ESG: The Current State of Play and What’s to Come
ESG stands for environmental, social, governance. ESG looks at the risks and opportunities pertaining to an organisation within the E, S and G pillars with the aim of mitigating risk and increasing the long-term value of an organisation.
ESG is a fast-moving space that has shifted from being a “progressive” business concept to being known as “business as usual” for boards and organisations to consider in their business strategies. In this article, we set out some headliners in the “E” and the “S”, including what is currently required and what is to come in this space.
The E - Net Zero Goals and Disclosures
The Current State of Play
There has been an uptake in organisations setting net zero goals. This has largely stemmed from growing consumer and stakeholder expectations and a growing awareness of the reputational benefits for businesses in implementing “E” strategies.
The most popular method for setting net zero goals is by using the Science Based Targets Initiative (“SBTi”) which assists organisations in preparing near-term and long-term net zero goals in line with the temperature goals of the Paris Agreement.
Alongside setting net zero goals, organisations will also typically prepare external facing documents such as a Sustainability Report which outlines their progress towards net zero goals and details their environmental and sustainability business risks.
The most popular framework for guiding environmental and sustainability disclosures are the standards issued by the Taskforce for Climate-Related Financial Disclosures (“TCFD Standards”). The TCFD Standards are part of a myriad of voluntary reporting frameworks which organisations can choose to report against. There has been growing scrutiny over the varying voluntary reporting frameworks, the inconsistencies between these standards and thus the inability to compare reports created using differing standards.
To fix this issue, the IFRS1 created a sub-group called the International Sustainability Standards Board (ISSB) who released the ISSB Standards on 26 June 2023 which create a global baseline to enable organisations to report on their climate and sustainability related risks and opportunities.
It is up to each country to implement the ISSB Standards and to make them mandatory. In Australia, the ISSB Standards will become mandatory through a phased in approach based on the revenue, assets and number of employees of the relevant organisation.2
What’s to come?
With the first tranche of mandatory reporting under the ISSB Standards expected in FY25, we are expecting an increase in organisations setting net zero goals and reporting on their climate and sustainability related risks. With the requirement to report on Scope 3 emissions3 from Year 2 of reporting onwards, we are also expecting to see an uptake in suppliers being required to provide information about their greenhouse gas emissions to their customers who are reporting under the ISSB Standards and are seeking visibility over their supply chain emissions. This line of questioning may be tied into existing supplier due diligence processes where organisations are already undertaking supplier due diligence for their compliance with the Modern Slavery Act 2018 (Cth) (“MS Act”).
We are also seeing organisations tie in broader “E” related risks which extend beyond climate and greenhouse gas emissions considerations. This includes considering the businesses impact on nature and biodiversity. The Taskforce for Nature Related Financial Disclosures (“TNFD”) released the TNFD Standards which have been developed to assist organisations in assessing their nature-related risks and opportunities. We expect that mandatory nature reporting standards will follow.
With increased disclosures comes increased scrutiny, with ASIC and the ACCC cracking down on “greenwashing”. Greenwashing is the misrepresentation of the extent that product or service is sustainable, green or otherwise tied to ESG Factors. With more organisations being required to issue climate and sustainability related disclosures, we expect ASIC and the ACCC to increase their enforcement action in this space to ensure that disclosures that are made are legitimate and are not being made to mislead or deceive consumers and stakeholders.
The S - Modern slavery compliance
Current state of play
Currently, organisations with a consolidated revenue of ≥ $100 million are required to issue annual modern slavery statements which outline the risks of modern slavery occurring in their operations and supply chains and what they have done to address and mitigate this risk.
Currently, the Act operates under a name and shame regime whereby the Attorney General can issue reports naming organisations which haven’t submitted modern slavery statements (but are supposed to) or organisations who have submitted statements which do not satisfy the seven reporting mandatory criteria pursuant to section 16 of the MS Act.
There has been growing scrutiny around the lack of progressive compliance efforts being undertaken by reporting entities. For example, in a recent review of compliance with the MS Act, 66% of the modern slavery statements reviewed did not meet the mandatory reporting requirements of the Ms Act.4
What’s to come?
Proposed amendments to the MS Act were released on 25 May 2023. Most notably, it has been proposed to lower the revenue threshold for reporting entities down to $50 million (capturing another 2,393 businesses), introducing a positive obligation to undertake due diligence and tying in financial penalties for non-compliance with the reporting requirements of the MS Act.5
With more organisations being required to produce modern slavery statements, and all reporting entities being required to undertake robust due diligence, we expect more suppliers will be subject to due diligence and being asked questions about their modern slavery risks. This should mean that suppliers are better prepared to respond to due diligence questions which should fast track due diligence processes, which has been a frustrating aspect of due diligence for many reporting entities.
Furthermore, the government has provided funding for an Anti-Slavery Commissioner to oversee compliance with the MS Act. If financial penalties are implemented into the MS Act, we expect to see the Anti-Slavery Commissioner using their role to enforce these financial penalties and the existing powers in the MS Act to issue reports “naming and shaming” non-compliant reporting entities.
We will touch on these topics and more in our session at the ACC Australia In-house Legal National Conference on Tuesday, 31 October 11:30am – 12:30pm.
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1 International Financial Reporting Standards.
2 For more information on the ISSB Standards, please see our in-depth article explaining the ISSB Standards here.
3 Scope 3 emissions are all indirect emissions associated with business operations that occur in the value chain (for example, supply chain emissions, employee commuting to work, business travel and waste).
4 “Broken Promises: Two years of corporate reporting under Australia’s Modern Slavery Act” by the Human Rights Law Centre et al.
5 For more on the amendments to the MS Act, please read our in-depth article here.