Essential ESG: Episode 32 – ESG litigation trends and what they mean for Australian businesses

Phoebe Wynn-Pope, Head of Responsible Business and ESG, Corrs Chambers Westgarth

Mark Wilks, Head of Commercial Litigation, Corrs Chambers Westgarth

Kate Gill-Herdman, Partner, Corrs Chambers Westgarth

Phoebe: Welcome to another episode of Essential ESG, coming to you today from the lands of the Wurundjeri people of the Kulin Nation and also from the Gadigal people of the Eora Nation in Sydney.

My name is Phoebe Wynn-Pope and I'm the Head of Responsible Business and ESG at Corrs Chambers Westgarth.

It's my pleasure to welcome to the podcast Mark Wilks and Kate Gill-Herdman.

Mark is our Head of Commercial Litigation at Corrs with more than 25-years’ experience in complex commercial disputes.

Mark is one of Australia's leading litigators and is consistently recognised by Chambers and Partners and Legal 500 Asia Pacific.

He has deep expertise across financial services, technology and resources litigation and has recently been advising on the emerging disputes landscape in the energy transition.

Kate is a regular on the podcast and a partner in the Corrs Responsible Business and ESG team, specialising in both contentious and non-contentious ESG matters, including greenwashing investigations and litigation, ESG-related disputes, business and human rights advisory, and climate-related financial disclosures.

Kate draws on her background as a commercial litigator and regularly presents to clients on ESG litigation trends.

Thank you both for joining us here today.

Kate: Thanks for having us.

Mark: Thank you very much for having us, Phoebe.

Phoebe: I think that that's a very interesting part of this whole ESG litigation landscape.

If we talk about that evolution of strategic climate litigation in Australia, we've seen courts close the door on some claims against governments, but litigants seem to be finding new avenues, including targeting those private entities and specific projects.

I wonder if you could walk us through what you're seeing here?

Mark: Yeah, look, it definitely has evolved and evolved quite rapidly over the last few years.

It's done so in distinct phases.

Now, the first wave was really focused on judicial review of government approvals.

And these, as I mentioned before, were the challenging of the decisions to approve coal mines, gas projects, on the basis that the decision makers failed to consider specific and very important climate impacts from those projects.

Then we had Sharma versus the Minister for the Environment, which I think everybody was made aware of when it occurred.

And that was a landmark case because at first instance, the Federal Court found the Minister owed a duty of care to young people to consider climate change impacts when exercising statutory powers to approve a coal mine extension.

Now, although when that duty of care was overturned on appeal, the case was important because the Court accepted the scientific evidence connecting fossil fuel emissions to foreseeable harm, including from heat waves, bushfires and sea level rise.

More recently in Pabai versus Commonwealth, which was a decision of the Federal Court last year, it was held that the Commonwealth does not owe Torres Strait Islanders a duty of care to protect them from climate change, but decisions on emissions, targets and adaptation measures being matters of core government policy were not suitable for judicial determination.

Kate: And Mark, I'll jump in here because I think it's really interesting that despite these decisions, which are largely around the duty of care, there have been some successful challenges to project approvals on climate grounds.

And this is an ongoing trend both globally and in Australia - the linking of climate change and human rights.

So we had, a few years ago, the decision of the Queensland Land Court in Waratah Coal, which essentially was founded on the Queensland Human Rights Act, where the president of the Land Court recommended to the Minister that the mine not be approved because it would unjustifiably limit rights protected under that Act, including the right to life, cultural rights of First Nations people and the rights of children.

And ultimately that project didn't proceed.

Also, there's a challenge to be heard concerning the Federal Minister for the Environment's approval of an extension to a significant gas project.

And the challenge is based on the Minister's failure to consider the project's contribution to climate change.

What is interesting about that case is the United Nations Special Rapporteur for a clean, healthy and sustainable environment has been granted leave to appear as amicus curiae to assist the court with understanding Australia's international obligations to reduce greenhouse gas emissions.

And that's really flowing from the UN's recognition of the right to a clean, healthy, sustainable environment several years ago and the recent ICJ advisory opinion.

So there's some really interesting kind of developments in this space.

Mark: I might just jump back in there and continue with the evolution piece, because what we really then have is the 2nd wave, which has been all about the challenging of corporate representations about decarbonisation.

Earlier this year, Santos successfully defended a claim brought by activist shareholder NGO, the Australian Centre for Corporate Responsibility, or ACCR, alleging that Santos had made misleading statements in its annual report and investor briefings about clean energy, zero emissions hydrogen and its net zero roadmap.

Now that decision has been appealed, but more recently the financial services sector has found itself the target of ESG activism, with retail shareholders seeking access to books and records to assess leaning decisions against climate and human rights commitments, as well as turning up at AGMs and putting forward resolutions to be passed in relation to banks making commitments about which entities they'll lend to and which they won't.

And this backdrop of targeted campaigns is also being directed at Superfund members and mum and dad shareholders, really designing to put pressure on financial institutions to reduce their exposure to fossil fuel projects.

It's been interesting to watch because although, on the one hand it's put pressure on financial institutions to stop lending to participants in, particularly in the fossil fuels market, it's those financial institutions which will be the same source of funds that will be necessary for those same companies to make the transition to green energy in due course.

So you sometimes have to be a little bit careful about what you wish for in terms of how successful your campaign is. Otherwise, you may end up with more problems.

But what that's all meant generally over the last sort of 12 months is that all businesses are seeing more challenges, whether it be climate, environment, and at the human rights level as well.

Phoebe: Thanks, Mark.

You mentioned earlier that greenwashing has been a real focus for both ASIC and the ACCC over the past few years, and we've seen some successful enforcement action and quite significant penalties.

I wonder if, Kate, can you take us through the key developments and what they signal for businesses making environmental or sustainability claims?

Kate: Yeah, sure.

So both ASIC and the ACCC have been pretty aggressive in their greenwashing enforcement action, coming at it from similar but slightly different rationales.

So ASIC is about protecting marketing integrity and the ACCC is really the consumer protection focus.

But in both cases, it's really making sure that the people who need the information have accurate information either to determine whether to invest their capital or whether to buy one good over another.

More recently, which is interesting, ASIC has expanded it's kind of pure misleading and deceptive conduct, greenwashing claims to include governance failures that may have contributed to greenwashing.

So we're seeing this kind of evolution play out in the funds space.

There's also, I think, some concerns around the impact that mandatory climate reporting will have.

Phoebe: So what impact will mandatory climate reporting have?

Kate: Mandatory climate reporting, just to go back a step, is an extension of the financial reporting regime.

The same liability framework that sits around financial statements will sit around the mandatory climate report.

The purpose of the regime, it's a disclosure regime, so you need to disclose climate-related risks and opportunities that may have a material financial impact on the reporting entity over the short, medium and long term, and information about your governance, your strategy, risk management that wraps around those risks.

So what this means in practice is that reporting entities will need to disclose much more information to the market about these matters than they ever have.

The underlying accounting standard that supports the regime is very prescriptive and very detailed, which means the information needed to found a claim is potentially more easily available to litigants.

So in terms of enforcement, ASIC can take enforcement action from day one and they have new powers to investigate and require production of information that substantiates claims made in the climate report.

And while there's a three-year safe harbour from private litigant action, it's relatively confined.

It only applies to statements made in the mandatory report, not statements made voluntarily outside the mandatory report.

So there's a lot that sits outside of the scope.

So there's plenty of information out there that will be scrutinised as we move into this mandatory reporting phase.

Phoebe: So that need for really being able to verify and demonstrate that you are doing what you're saying you're doing and you have the information to back up all claims.

Kate: Exactly making sure there's an evidentiary basis for your claims, you think about climate reporting is primarily qualitative reporting of information about risks and opportunities over five, 10 [years], timeframes out to 2050.

So there are a lot of judgments, a lot of assumptions that need to go into formulating that information.

So it is critical that you have an evidentiary basis for that.

Phoebe: And staying with the enforcement theme, recently we've seen regulatory focus on governance.

Are there learnings from ASIC's prosecution of Star Entertainment's directors and executives for alleged breaches of duty of care and diligence?

Mark, can you speak to us about that?

Mark: Happy to, Phoebe.

There are undoubted lessons coming out of that case and there's a reason that it got as much publicity as it did.

And when you've got the regulator coming after 11 current and former Star Entertainment directors and executives for breaches of duty and care, some of which incredibly seriously involve failing to pay enough attention to the risk of money laundering and criminal associations at the casino, it's no surprise that it had most of corporate Australia sort of sitting on the edges of their seats.

The judgment was interesting insofar as the court found that the management were the ones that were primarily liable for the breaches.

In this case, it was the CEO and the general counsel and the non-executive directors were able to escape liability.

But I think rather than the case providing comfort to boards that responsibility for compliance stops at management, it has served more as a cautionary tale for how narrowly they escape liability for the same thing.

And I suspect it will be a stark reminder for boards moving forward that the ultimate responsibility for governance and compliance with regulations, whether they be from a governance perspective, whether it's AML issues, whether it's environmental issues, will ultimately sit with the board and they have to be aware of them and they have to ensure that there are appropriate systems in place.

Phoebe: I want to turn now to shareholder and investor claims.

So are we starting to see ESG related claims in the class action space?

And are we seeing shareholder and investor claims in this space And how does this connect to broader continuous disclosure obligations?

Mark: Well, at the moment, Phoebe, the answer is no, but there may be a reason for that.

So, at the moment, there is a three-year safe harbour from private litigant action on mandatory climate reporting.

That is due to expire in the near future.

And when it does, I think that will be the test as to whether we will see a spate of shareholder class actions in this space.

As many of the listeners will appreciate, shareholder class actions are really not about driving change.

They're about monetizing claims and ultimately pursuing losses that are claimed to have been incurred.

And for the most part, shareholder claims are driven by litigation funders.

Litigation funders, of course, only fund litigation where they have a prospect of a deep pocket and a return.

And so I think a lot of focus will be on this area to see the extent to which this can become a new species of shareholder class action for what is essentially a failure to disclose to the market, whether it be that there have been promises made, that haven't been met in terms of environmental and climate compliance, or whether it's been a failure to disclose material facts that would impact the company's business based on its problems in that same area.

I see it as being ultimately inevitable, Phoebe, but I think the next 12 to 24 months will point us in the right direction.

Phoebe: Kate, I wonder if you can bring some of this to life with some specific examples.

What kind of disputes are you seeing in practice, and whether that's greenwashing investigations, challenges to environmental claims, disputes arising from ESG commitments in commercial contracts, and what lessons can businesses draw from those?

Kate: Yeah, sure.

There's still, in Australia, heavy emphasis on private litigant action in this space and enforcement action really based on the prohibition on misleading and deceptive conduct and using that as an accountability mechanism.

So as Mark said, we haven't really seen it shift into kind of the commercial dispute space yet.

That said, a lot of businesses thinking about it, so particularly in the context of, for example, in New South Wales now, government agencies and public departments need to use the New South Wales Anti-Slavery Commissioner's reasonable steps guidance and impose in their contracts model contract terms around modern slavery.

And so we're seeing counterparties to those agreements really focus on whether they have the underlying modern slavery framework in order to be able to discharge their obligations under those contracts.

So it's not really the disputes, it's really focusing on how to prevent a dispute from happening business to business.

I think one of the more interesting pieces of litigation at the moment is a preliminary discovery application made against a retailer, an Australian retailer, purely seeking documents around its ethical procurement processes to test its public statements about its commitments to modern slavery.

We haven't seen that kind of pure human rights related private litigant claim in Australia up until now, so I think that's a significant shift.

The other area where we may see business-to-business claims is there's an increasing ESG regulation in the EU and Asia mirroring the US's forced labour bans, which essentially means that, you know, depending on how the particular regime works, but your goods can be seized at the border either if they're suspected to be made with forced labour or if they are made with forced labour. So where you have a, you know, a supply agreement there and you don't get your goods, that might, I think, result in business-to-business type claims as these laws proliferate.

Phoebe: So that need to actually understand your supply chain and have done that due diligence on your supply chain and ensure there's no modern slavery in it if you're importing into those jurisdictions that have forced labour bans is going to be critically important.

Kate: That's right.

And coming back to, you know, we talked about earlier about the evidentiary basis for your claims.

Here, the evidentiary basis is just as important in demonstrating that your goods are free from forced labour.

Phoebe: This has been such a great conversation, you two.

But finally, if we're just looking ahead, what should boards and senior management be thinking about in terms of managing their ESG related litigation risk?

And are there key governance or strategic steps that businesses should be taking now to position themselves for the evolving landscape?

What do people need to do?

Mark: I spoke to Kate before, you know, we came on the podcast and I have the benefit of her thinking on these.

I do want to acknowledge Kate's passion in this area, and she is a real thought leader.

And I think between the two of us, we've been able to create a bit of a checklist for management and for boards.

I think, number one, boards and company leadership need to consider what ESG risks are, material risks in their industry and to their business, and ensure that there is strong oversight, clear accountability, regular reporting, and evidence of scrutiny.

In other words, you can't fake it till you make it. You actually have to get this stuff done, and there's got to be evidence that it's being done.

They need to be comfortable that their ESG disclosures are accurate, that they're evidence-based, and ultimately backed by robust governance.

I really think from a de-risking perspective, boards need to conduct a greenwashing disclosure risk review.

If there's one thing to take out of this podcast, Phoebe, for boards thinking about these risks moving forward, it should be about thinking about conducting a greenwashing or disclosure risk review.

They should rigorously test sustainability of any net zero claims that they're making.

They need to have supporting documents for the reasonable basis for any key ESG statements that the company is issuing.

And then they need to examine and test ESG data systems and controls and ultimately make sure that the ESG governance structure is formalised.

And I think if all of these things are done and they become part of standard operating procedure for boards and another risk that they have to deal with, the risks that we've been talking about, the litigation risks, are going to be, for the large part, avoided.

Phoebe: Thanks very much, Mark.

I think that that's a great sum up from you and Kate, and it really brings home to me that, there's been a lot of discussion recently about ESG losing momentum because of changes in the global environment and the global market.

But I think when we sit down and think about actually the trends for litigation in the ESG space, we can see that even if ESG is losing momentum, that ESG risks are not losing momentum and that people need to keep their eye on it and keep it in their sights.

So thank you both for sharing your insights today.

It's been great to cover such a broad range of issues and I look forward to speaking to you again.

Mark: Thanks for having me on the podcast.

Kate: Thanks, Phoebe.