However, in August 2022, ¹⁹ state Attorneys General signed correspondence expressing concerns that BlackRock’s ‘coordinated conduct with other financial institutions to impose net-zero’ raised potential antitrust violations.¹⁸

There is domestic precedent for anti-competition claims arising from competitors’ collaboration on ESG-related matters. In December 2013, the ACCC commenced proceedings against two companies for allegedly engaging in cartel conduct contrary to the Trade Practices Act 1974 (Cth) (TPA), despite the purported environmental bebefits associated with this conduct. In particular, the companies were said to have entered into arrangements to simultaneously transition from supply of standard concentrate laundry detergents to ultra concentrate detergents. One company admitted to contraventions of the TPA and was ordered to pay an $18 million penalty¹⁹, while the ACCC's claimagainst the other company was unsuccessful.²⁰

‘Anti-ESG’ litigation may also manifest as claims that the prioritisation of ESG objectives constitute a breach of directors’ duties. For example, where asset divestments or closures and/or the pursuit of ESG-related targets and goals are said to have eroded shareholder value, claimants may argue that company directors have breached their duty to act in the best interests of the company under s 181 of the Corporations Act 2001 (Cth).

Conclusion

The Chief Judge of the Land and Environment Court of New South Wales recently described climate law as ‘hot law’, in the sense that ‘the law relating to climate change and its consequences is rapidly evolving’.²¹ As is apparent from the above, recent developments suggest this is true of ESG-related matters more broadly, and particularly true of the law concerning companies’ management of those matters. Future litigation will likely raise novel questions regarding the quantification of losses said to have been caused by alleged greenwashing, and companies’ and directors’ obligations in relation to the management and disclosure of nature-related risks, including how those obligations may be impacted by the incorporation of ‘double materiality’ in disclosure frameworks such as the TNFD. BN

ENDNOTES

^{1 Senior Solicitor, Safe Climate (Corporate) at the Environmental Defenders Office.}

^{2 S & P Dow Jones Indices, The Carbon Scorecard (May 2017).}

^{3 ACCC v GM Holden Ltd [2008] FCA 1428.}

^{4 Australasian Centre for Corporate Responsibility v Santos Ltd (NSD858/2021).}

^{5 TNFD, The TNFD Nature-related Risk and Opportunity Management and Disclosure Framework: Final Draft – Beta v0.4 (Report, March 2023) page 3.}

^{6 TNFD, The TNFD Nature-related Risk and Opportunity Management and Disclosure Framework: Final Draft – Beta v0.4 (Report, March 2023) pages 24-25.}

^{7 ‘ANZ under pressure to reveal biodiversity risk’, Australian Financial Review (News Article, 29 August 2022) <https://www.afr.com/companies/financial-services/anz-under-pressure-to-disclose-biodiversity-risk-in-annual-report-20220826-p5bd2r>.}

^{8 Nicola Swan and Alana Lampitt, New Zealand director duties to manage nature-related risk and impact on natural capital (Legal Opinion, March 2023).}

^{9 Commonwealth Climate and Law Initiative, Biodiversity Risk: Legal Implications for Companies and their Directors (Report, December 2022).}

^{10 ACCC, Greenwashing by businesses in Australia: Findings of the ACCC’s internet sweep of environmental claims (Report, March 2023) p 1.}

^{11 ‘Greenwashing’, Parliament of Australia (Web Page) <https://www.aph.gov.au/ParliamentaryBusiness/Committees/Senate/Environmentand_Communications/Greenwashing>.}

^{12 Assistant Treasurer and Minister for Financial Services, ‘Address to the Australian Council of Superannuation Investors’ (Speech, 3 May 2023).}

^{13 Science Based Targets Initiative, SBTi Corporate Net-Zero Standard (Version 1.1, April 2023) criteria 2, 3, 4 (the SBTi requires companies to have a Scope 3 emissions target if their Scope 3 emissions are 40% or more of their total Scope 1, 2 and 3 emissions, or if companies are involved in the sale or distribution of natural gas and/or other fossil fuels, irrespective of the share of these emissions compared to their total Scope 1, 2 and 3 emissions), 12 and 14; United Nations’ High-Level Expert Group on the Net Zero Emissions Commitments of Non-State Entities, Integrity Matters: Net Zero Commitments by Businesses, Financial Institutions, Cities and Regions (Report, November 2022) pages 12, 15-19.}

^{14 Greenpeace France & ors v TotalEnergies SE (Summons, Judicial Court of Paris, 2 March 2022).}

^{15 Fagen v Enviva Inc & ors (Class Action Complaint, United States District Court, District Court of Maryland, Case 8:22-cv-02844, 3 November 2022).}

^{16 McVeigh v Retail Employees Superannuation Pty Ltd (Amended Concise Statement, Federal Court of Australia, NSD1333/2018, 24 September 2018) paragraph 15(b).}

^{17 International Sustainability Standards Board, [Draft] IFRS S2 Climate-related Disclosures (Draft Standard, March 2022) paragraphs 20(d), 23.}

^{18 Letter to the CEO of BlackRock Inc. from the Arizona Attorney General & ors (4 August 2022) page 5.}

^{19 ACCC v Colgate-Palmolive Pty Ltd [2016] FCA 528.}

^{20 ACCC v Colgate-Palmolive Pty Ltd (No 4) (2017) 353 ALR 460.}

^{21 The Law Society of New South Wales, Climate Change Litigation: Trends, Cases and Future Directions (Briefing Paper, November 2021) page 3.}