Anticipating the drivers of ESG litigation

What you need to know

• Ashurst recently published an article outlining the current state of climate change litigation in Australia, highlighting the increasingly varied causes of action being brought against both individuals and companies, and the very real risk of regulatory enforcement action in Australia.
• Climate change actions represent just one important aspect of ESG litigation. In this article we go beyond climate related risks to also explore the "S" and the "G" that make up ESG.

What you need to do

• Businesses should conduct a comprehensive compliance review to ensure both existing and evolving ESG requirements are captured appropriately, and to assess the strength of controls in place to address and mitigate the risks of ESG litigation drivers.

The broader scope of ESG litigation drivers 

The scope and attention on companies' compliance with ESG requirements has historically been largely focused on climate and environmental related risks and issues. We are now increasingly seeing stakeholder expectations geared towards transparency around social impacts and governance accountability. The types of stakeholder groups bringing claims against companies are also increasingly varied, including individuals, government, civil society organisations, other companies, financial institutions and litigation funders. The combination of broadening ESG causes of action coupled with increasing classes of claimants reinforces the importance of implementing continuous risk assessment and rigorous compliance – acting now to prevent ESG breaches in the future.

For more information on key litigation developments and implications see articles: ESG Litigation – how companies can get ready, respond and resolve claims, ESG-inspired disputes – recent developments, and Climate change the use of litigation to force governments to act. 

"The S"

Both existing and emerging societal expectations illustrate that emissions reduction is more than just about environmental protection and benefits. It is also about the power exercised by businesses through the decisions they make to protect the communities in which they operate and future generations. This responsibility also extends to the protection of human rights and Indigenous cultural heritage. It is in this space that we see the environmental and social impacts that make up the "E" and "S" in ESG, converge.

Regulators also continue to support the union of environmental and societal preservation, using various legislative tools to take action and enforce ESG requirements. Such actions include the anticipated amendments to the Environmental Protection and Biodiversity Conversation Act 1999 (Cth) (EPBC Act), which build on the 2021 Samuel Review recommendations around Indigenous cultural heritage and the work currently being undertaken by the Department of Climate Change, Energy, the Environment and Water and the First Nations Heritage Protection Alliance.

Although still on foot, a challenge is underway between Traditional Owners, Youth Verdict  Ltd and others and Waratah Coal Pty Ltd, citing similar issues of human rights violations and environmental impacts to country in light of a proposed mining lease. More information on this case can be found in the Ashurst article: Human rights objections pass first test in Land Court.

The "G"

Not only do companies need to focus on what impact they are having on the environment and society but also how these impacts are managed, as proper governance requirements are being increasingly scrutinised by financiers, regulators, investors and the community as a whole. ESG governance includes a range of factors, but in the context of climate change, environmental and social issues, the most prominent and risk-exposed include requirements relating to directors duties, disclosures and reporting obligations.

Now more than ever, companies risk facing claims of misleading or deceptive conduct for both greenwashing and a failure to meet public net zero and/or climate commitments. Importantly, this risk extends to directors and senior management in relation to their shareholders and investors but now also requires companies to ensure they have a clear plan to deliver on public commitments made.

The type of language used in reporting, how and when information is disclosed and how a company demonstrates it is taking steps to meet commitments are all in the spotlight for regulators like ASIC, APRA and the ASX, lawmakers and a variety of stakeholders.

Recently, ASIC issued the first compliance action against corporate greenwashing in Australia. Tlou Energy (Tlou) was fined for misleading sustainability-related statements. ASIC fined Tlou for misleading statements to the ASX that electricity produced by Tlou would be carbon-neutral; that Tlou had the required approvals and capability to use solar power; and representations that Tlou's gas-to-power project would be low emissions.

Given the increased focus on the credibility of companies' net zero pathways over the next two decades, it is clear that the journey is as important as the destination when it comes to proper governance.

Identifying drivers of litigation

ESG litigation is being used by claimants as a tool to achieve strategic outcomes and to mitigate risks, as now more than ever both companies and government are expected to revise and enhance their approaches towards transparency and accountability.

The unpredictable and rapidly increasing nature of ESG litigation risks calls for companies and their directors to understand the litigation drivers in order to mitigate exposure to both current and future ESG litigation trends.

Key litigation drivers include:

• Seeking to decrease emissions (duty of care)
• Protecting human rights and indigenous culture heritage (duty of care)
• Forcing companies to meet commitments (misleading or deceptive conduct)
• Protecting value of business by reporting on climate change (disclosure obligations)

The application of ESG-related laws and regulations in disputes is still relatively new. We are observing that claimants are not only widening the scope of the types of actions brought before the courts, but are also applying existing laws in novel ways. These actions now contribute to shaping new precedents, and in turn, encourage government action to evolve public policy in the ESG space. In light of this, the probability of more serious risks materialising, across a wider range of risk classes, is now greater than ever.

Despite the relative infancy of some ESG laws and regulations, directors and senior management are largely responsible for making the right decisions now, which their organisations must be able to stand behind in the future. To do this, it is critical that business strategy is concreate enough to forge a stable trajectory for the business. On the other hand, plans must be agile enough to incorporate existing ESG requirements as well as plan for the introduction of new requirements as and when they arise.

Both clarity and purpose are cornerstones in executing business strategies that address the interests of the business while mitigating the likelihood of ESG risks materialising. Ultimately, business strategies must pass "the test of time".

What you need to do

Understanding what areas of ESG are important for your business is an essential first step in managing ESG-related risks.

Companies are encouraged to conduct thorough and frequent analysis of their risk and compliance landscape to understand the breadth of ESG related impacts across their business to ensure minimum exposure to ESG litigation drivers.

Companies and their directors and senior management should consider the below risk mitigation strategies in light of ESG impacts relevant to their operations and ask the following questions to gauge ESG awareness and preparedness:

• ESG context
  • What aspects of ESG are relevant to your business?
    
  • Who are your key stakeholders and what are their ESG expectations?

• Horizon scanning:
  • What trends are happening now that could impact on your company in the future?
    
  • What is your company relying on now that it can't rely on in the future?
• Risk appetite and strategy
  • How is your company going to respond?
    
  • Is your company going to take a proactive or reactive approach to ESG disputes?
    
  • What are your company's strategic and operational weak spots?
  • What are the impacts to your company's strategic objectives?
• Conduct due diligence:
  • Are your company's claims defensible?
    
  • Is your company considering ESG due diligence in light of current ESG litigation trends?
    
  • What are the impacts to capital/finance?
  • What are the potential impacts to partnerships?
  • Is your company reviewing investor communications, media releases, marketing materials?

• Uplift data environment
  • Is your company utilising data and technology for decision worthy insights?
• Implementing a plan
  • What are the opportunities for your company?

Authors: James Clarke, Partner; Risk Advisory - Elena Lambros, Partner; Tony Morris, Partner; Michael Duggan, Director; Kate Wilson, Director; Charlotte O'Sullivan, Executive; and Mikaela Wyndham, Specialist.