There have been some significant regulatory shifts to encourage a focus on sustainable outcomes in Australia.
Sustainable Impact asked MinterEllison Partner and ESG lead, Paul Schoff, and Associate, Lizzy Enright, about the current trends seen across New Zealand’s closest trading partner.
What trends are you currently seeing across ‘E’ ‘S’ and ‘G’ that Australian businesses are focused on and why?
'E' - Environment
- Mandatory climate reporting and nature as a ‘fast follower’ to climate: In parallel to the introduction of the Australian mandatory climate reporting regime (a year after New Zealand), nature and biodiversity have been hot topics this year, with the Government developing the Nature Repair Market (incentivising and funding projects to restore and protect Australia’s biodiversity) and voluntary reporting in accordance with the Taskforce for Nature-related Financial Disclosure (TNFD) on the rise.
- Transition plans: The credibility of transition plans is under the spotlight following Australian-founded Woodside Energy’s shareholders’ rejection of its Climate Transition Action Plan (CTAP), and the new mandatory climate reporting regime mandating disclosure of CTAP’s if they exist. Given the required content of mandatory climate reporting it is hard to see that many companies will not end up having a CTAP, so we expect to see a lot of work by companies to develop their transition plans over the next few years.
- Circular economy: There is increased recognition of circular economy solutions as a way to increase waste recovery along with economic growth, with the Commonwealth Scientific and Industrial Research Organisation (CSIRO) preparing a report on Australia’s comparative and competitive advantages in transitioning to a circular economy, commissioned by the Office of the Chief Scientist.
- Greenwashing scrutiny: Regulator scrutiny of greenwashing has continued, with the Australian Securities and Investments Commission (ASIC) making 47 regulatory interventions during the 15 month period leading up to 30 June, and most recently the Federal Court ordering Vanguard Investments Australia to pay a record $12.9 million penalty for misleading ESG claims.
‘S’ – Social
- First Nations co-design: There is growing momentum around corporates pursuing meaningful partnerships and co-design strategies with First Nations organisations, particularly in carbon and biodiversity markets.
- Gender pay gap data: For the first time, the Workplace Gender Equality Agency (WGEA) published gender pay gap data for private sector employers with 100+ employees following 2023 legislation aimed at spurring employer action on gender equality. This issue is squarely on board and management radars, and corporates remain concentrated on gender equality targets within their published diversity and inclusion strategies.
‘G’ – Governance
- Cyber resilience and AI: Boards continue to be concerned about cyber resilience and are looking to up-skill when it comes to navigating the operational and ethical challenges of integrating AI solutions.
- Directors’ duties: The recent Hartford-Davis Bush legal opinion has clarified the foreseeability of nature-related risks, suggesting that directors may be held accountable for neglecting to address these risks, potentially breaching their duty of care and diligence. As a result, Australian directors will need to consider these complex risks proactively, and if they are material, manage them effectively.
Australia has just enacted its mandatory climate-related financial disclosures regime, bringing it into line with others, including New Zealand, the EU, UK, and Japan. What impact is this recent change creating?
Australia passed mandatory climate-related financial disclosure legislation in August 2024, which has been hailed by the Chair of ASIC, Joe Longo, as the biggest change in financial reporting disclosure standards in a generation. The standards are broadly similar to those introduced a year earlier in New Zealand (both regimes are aligned with the International Sustainability Standard Board (ISSB) requirements), but with important differences in the detail. Currently, there is no provision for mutual recognition.
The legislation takes a phased approach, starting with Australia’s largest entities (referred to as Group 1 entities) from 1 January 2025. While many of these companies already disclose under the Task Force on Climate-Related Financial Disclosures (TCFD) framework (which may serve companies well as a ‘dry run’ given the regime is based on TCFD principles), all companies face a significant reporting uplift.
In particular, Group 1 entities are seeking support to meet the challenge of increasing the quality of systems oversight (e.g. the policies, processes and procedures which govern reporting) to meet the new standards. Likewise, directors are focused on ensuring the proper factual verification of disclosures and interrogation of forward-looking statements and judgments which underpin the disclosures. Companies who are not well-versed with climate disclosures and have adopted a ‘we’ll cross that bridge when we come to it’ approach will need to accelerate their readiness assessments including an assessment of whether they have the right skills/knowledge at the board/management level.
Companies that have been building their capacity to meet these standards are embracing them as an opportunity to embed climate (and in some instances broader sustainability considerations) in company strategy. The disclosures require companies to articulate their approach to climate-related opportunities as well as risks, prompting some businesses to accelerate their exploration of Australian Carbon Credit Units (ACCUs) and partnerships with carbon sequestration initiatives, alongside cost-reduction strategies like adopting renewable energy and circular economy solutions. Likewise, it is an opportunity to integrate climate-risks in financial reporting and risk management frameworks, rather than these issues being siloed in a sustainability team. This integration is expected to facilitate the evolution of more sustainable business models over time.
The disclosures require companies to articulate their approach to climate-related opportunities as well as risks.
Australian subsidiaries of New Zealand companies may need to prepare to comply with these standards and if already complying with New Zealand standards, identify any uplift/ modifications required to meet the Australian standards as well. Likewise, New Zealand companies that are in the supply chains of Australian companies should be expected to be asked provide information on annual basis to Australian reporting entities allow these companies to report on their scope 3 emissions.
What is the status of nature-based disclosures in Australia? Are many businesses adopting the TNFD framework?
Nature-based disclosures are not currently mandatory in Australia or New Zealand. Nevertheless, there is growing momentum behind the uptake of voluntary disclosures against frameworks such as those published by the TNFD. Recently, 23 Australian companies, including ASX 100 entities such as Telstra, QANTAS and GPT Group, have committed to publishing TNFD-aligned disclosures for 2024, or prospectively for 2025.
This shift is partly influenced by the Australian Government’s ‘climate first, but not only’ strategy articulated in the Sustainable Finance Roadmap, signalling a possible move towards mandatory naturerelated financial disclosures in the future [1]. The Government’s substantial investment in nature-related initiatives, such as the newly established Nature Repair Market – a regulated, nationwide, voluntary biodiversity market expected to operate similarly to the current ACCU market – is also likely to encourage companies to begin assessing and disclosing their nature-related risks and opportunities [2].
Companies are also recognising that disclosure is a way to build trust with investors, particularly given rising investor expectations in relation to the value placed on nature and biodiversity. Many companies are already implementing nature-related screening and divestment – for example, Australian Ethical divested from Lendlease in March 2023 over development threat to endangered species in southwest Sydney, and disclosure is another powerful mechanism being deployed to meet shifting investor sentiment.
What role does Australia’s energy transition towards renewable sources play in shaping corporate sustainability strategies across industries?
In light of the Australian Government’s 2022 codification of emissions reduction commitments under the Paris Agreement, there has been a concerted push for decarbonisation. The Government’s recent Sustainable Finance Roadmap emphasised the expectation for the private sector to contribute to these goals. Consequently, Australian companies are crafting strategies to reduce their carbon footprint, manage associated risks, and leverage emerging opportunities. These strategies include:
- Establishing baselines for their current emissions and setting their own targets for achieving Net Zero;
- Developing comprehensive CTAP to reach these objectives, which may involve the implementation of green technologies, internal carbon pricing and more energy-efficient practices. Treasury has flagged that it will be releasing best practice guidance on credible transition plans by the end of 2025 and is focused on improving the consistency and comparability of greenhouse gas emission data;
- Assessing the use of offsets in transition planning (the current prevailing view is that offsets should be used judiciously, only for emissions that cannot be eliminated, and should adhere to high integrity standards);
- Prioritising a just transition, especially within the energy industry, to ensure social and economic considerations are balanced with environmental objectives; and
- Investigating transition finance options, which are financial products designed to support environmentally sustainable alignment.
What trends are emerging in sustainable finance and investment in Australia and how are investors influencing corporate behaviour in relation to ESG criteria?
Trends in sustainable finance and investment in Australia have been influenced by the release of the Australian Government’s Sustainable Finance Roadmap, which highlighted the Government’s commitment to mobilising private capital in a bid to meet Australia’s emissions reduction commitments under the 2015 Paris Agreement.
Notably, the Australian Federal Government issued its inaugural AUD7 billion sovereign green bond, which was significantly over-subscribed, with more than AUD22 billion in bids from 105 investor institutions across Australia, Asia, Europe and North America. This echoes global trends – for example, New Zealand’s inaugural sovereign green bond in 2022 was 2.5 times over-subscribed. The trend of green bond issuance being far more common than the issue of social and sustainability bonds is set to continue across Asia-Pacific, including in Australia. This reflects that climate considerations remain the top ESG priority.
In contrast, sustainability linked loans have been declining over the past couple of years, but this has been offset by the record issuance of green bonds. This decline may be due to the increased scrutiny on greenwashing, leading borrowers and lenders to review the integrity of ESG data and associated commitments.
In terms of sustainable investment products, the Government is developing (in conjunction with the Australian Sustainable Finance Initiative), a sustainable finance taxonomy to bolster investor confidence and reduce greenwashing (there are similar developments in New Zealand with Toitū Tahua – The Centre for Sustainable Finance beginning work on a New Zealand taxonomy in agriculture and forestry). While ESG related investment products are facing additional regulatory scrutiny in relation to greenwashing, the appetite for ESG-oriented funds has continued in Australia (despite anti-ESG sentiment in other jurisdictions such as North America). Likewise, fund managers are continuing to embed ESG considerations throughout the investment life-cycle (e.g. negative screening and exclusion policies, minimum due diligence requirements, building out standalone ESG due diligence processes, annual reporting and vendor due diligence at exit). As noted above, there is a growing awareness of nature not only as a risk and dependency for traditional asset classes but also as a separate asset class, with increased demand for funds that develop nature-based solutions and monetise biodiversity credits.
There is a growing awareness of nature not only as a risk and dependency for traditional asset classes but also as a separate asset class, with increased demand for funds that develop nature-based solutions and monetise bio-diversity credits.
How do Australian businesses successfully embed longterm sustainability and ESG commitments, particularly when faced with ESG scepticism?
- Educating and engaging stakeholders about risks and opportunities: While ESG commitments are often geared towards managing risk, they also can be a means to capitalise on short-term and long-term opportunities. There are immediate cost-savings from moving towards renewable and circular economy solutions, and fulfilling ESG KPIs can create opportunities to reduce the cost of capital. ESG commitments can also lead to tangible long term financial benefits by driving innovation (which in turn attracts and retains talent), increasing operational efficiency and building trust with customers and other stakeholders.
- Bring ESG out of the silo: ESG and broader sustainability targets only work long-term when they are embedded within core company strategy, and not treated as a discrete issue for sustainability teams to manage. Companies need to ensure that ESG considerations are being discussed at board level and integrated into existing financial reporting and risk management frameworks and systems.
- Striking a balance between ambition and commercial reality: Companies need to balance the desire to set ambitious Net Zero or nature positive targets with commercial reality. Don’t let ‘perfect’ be the enemy of ‘good’ the most important thing is to start putting a plan in place and take stakeholders along on the journey.
- Embrace re-evaluating targets: It’s integral to closely monitor and regularly re-evaluate targets and associated timeframes (even if targets have to be rolled back or postponed) to ensure that targets are feasible, based on the best available science and take into account new factors (e.g. technological developments, changes to business strategy).
Footnotes
