Australia’s evolving ESG regulatory landscape: managing the legal risks

The re-election of the Australian Labor Party will bring fresh momentum to Australia’s environmental, social and governance (ESG) regulatory agenda.

Globally, the ESG regulatory environment is in a state of flux. In Europe, businesses preparing for European Union (EU) sustainability regulations face proposed ‘simplification’ reforms, leading to implementation delays in some jurisdictions and leaving businesses to navigate regulatory fragmentation at the national level. In the United States, the federal government has significantly rolled back its ESG ambition while ‘blue states’ press on, further exacerbating political tensions and regulatory fragmentation.

Understanding the four core drivers of ESG legal risk – domestic regulation, global regulation, ESG-led litigation, and stakeholder pressure – and implementing strategies for managing those risks are imperatives for Australian businesses. Taking those steps will enable businesses to navigate rapidly evolving ESG legal risks and provide a competitive advantage above those that take a piecemeal, siloed or reactionary approach to the current state of regulatory flux.

Four core drivers of ESG legal risk

Domestic regulation

A complex patchwork of Australian regulations impose new and ongoing ESG obligations on businesses. Australia’s new climate-related financial disclosure regime has commenced, and with the re-election of the Labor government, Treasury’s sustainable finance roadmap is expected to progress as planned. The government’s nature positive plan, which had paused ahead of the election, is also likely to return to the agenda. Anticipated social developments include progressing ‘first of a kind globally’ requirements for setting, and reporting on progress towards, workplace gender equality targets, and delivering on commitments to consult with stakeholders on reforms to the Modern Slavery Act. Progress towards a federal Human Rights Act may also be made.

These reforms are directed to both requiring corporate action and improving transparency, and will therefore require deep thinking about what is achievable, uplifting compliance frameworks, ensuring that the company's corporate officers fulfil their legal duties and obligations, and ensuring that publicly stated targets do not expose the business to allegations of greenwashing or social-washing.

Global regulation

Despite movement towards deregulation in some jurisdictions, the overall global trend continues towards greater ESG due diligence and reporting requirements. Regulatory activity has been primarily driven by the EU, with Asia, Canada and the United Kingdom recently following suit. Australian businesses, even those that don’t directly operate out of those jurisdictions, need to be mindful of regulations there which are increasingly impacting business partners globally through flow-through or ‘cascading’ contractual obligations.

ESG-led litigation

Climate issues remain at the forefront of ESG litigation, with social and governance claims growing in prominence. ESG activists continue to pursue strategic claims in Australian courts, as well as through non-court channels such as OECD National Contact Points. Australian corporate regulators also remain focused on ESG, with enforcement priorities including ‘greenwashing’, First Nations rights, and climate-related consumer rights.

Stakeholder pressure around ESG

Stakeholders continue to exert ESG pressure in Australia, from continued shareholder activism on climate issues, to an increase in consumers willing to pay premiums for sustainable products, and a stronger employee focus on sustainability. Mandatory climate reporting and the development of a sustainable finance taxonomy have been designed to accelerate the flow of capital towards more sustainable businesses over the coming years as investors increasingly prioritise businesses that are able to meet the decarbonisation challenge.

Four fundamentals of sound ESG governance and risk management

To future proof against ESG legal risks, businesses should, at a minimum, focus on adopting or strengthening the following four fundamentals.

1. Embed ESG into board oversight and governance processes. Formalise ESG oversight through dedicated governance committees. These require clear terms of reference and upskilling (as required), regular reporting mechanisms and board training, and integration of material ESG factors into strategic planning and policies. Salient risks should be identified and prioritised for action.
   
   
2. Understand your supply chain and operations. Map out your supply chain and operations to understand risks and identify where compliance uplift is required. In-depth knowledge of supply chain and operations also ensures readiness for either direct or flow-through mandatory reporting requirements, including both human rights and GHG emissions reporting. Implement systematic, risk-based ESG screening processes across business relationships, ensuring consistent application to suppliers, acquisition targets and joint ventures, with particular attention to salient human rights and environmental risks, including high-risk sectors and geographies.
   
   
3. Adopt robust grievance processes and remediation mechanisms. Establish accessible channels for stakeholders to report concerns. These should be backed by robust and transparent investigation procedures and standardised remediation processes that align with international standards and incorporate meaningful stakeholder engagement.
   
   
4. Establish systems to support reporting and disclosure. Develop robust data collection, verification, and internal review protocols that promote accuracy and consistency across all public ESG communications, maintain appropriate records and involve legal counsel early to ensure these processes adequately respond to legal and regulatory requirements.

To mitigate the legal and reputational risks of the patchwork of ESG regulation aimed at enhancing transparency and accountability, the need for strong oversight backed by robust processes and controls tailored to the particular circumstances of the business has never been greater.