As the landscape of ESG continues to evolve, so does our understanding and engagement with it. With significant developments in regulatory focus, judicial decisions and emerging trends, staying updated and informed is paramount for effective decision-making and forward-looking strategies.
We present the following updates to our comprehensive ESG report from May 2023, which focuses on:
- The outcome of ClientEarth v Shell’s Board of Directors (UK), shedding light on the changing face of ESG-based litigation and the court’s stance on management decisions relating to ESG factors;
- Regulatory actions by the ACCC and ASIC, which signal Australia’s growing commitment to curbing misleading ESG claims and setting clearer guidelines for businesses; and
- Insights from the International Sustainability Standards Board and Australian government initiatives that could shape the future legislative framework around ESG disclosures.
ClientEarth v Shell’s Board of Directors (UK)
On February 9, 2023, Shell shareholder ClientEarth filed a derivative action against Shell’s Board of Directors alleging mismanaging of material and foreseeable climate risk and breaching company law. ClientEarth alleged Shell’s 11 directors breached their legal duties by failing to adopt and implement an energy transition strategy that aligned with the Paris Agreement.
This case was significant as the first example in England and Wales of an activist shareholder applying established principles of company law to an ESG claim,
Based on written submissions, in May the High Court dismissed ClientEarth’s application, agreeing largely with Shell’s submissions and placing emphasis on the well-established principle that it is for a company’s directors to determine how best to promote the success of a company.
ClientEarth was subsequently allowed to make additional oral submissions, however the High Court ultimately dismissed the application on the 24th of July 2023, holding that ClientEarth lacked a prima facie case as “it ignores the fact that the management of a business of the size and complexity of that of Shell will require the Directors to take into account a range of competing considerations, the proper balancing of which is a classic management decision with which the court is ill-equipped to interfere”. ClientEarth has indicated that it will now pursue an appeal.
The Regulators - Developments in Australia
At the end of 2022 and into the start of 2023, the ACCC conducted a high level investigation into 247 companies in an ‘internet sweep’ to assess their green representations. The ACCC concluded that more than half of the companies reviewed had made concerning (potentially misleading) claims about their environmental practices. The cosmetic, clothing and footwear, food and drink sectors were found to have the highest proportion of concerning claims among the industries targeted in the investigation.
In July 2023, the ACCC published a draft guidance paper, in response to the ‘internet sweep’ setting out 8 principles the ACCC have deemed as essential for a business to follow to ensure “trustworthy environmental and sustainability claims”:
- Make accurate and truthful claims
- Have evidence to back up your claims
- Do not hide important information
- Explain any conditions or qualifications on your claims
- Avoid broad and unqualified claims
- Use clear and easy to understand language
- Visual elements should not give the wrong impression
- Be direct and open about your sustainability transition
In June 2023, ASIC Chair Joe Longo made a speech at the Committee for Economic Development of Australia: State of the Nation conference, during which he referred to the fact that change is not on the horizon, but instead that it is already here and that we must be preparing and adapting to that change now. He also stated that ESG issues are the largest driving force to changes occurring to financial reporting and disclosure standards in this generation.
Australian Securities and Investments Commission (ASIC) v Vanguard Investments (Australia)
In July, ASIC commenced civil penalty proceedings in the Federal Court against Vanguard Investments Australia (Vanguard), alleging that the company had engaged in misleading conduct regarding claims about ESG exclusionary screens applied to investments in a Vanguard fund.
ASIC argues that the allegedly misleading conduct occurred when Vanguard presented that all securities in the Vanguard Ethically Conscious Global Aggregate Bond Index Fund (Hedged) (Fund) were screened against certain ESG criteria.
Investments held by the Fund were based on an index called the Bloomberg Barclays MSCI Global Aggregate SRI Exclusions Float Adjusted Index (Index). Vanguard claimed the Index excluded issuers with significant business activities in a range of industries, including those involving fossil fuels.
ASIC alleges this was not the case, claiming that a proper ESG screen was never undertaken in relation to a large portion of issuers of bonds in the Index and the Fund. Due to this, ASIC claims these “bonds exposed investor funds to investments which had ties to fossil fuels, including those with activities linked to oil and gas exploration”.
ASIC alleges that these misleading statements were contained in Product Disclosure Statements issued by the company between the 7th of August 2018 and the 17th of February 2021, a media release issued in August 2018, statements on its website, statements made in an interview with Finance News Network and statements made in a presentation at a Finance News Network Fund Manager Event, both of which were recorded and published online
ASIC had already issued a total of three infringement notices to Vanguard, adding up to $39,960, for separate instances of alleged greenwashing.
ASIC now seeks declarations and pecuniary penalties from the Federal Court as well as orders that would require Vanguard to publicly release details of any contraventions found by the Court.
Legislative Changes on the Horizon
The International Sustainability Standards Board (ISSB) released International Financial Reporting Standards (IFRS) S1 and S2 in June 2023. IFRS S1 outlines the information businesses must disclose about sustainability-related financial information, with IFRS S2 outlining what must be disclosed in relation to climate-related risks and opportunities.
Specific proposals include companies needing to disclose transition plans in relation to information on offsets, target-setting and mitigation strategies, processes used to monitor and manage, climate-relation risks and opportunities, and the use of scenario analysis.
The IFRS S1 is a general standard, under which businesses are required to disclose information related to all potential sustainability-related risks and opportunities that may affect the businesses operations and compliance with regulations in the future. This includes information about sustainability strategy and objectives, GHG emissions and may be in relation to relationships with stakeholders, new regulations, the economy and emerging technology.
The IFRS S2 is a more detailed standard and highlights climate-related physical and transition risks and opportunities within a business. Disclosures must be made about the business’ Scope 1, 2 and 3 GHG emissions, adaption and mitigation plans and all physical and transition risks and opportunities. These standards are likely to inform the regulatory and legislative frameworks ultimately implemented in Australia.
In June 2023, the Treasury released the ‘Climate-Related Financial Disclosure: Consultation Paper’ that outlines the progress of a “disclosure framework for companies and financial institutions”. It also details the introduction of mandatory reporting requirements in relation to sustainability and ESG reporting, that is expected to begin next year.
The paper suggests that the goal is to introduce company-level disclosures that are in line with international standards, which would require large Australian entities to report disclosures relating to carbon footprint, GHG emissions and climate risks. This would be to ensure financial risks that are climate-related are transparent, well understood and mandatorily reported.
The implementation of mandatory reporting requirements is intended to be implemented through a ‘phased approach’, starting with implementation for large entities in 2024 before moving on to smaller entities in 2028.