First coined in the mid ‘80s, the term “greenwashing” has achieved widespread attention in recent times, as a number of organisations have made (unwanted) headlines, being held to account for misrepresentation of environmental performance, disclosures and reporting, and ESG more broadly. Extending beyond greenwashing, ESG refers to a far broader set of metrics, including human rights and diversity and inclusion.
The absence of a mandatory global sustainability reporting framework has resulted in environmental and sustainability reporting practices lacking transparency and reliability. Despite a recent crack down on greenwashing from Australia’s competition watchdog, the Australian Competition and Consumer Commission (ACCC) and the Australian Securities and Investments Commission (ASIC) disclosure guidelines, Australia, in many respects, has not yet seen the level of ESG claims activity that has been seen in America and Europe.
Broad-based ESG reporting remains voluntary in Australia for now, aside from certain mandatory reporting obligations under discrete pieces of legislation (for example the Modern Slavery Act 2018 (Cth) and the National Greenhouse and Energy Reporting Act 2007, however it is only a matter of time until there are more consistent, transparent and reliable reporting requirements.
Impacting the organisation, regulators, consumers and investors, the investment community in particular has made clear that ESG accountability will continue to be a key driver in where funds are invested going forward. The drive to obtain a competitive advantage, paired with renewed attention from Australia’s regulators, means that new legislative frameworks and an era of structured sustainability reporting are an inevitability in the Australian market. Similarly, it seems inevitable that there will be a corresponding increase in ESG claims in the Australian market over the coming years, as reporting expectations are clarified and failure to comply with those expectations come under sharp focus.
This report outlines the current state of play of ESG in Australia, and how this space is likely to develop in the near future, and includes:
- An Overview of ESG
- Global Trends
- ESG Claims
- The Regulators - Developments in Australia
- Legislative Changes on the Horizon
- Implications for Insurers
What is ESG?
Why is ESG significant?
The global ESG trend has continued to grow rapidly in recent years. According to a report by Bloomberg Intelligence, global ESG funds and assets may surpass $50 trillion by 2025, an upward trend from $35 trillion in 2020 – leading to the presumption that ESG trend assets will grow at 15% which is a third of the pace of the past five years.1
The COVID-19 pandemic also accelerated the general trend towards a focus on ESG, due to a combination of factors with an emphasis on internal workforce expectations, the importance of ESG in the war for talent and increased scrutiny on corporate performance which forced companies to adapt to changing consumer and stakeholder demands.
According to an analysis by MSCI, of more than 30 emerging risks set to impact corporations and investors worldwide in 2023 and beyond, the key themes of the predicted ESG and climate investing trends include:
- Innovations in the supply chain, including prospects of tracking goods through blockchain technology and the mining of e-waste that could reshape the dynamics of controversial raw material sourcing;
- Changing governance, with exploration of how new corporate board demographics could play a role in say-on-climate and other proxy voting trends;
- Responses to regulation, including tangible impacts of new rules on asset managers, institutional investors, and corporations;
- Work life changes, such as the proliferation of railroad strikes and labour rights movements globally;
- New frontiers in measurement and transparency, with insurers and banks set to expand scope of emissions tracking;
- Emergence of new investments, ranging from lab-grown commodities to carbon as an asset class;
- Turning points for ESG assets, including green bonds and nuclear energy2.
As ESG has moved towards centre stage, there has been a corresponding increase in ESG-related claims.
By way of a brief global snapshot, the following represent part of the first wave of global ESG claims against directors and officers and shareholder class actions.
ClientEarth v Shell’s Board of Directors (UK)
Re McDonald’s Corporation Stockholder Derivative Litigation (USA)
Re Pfizer Inc. Shareholder Derivative Litigation (USA)
Australasian Centre for Corporate Responsibility (ACCR) v Santos (AUS)
The Regulators - Developments in Australia
Although the Australian ESG reporting regime is currently one of largely voluntary self-reporting, the winds are changing and there has been a significant amount of regulatory attention over the past 6 months in representations being made by a raft of Australian companies.
In our view, attention from the regulators represents the first phase for ESG claims in the Australian market and we anticipate considerably increased action in this space in the coming one to two years. Once a body of case law develops in the face of regulatory proceedings, and the legislative framework around reporting requirements take shape, we anticipate the second phase will begin to unfold, being proceedings against directors and officers and potential shareholder actions against listed Australian companies.
Australian Competition and Consumer Commission (ACCC)
Australian Securities and Investments Commission (ASIC)
Australian Securities and Investments Commission (ASIC) v Mercer Superannuation (Australia)
Legislative Changes on the Horizon
Whilst there has been a significantly increased focus on the part of Australia’s leading companies on environmental, social and governance (ESG) reporting, broad-based ESG reporting remains largely voluntary. There are certain entities that have mandatory reporting obligations under various ESG-related acts such as greenhouse gases and anti-slavery legislation. However, some stakeholders have demanded far more comprehensive reporting requirements that cover a broader range of ESG issues.
The International Sustainability Standards Board published two Draft Exposure IFRS Sustainability Disclosure Standards in March 2022 which will form a comprehensive global baseline of disclosure (particularly designed to meet the information needs of investors). These standards are due to be finalised in the coming weeks and are likely to inform the regulatory and legislative frameworks ultimately implemented in Australia.
In January 2023, the Australian Government released a paper on the development of a climate risk disclosure framework for companies and financial institutions as well as plans to introduce mandatory sustainability and ESG reporting requirements for large Australian entities in the next few years.
In 2023-2024, it is likely that we will see legislation rolled out in relation to the environmental aspect of the ESG framework to combat greenwashing. In an interview with Pro Bono Australia, Stephen Jones, Federal Minister for Financial Services, said that in 2023, he would be investigating whether ESG definitions need to be legislated and that they are “looking specifically at funds, at the ‘E’ part of the ESG’.12
Furthermore, in a joint media release with The Hon Chris Bowen MP, Minister for Climate Change and Energy and Stephen Jones, they spoke of developing a comprehensive strategy involving the development of ‘new standards or taxonomies for sustainable investment, further initiatives to reduce greenwashing and strengthen ESG labelling and more ambitious participation in global forums to support climate and sustainable finance frameworks and investment.’13
It appears certain that legislation will begin to develop over the coming 12-24 months, informed no doubt by decisions which begin to be handed down by the Courts in response to the first phase of regulator-led proceedings.
Implications for Insurers
For insurers, it is clear that ESG claims will continue to develop, mature and increase in volume. We anticipate that inside of the next 12 to 24 months, they will begin to transition from novelty to become a permanent part of the Australian claims landscape.
While the landscape is evolving, insurers can currently take away the following certainties:
- Phase One of the ESG claims landscape will continue to revolve around regulator-driven proceedings, civil penalties, injunctions and declaratory proceedings;
- Informed by Phase One, the legislative and regulatory framework will continue to crystalise over the course of the next 24 months;
- Phase Two of the ESG claims landscape is likely to see an increase in D&O claims, shareholder class actions and proceedings for damages generally, relating primarily to capital raising and ASX disclosures;
- As a general observation, we would also expect ESG claims to progress past the “low hanging fruit” of environmental/greenwashing claims, and for an increased focus on the ‘S’ and the ‘G’ – the references to gambling and alcohol companies in the Mercer proceedings perhaps the first sign that this is on the horizon.
Understanding, identifying and managing risk lies at the very heart of the insurance industry. The proliferation of ESG considerations presents a number of challenges to the industry, both from an underwriting and claims perspective. As the area continues to develop in prominence and maturity in the Australian market, insurers (and their insureds) will need to carefully consider whether a raft of insurance products are adequately suited to meet this emerging claims area.
At the same time, there are also significant opportunities presented to insurers by developing ESG space. Taking into account the ESG profile of a risk is a relatively new phenomenon and something which sophisticated insurers will continue rely on in undertaking risk analysis, particularly in the D&O market but also beyond.
From a risk perspective, a company and board which takes its ESG obligations seriously and implements considered and detailed policies in the space is likely to represent a far more appealing risk generally to an insurer. A concerted effort by a board to ensure that a company is operating to the highest ESG standards is, by its very nature, likely to lower the risk profile of that company. For example, a high Workforce Health & Safety score for a company, reflecting its commitment to the “social” element of ESG, is likely to have a quantifiable and positive effect on employee accident and fatality levels – this can then be factored into the pricing.
Insurers who are able to understand and utilise company metrics across the entire range of ESG areas will be uniquely positioned to gain an unprecedented level of insight into their potential insureds, analyse risk and craft insurance products accordingly. As ESG-driven claims numbers increase, utilising ESG data to inform the selection and pricing of risk and the scope of cover provided will become vital to insurers.