Modern Slavery and Human Trafficking Statement | Accessibility | Legal and Regulatory | Privacy Policy | Report Fraud | Whistleblowing
SURVEY
© Herbert Smith Freehills 2022
However, very few rely on rating agencies to calculate ESG benefits of an investment
5
<
ESG factors in decision making were deemed very important or critical by the majority of respondents
58
01
HAVE Conducted or plan to conduct
80%+
Modern slavery
Emissions reduction
an ESG Review
said ESG considerations used to assess
75%
Investment decisions
in last 2 years
Have abandoned or delayed investment proposals
1/2
say they face barriers to increased esg-aligned investment
58%
25
35%
50
US$
>
Trillion by 2025
Total assets under management
Total market
43%
1.54
A$
trillion
increased ESG investment plans Following change in federal government
Ranging between now and 2050
Net Zero commitment
don't reflect indirect Scope 3 Emissions
Two thirds of respondents stated that their due diligence processes explicitly include ESG considerations
66
To find out, Herbert Smith Freehills conducted an extensive survey of more than 100 business leaders, gathering insights on the size and shape of the investment challenges and opportunities. The results confirm that ESG is high on the agenda of Australian boardrooms. Most respondents believe ESG outcomes are extremely important – even critical – to investment decisions across capital expenditure, corporate development (M&A) and financial investment. Three out of four say ESG plays a role in assessing the company’s investment strategy. Yet the reality is that companies face challenges and roadblocks along the way. For instance, almost half of our respondents report having abandoned or delayed ESG related investment proposals over the last two years due to perceived barriers. By drilling deeper into our client’s responses it became clear these barriers can take a variety of forms – from legal risk and technological inadequacies to the sheer scale of funding needed to transition the economy. Moreover, these decisions are overlaid by uncertainties around investment returns in ESG and the timeframes over which those returns will be realised.
This includes Australia’s benchmark of cutting net greenhouse emissions to 43% below 2005 levels by 2030, a target now enshrined in the Federal Government’s new Climate Change Act, as well as people and sustainability goals being embedded throughout supply chains. Corporate Australia has demonstrated it is up for the challenge – it’s now a matter of scale, speed and investment.
Today’s investors, consumers and employees increasingly expect companies to take the lead with environmental, social and governance (ESG) initiatives – requiring sharp focus on the investments required to achieve targets being set by Australia and its corporate citizens.
Tel +61 0 0000 0000
Executive Partner, Asia & Australia
Andrew Pike
Email
PARTNER & ESG Lead, Australia
Timothy Stutt
Where the real problem lies
Mind Blowing Money
05
Lorem ipsum sit dolor
Barriers to Scalability
04
The rising importance of "the S"
The ESG Premium
03
The challenges and legal hurdles
Rethinking Risk
02
Executive Summary
Unlocking ESG Investment in Australia
Contents
%
40%
say Commitments
60%
Australia
Globally
To provide a further perspective, we engaged in conversations with various experts – from corporate leaders to venture capitalists and academics. The common thread is a sense of urgency and powerful enthusiasm to make good on ESG ambitions. However, as our report reveals, the pathway is complex and expensive, demanding far more than an appetite for change. Our report, Unlocking ESG Investment in Australia, breaks down the challenges and opportunities and explains why our clients see the investment pathway as a collective effort that hinges on development of emerging technologies, government funding, and a change to orthodoxies on risk and return. Timothy and Andrew
Regulatory uncertainty and inconsistency Cited as the only barrier unique to Australia
Lorem ipsut sit dolor
So what is the key?
07
06
= Competitive Advantage
Tech x Time = Competitive Advantage
Keeping focus on "the S"
Lorem ispum sit dolor
Start at the Source
Lorem ipsum
Risk and return under every rock
Next Chapter
Read the report
In August 2022 Herbert Smith Freehills surveyed over 100 business leaders across Australia including directors, NEDs, business and legal leaders, Partners, strategists, as well as General Counsel.
Guest contibutors Dr Cameron Kelly, General Counsel for the Australian Renewable Energy Agency (ARENA). Dr Chris Greig, Theodora and William Walton III, Senior Research Scientist at the Andlinger Centre for Energy & the Environment at Princeton University. Kate Glazebrook, Head of Impact and Operating Principal at Blackbird Venture Capital. Kirsten Gray, Chief Sustainability and External Affairs Officer for Treasury Wine Estates. Mike Ferraro, Managing Director at Alumina Limited. Scott Richards, GM Procurement at EVT (Entertainment, Ventures, Travel) (previously Event Hospitality and Entertainment). Herbert Smith Freehills Heidi Asten, Malika Chandrasegaran, Melanie Debenham, Alison Dodd, Patrick Gay, Rebekah Gay, Emma Iles, Danielle Kelly, Jay Leary, Gemma McKinnon, Kathryn Pacey, Stephanie Panayi, Drew Pearson, Andrew Pike, Carolyn Pugsley, Mark Smyth, Timothy Stutt, Anthony Wood and Jacqueline Wootton.
CONTRIBUTORS
CHAPTERS
Start at the source
Mind blowing money
Tech x time = competitive advantage
Keeping focus on the “S”
So what is the key to unlocking ESG investment?
Herbert Smith Freehills would like to acknowledge the Traditional Owners of the land where our Australian offices are based. We would also like to acknowledge Elders past, present and emerging. We seek to foster a culture of friendship and partnership between Herbert Smith Freehills and Aboriginal and Torres Strait Islander peoples, organisations and communities.
Acknowledgement of Country
A legal lens on ESG
With special thanks to all contributors who provided their valuable time and insights and helped bring this report into fruition.
Download Summary
Unlocking ESG Investment in Australia Key challenges and actions
listen to our series
Reporting for duties esg reporting in Australia
“There are risks and opportunities under every rock. But without a system in place for understanding what is most material to the business, deciding where to allocate capital – and over what timeframes they will be investing – it becomes very difficult for Boards to approve investment.” Stutt sees a key challenge around a mismatch of timeframes. He cites the example of making substantial changes to a company's supply chain, which may deliver benefit in achieving sustainability-related premiums, lowering human rights risks or improving resilience to geopolitical risks but would also require a significant investment of time and resources over the short term. “For a board to make a decision about something like that means dealing with an immediate financial outflow, which is known and quantifiable, versus a long-term benefit that may or may not happen,” notes Stutt. “It requires a leap of faith.” Kirsten Gray, Chief Sustainability and External Affairs Officer for Treasury Wine Estates picks up the theme: “One of the challenges that business continues to face is how it thinks about return on investment. Defining the broader benefits of ESG investment in assessing returns is an evolving area – I haven’t yet found anyone who’s really cracked that nut! “However, investment in ESG can sometimes have a different time horizon or success metrics to other types of investment. It’s sometimes hard to square the ledger with a transformation of this scale, especially when the benefit only becomes clear in the long term.” There is a clear need for Boards and companies to communicate the rationale sitting behind their ESG investment strategy. There is also a need to communicate the ESG benefits which are, or are expected to be, realised from this investment. However, complications arise from the rapidly emerging issues and uncertain timeframes. HSF Disputes partner Mark Smyth observes, “This can create difficulties for companies in talking about the long-term benefits they expect to realise through ESG investment or announcing a strong corporate ambition on ESG, without creating exposure to potential greenwashing litigation or regulatory enforcement risk. “We have seen an increase in claims commenced by consumers on grounds of greenwashing in the US, UK and Australia. Disclosures on sustainability and a product’s green credentials may give rise to claims for misleading or deceptive conduct. Future statements on corporate ESG ambitions can create risk if the statements are not based on reasonable grounds or carefully framed. For example, proceedings in the US and Australia have been commenced in the consumer and retail sectors for companies allegedly falsely marketing products and packaging as sustainable and environmentally-friendly.”
of companies see barriers to greater levels of ESG-aligned investment
As Dr Greig describes it, the “front load” can be a noteworthy challenge – especially for energy and industrial sectors that must transition from an asset base with fairly modest capital requirements, by substituting those assets with more capital-intensive assets that have much lower operating costs in the long run. “At the moment we are allocating a fraction of the business-as-usual capital flows to clean energy, and the rest is going into traditional energy capital,” says Dr Greig. “If you think about the pools of capital out there, the majority is sitting in funds under management, essentially superannuation funds, hedge funds, private equity and so forth. Most of these funds are invested with relatively low risk or in assets with predictable returns – typically equities, cash and bonds. What we are talking about for net zero scenarios is mobilising all this risk capital, which is essentially development capital and project finance for greenfield construction, and they constitute a much smaller pool of capital.” It is not just a matter of the scale of funds. Dr Greig argues that while companies and nations have made promises to deliver a net zero economy around the mid-century, this is going to require the allocation of capital to greenfield assets at an unprecedented speed. “We have got to see a lot more allocation of risk capital to clean energy assets and transmission infrastructure and pipelines for hydrogen, ports for hydrogen, and terminals and ships – that whole value chain,” he says. “It is not about making investment decisions around ‘Do I invest in this company or that company?’ We need an overhaul of how capital is allocated, and how risk and reward is considered, because there is certainly enough capital available to fund the energy transition. It is a question of the risk profile that is willing to be accepted.”
Dr Chris Greig Senior Research Scientist Andlinger Center for Energy and the Environment Princeton University
We need an overhaul of how capital is allocated, and how risk and reward is considered, because there is certainly enough capital available to fund the energy transition. It is a question of the risk profile that is willing to be accepted.”
Timothy Stutt Partner herbert Smith Freehills
There are risks and opportunities under every rock. But without a system in place for understanding what is most material to the business, deciding where to allocate capital – and over what timeframes they will be investing – it becomes very difficult for Boards to approve investment.”
Among the top barriers to increased ESG-aligned investment cited in our survey, is access to capital. Dr Chris Greig, the Theodora and William Walton III, Senior Research Scientist at the Andlinger Centre for Energy & the Environment at Princeton University, maintains that insufficient capital is being deployed to achieve net zero. Part of the problem, he believes, lies in the capital intensive nature of net zero scenarios, as outlined in the Net Zero Australia and Net Zero America research projects.
Dr Greig notes that when he asks investors or banks why they are not funding more clean energy projects or clean industrial companies, the response often runs along the lines of ‘there are just not enough investment opportunities out there’. Or, he adds, “Banks will say there is plenty of capital but not enough good projects to invest in.” "And that's the risk issue,” says Dr Greig. “The response is that there is not a pipeline of opportunities out there that are sufficiently de-risked, with the predictable returns we have come to expect to be able to allocate our money in this ESG-aligned framework.” Dr Greig cites the comment of one business leader he spoke with recently who noted, “You have to understand that as the saying goes: ‘capital is a coward’. “It is all about: ‘Where is my revenue coming from? What is the risk on capex? What is the risk of social backlash?’,” says Dr Greig. “Governments have to find a way to intervene and underwrite greater risk because we need to accelerate the allocation of capital to the transition to net zero by a factor of four, at least, if not more.” Underwriting of ESG projects does itself needs to be sustainable however. HSF projects partner Alison Dodd reflects: “Even laudable ambitions can have unforeseen consequences. While the ESG agenda is serving its function by pushing stakeholders together in novel and innovative ways, it is also increasing demand for assets with ESG credentials, sometimes at the expense of robust due diligence. Warns Dodd: "Does it make money? Is it full of risk? Will the contractor go broke? The ESG angle doesn't matter if you don't have the right answer to those questions." A potential approach is the greater use of risk-sharing and incubation in Australia.
A perceived lack of quality investments also has the potential to delay or even dissuade decisions around ESG investments.
Dr Cameron Kelly General Counsel ARENA
There are “unprecedented challenges at the moment, both domestically and internationally ... there has never been a more relevant time for organisations like ARENA to assist in delivering corporate Australia's ESG-related goals. The problems and the uncertainties now are perhaps more than ever.”
Dr Cameron Kelly, meanwhile, says that organisations like ARENA can mitigate financial barriers to the extent that a project or idea won’t get off the ground because of perceived bankability issues or a reluctance of traditional financiers. “That's the sweet spot for ARENA. “That's the area we look to support.” He acknowledges however, that there are “unprecedented challenges at the moment, both domestically and internationally”. It is not just about Covid-19 and the disruption the pandemic delivered. Dr Kelly believes the uncertainty associated with geopolitical issues globally has seen “an absolute reduction” in business confidence – and therefore investment. “We see it in our projects". A lot are suffering in terms of EPC contractors needing to re-price, coupled with an inability to source labour, and therefore coming back to us with a greater funding ask. Against all of that, there has never been a more relevant time for organisations like ARENA to assist in delivering corporate Australia's ESG goals. The problems and the uncertainties now are perhaps more than ever.” ARENA’s most recent annual report points to around A$1.8 billion invested since inception a decade ago. Dr Kelly estimates that accounts for over 600 projects, which have collectively catalysed just over A$8 billion in project capital. The more interesting metric, asserts Dr Kelly, is that every dollar of ARENA funding is looking to catalyse over A$3 of private capital.
I believe governments have to find a way because we need to accelerate the allocation of capital to the transition to net zero by a factor of four, at least, if not more.”
4
x
Timothy Stutt, a partner & ESG Lead, Australia at Herbert Smith Freehills, and a specialist in governance, disclosure and ESG, believes one of the challenges of funding additional investment is uncertainty about how to prioritise differing aspects of ESG.
HSF Environment, Planning and Communities partner Heidi Asten acknowledges that legal barriers can also impact plans for investing in ESG. She notes that approval timelines for major projects such as renewable energy and transmission projects can take years to work through and remain susceptible to challenges by community groups that are less than welcoming about this type of local development. This highlights the complexity that can arise in balancing localised environmental and social impacts with broader objectives. This adds an extra layer for consideration with respect to the risk tolerance of Boards in deploying capital, including as to the timeframe for achieving a desired outcome. Recent regulatory developments including the Climate Change Act and the Consequential Amendments Act has further codified Australia’s greenhouse gas emissions reduction targets. This provides a level of certainty for business in respect of decarbonisation efforts and the ‘net zero imperative’. HSF Environment, Planning and Communities partner Kathryn Pacey reflects: “This legislation is the first step in a range of climate-related reviews and proposed amendments that we expect to see in the next 12 months. This is just the beginning of the legal journey to tangible climate action.” Dr Cameron Kelly, General Counsel for the Australian Renewable Energy Agency (ARENA), an independent Federal Government body that supports national renewable energy projects, says: “The government has also passed various consequential amendments legislation. “This enshrines that objective into the legislation of agencies like ARENA, and also the Northern Australia Infrastructure Facility (NAIF), the Export Finance Association, and the Clean Energy Finance Corporation.” This could provide a meaningful step-change in market certainty, given the ‘catalysing’ role that organisations like ARENA can provide for funding potential projects and technologies. There is a need for balance however. Melanie Debenham, HSF Environment, Planning and Communities partner, says: “More interventionalist regulation by governments, stepping into ESG spaces previously either not regulated or regulated only in a general way, can be a double-edged sword. At the same time as providing more certain settings for ESG investment, barriers may be created. Balance is needed in regulation, and the benchmarks and processes established, to truly unlock investment potential in Australia.
Melanie Debenham Partner herbert Smith Freehills
There is a huge opportunity here to enhance outcomes of offset projects by taking a more holistic view of what they can achieve. In particular working collaboratively with First Nations people and leveraging their deep knowledge of country.”
HSF Competition, Regulation and Trade partner Patrick Gay adds: “The risks for businesses in making misleading sustainability claims have never been higher. Financial penalties for contraventions of Australian Consumer Law (ACL) have also been increasing substantially over the last few years, and this trend is likely to accelerate if the proposed increases to the penalties under the ACL are enacted.” The Australian Prudential Regulation Authority (APRA) and Australian Securities & Investments Commission (ASIC) have named climate risk as top priorities for the next 12 months, focusing on two angles: taking action with disclosures that are not useful, accurate or substantiated and, secondly, monitoring and bolstering operational resilience. Meanwhile the Australian Competition & Consumer Commission (ACCC) recently announced internet sweeps to identify misleading environmental and sustainability marketing claims.
Conventional funding approaches come up short against the vast uncharted risks and uncertainties of ESG investment. Our findings show the perceived barriers to ESG investing include legal concerns, tax issues, tenure of investment, regulatory uncertainty, and of course, access to capital and apprehension around returns. Regulatory uncertainty was the only barrier cited as unique to Australia.
This can create difficulties for companies in talking about the long-term benefits they expect to realise through ESG investment or announcing a strong corporate ambition on ESG
Lorem pipsum
Lorem ipsum sit dolor amet
BANKING ON PEOPLE
GLOBAL BANK REVIEW 2022
Communicating a clear strategy on ESG, including what is material to the business and key objectives Delineating and weighting qualitative benefits of ESG-aligned investment (in context of the strategy) Scoping the level of investment needed to align with stakeholder expectations
Uncertain returns and outcomes
Greater use of risk-sharing mechanisms Greater role for incubators and platforms Government funding to seed investment
Risk aversion
Emerging frameworks adding certainty in some areas Focus on global harmonisation means more horizon scanning needed by business Collaboration mechanisms to support co-ordination between Government and industry, between businesses, and between suppliers/customers
Regulatory uncertainty
Barriers ranked consistently at number 1 include legal issues, tax issues, and tenure of investment
1
ST
Regulation/policy certainty was most selected in the TOP 3 for levers to support greater levels of ESG aligned investment (followed by enabling infrastructure/ technology and corporate action)
READ MORE +
Legal Sidebar: Applying a legal lens on ESG investment as corporate Australia readies
“The review of Australia’s carbon credit units includes the extent to which carbon projects are currently supporting positive environment, social and economic outcomes, including for biodiversity and the participation of First Nations people. “Importantly, the terms of reference appear to be recognising the potential of carbon credits to generate co-benefits, which we already see leading to increased integrity and value in the market. There is a huge opportunity here to enhance outcomes of offset projects by taking a more holistic view of what they can achieve, in particular, by working collaboratively with First Nations people and leveraging their deep knowledge of country.”
Consumers increasingly demand that not only their products are environmentally responsible, but that the entire supply chain is sustainable. Companies acknowledge that transitioning to renewable energy can only go so far – and cutting emissions from production and use of consumer goods through circular economy practices has a significant role to play. Treasury Wine Estates’ Chief Sustainability and External Affairs Officer Kirsten Gray comments, “With electricity counting for 68% of our Scope 1 and 2 emissions, switching to renewables is the quickest move we can make in decarbonising our business. While we have some large-scale projects underway, such as our commitment to invest A$20 million in on-site electricity generation and metering to achieve the target of being 100% renewable electricity by 2024, (including solar panel installations at our two largest Australian sites), some areas of renewables, like alternatives to diesel on vineyards and in remote areas, will take more time to get right. “Like so many other industries, as we aim for net zero by 2030, we recognise the need to focus on efficiency and reduce waste through circular thinking. In our operations, we’ve found ways to recycle, reuse or repurpose our waste: 95.25% was diverted from landfill in the last financial year.” “Another focus is packaging, and we’ve committed to increasing recycled content to an average of 50% by the end of the 2025 calendar year. This is a challenging area, if you consider the broad range and lack of consistency in post-consumer recycling schemes in Australia and internationally, all moving at different paces.” “With climate research showing that our main growing regions are getting warmer and drier, water security will become increasingly important for all agricultural businesses. We recently completed a global review of our water footprint at a catchment level, with a series of recommendations to inform our role as a responsible steward of water in the communities where we operate.”
It’s a long road for businesses assessing how to prioritise ESG goals and balance immediate pressures with long-term ambition.
Scott Richards, GM Procurement at EVT (Entertainment, Ventures, Travel) says, “There is definitely a “greenium” a green premium – we attach to products which align with our sustainability aims and help deliver on our ESG commitments. Not just in terms of environmental benefits such as recyclability, but across broader social aims as well, for example, local sourcing or modern slavery practices.”
Scott Richards GM Procurement EVT (Entertainment, Ventures, Travel)
There is definitely a “greenium” (green premium) that we attach to products which align with our sustainability aims and help us deliver on our ESG commitments. Not just in terms of environmental benefits such as recyclability, but across broader social aims as well, for example local sourcing or modern slavery practices.”
Keeping focus on the "S"
Kirsten Gray Chief Sustainability and External Affairs Officer Treasury Wine Estates
With electricity counting for 68% of our Scope 1 and 2 emissions, switching to renewables is the quickest move we can make in decarbonising our business.”
Recognition of strong consumer demand for sustainable products Sustainable approaches as a source of competitive advantage (short term) and as a baseline expectation (long term) Longer term supply partnerships, with collaboration on ESG targets and outcomes
Tenure of investment needed to support transformation
Delineating and weighting benefits from waste reduction and circular thinking Integration of Scope 3 and broader ESG commitments into commercial contracts, financing and investment policies Banks / equity investor recognition of differing risk profiles on ESG
Misalignment across value chains on ESG commitments
say their company has a net zero commitment ranging between now and 2050
60
said ESG considerations are being used to assess their investment decisions
75
“EVT manages a diversified portfolio of interests across Entertainment (including Event Cinemas), Ventures (including a diversified property portfolio), and Travel (including QT, Rydges and Atura hotels and Thredbo Alpine Resort). Talking to our operational teams, it is clear there is real demand from customers for products which are aligned with positive ESG outcomes. But from the supply side, there can be challenges in meeting that demand across many product categories. Particularly with respect to small and medium sized suppliers, the capital investment needed to reconfigure their own sourcing or manufacturing can be considerable. This creates a timing mismatch between the short to medium term tenure of most supply contracts, and the more significant capital investment which will pay off in the long term. It’s good to see banks and equity investors becoming more active in this area.” “Previously, we would describe ‘bad’ procurement practice as focusing on price alone, whereas ‘good’ practice focused on a broader assessment of value. That principle still holds. What we are seeing now is just a more direct acknowledgement that there is a meaningful value attributed to the ways in which products and services contribute to broader social or environmental aims – or minimise adverse impacts.” HSF corporate partner Malika Chandrasegaran underlines the impact ESG outcomes are having as a core driver of consumer M&A activity: “We are seeing this play out in a number of ways, including portfolio reviews with an ESG lens, private capital focusing on conscious investing, consolidation to manage ESG challenges and buyers of last resort emerging to snap up ESG challenged businesses. There is also a greater level of consciousness in M&A processes, including leveraging ESG strengths to drive consumer demand and greater emphasis on understanding and managing known risks.”
ON JUST TERMS PODCAST SERIES – AUSTRALIA'S LEADING LEGAL AND COMMERICAL MINDS
LEARN MORE +
In particular, Dr Kelly believes one of the most high-profile aspects of ESG is the approach to modern slavery – and that this is impacting business’ approach to investment. He says, “ARENA is caught by the modern slavery legislation because our annual funding amount trips the A$100 million threshold, and many other organisations are also caught up in this legislation. The modern slavery legislation is relatively recent, dating from 2018. Nonetheless, as part of its efforts to address such risks in its projects, ARENA requires all its funding recipients to warrant in contractual documentation that they now comply with modern slavery obligations. Dr Kelly says this makes it a “big deal” particularly in the clean energy sector industry as many of the raw materials, particularly for solar, come from jurisdictions that may have issues with modern slavery. He notes: “We are keeping a close eye on the current reforms being considered for modern slavery because some reforms are considering penalties for organisations that get this wrong. Attitudes towards things like modern slavery are maturing. It's very much work in progress.”
Dr CAMERON KELLY General Counsel ARENA
We are keeping a close eye on the current reforms being considered for modern slavery because some reforms are considering penalties for organisations that get this wrong. Attitudes towards things like modern slavery are maturing. It's very much work in progress.”
Danielle Kelly Director of Culture and Inclusion Herbert Smith Freehills
Even organisations which have long invested in diversity and inclusion have needed to quickly adapt to shifting employee expectations around flexibility, inclusion, purpose and impact. We continue to learn and remain more galvanised than ever to improving the experience of all our people.”
"Opinions on issues like diversity tend to be polarised, which creates a dilemma for employers,” says Tony Wood, a partner in HSF’s Employment, IR & Safety team. "While, superficially, it's difficult for employees to disagree with most employers' general statements in support of diversity, many employees want to advance causes by going harder, faster. This creates the scope for friction. Some employees might not agree with a company’s public voice or inaction on a particular topic. How do you navigate that? Could that result in activism among a minority? And if a company speaks out on a subject, employees will look at whether it is walking the walk. If the employer’s actions aren’t consistent with what it says, the risk of activism or public criticism will be higher." According to Danielle Kelly, HSF’s Director of Culture and Inclusion, the importance of workplace inclusion is being felt like no other time in recent history. “Even organisations which have long invested in diversity and inclusion have needed to quickly adapt to shifting employee expectations around flexibility, inclusion, purpose and impact. We continue to learn and remain more galvanised than ever to improving the experience of all our people.” Gray strikes a similar note “As a wine producer with a global footprint, we’re very aware of our responsibility across all elements of ESG, and are working hard to make progress in a way that resonates in each of the regions where we operate. “Supported by an active global employee resource group, the partnership with Sydney Mardi Gras and WorldPride is an example of where corporate values and brand initiatives align to create meaningful impact.” “Another area that’s very important to us is the impact of alcohol on consumer health. We’ve recently released a policy called Celebrating Moderation, which outlines TWE’s position on alcohol’s impact on health; we believe the misuse of alcohol causes harm, and therefore believe in and support the World Health Organisation’s (WHO) and the UN Sustainable Development Goals to reduce harmful use of alcohol by 20% (in comparison with 2010) by 2030. The policy sets out a number of ways we want to start to have a positive impact on health outcomes.” “We’re also integrating the social component of sustainability into our broader business issues, including conduct and business continuity across our supply chain, as well as modern slavery and labour practices, and health and safety.”
Over 80% of HSF's survey respondents say they have reviewed or plan to review their ESG policies and operations. It is a figure Dr Cameron Kelly, General Counsel at ARENA is unsurprised by. He expects the figure to increase incrementally year-on-year.
say they HAVE REVIEWED or plan to review their ESG policies and operations
80%
Likewise in HSF’s 2021 Future of Work report, the ‘social’ aspect of ESG was named as one of the biggest hidden risks for employers. Companies are becoming drawn, willingly or not, into political and social discussions, raising complicated ethical and moral dilemmas. One concern is that many employers are not taking active steps to address the potential for activism before it spills into public discourse.
Diverse stakeholder groups want to shop with, invest in, and work with companies that are taking a leadership role in social imperatives.
The S in ESG was found to be a key issue emerging from corporate ESG reviews for many of our survey respondents. This applied across investment and broader operations, including positioning the business with employees and customers. Gemma McKinnon, Responsible Business Manager at HSF and Barkindji woman from Wilcannia on the Darling River notes, “ESG is a reflection of values and priorities of society today.” “Organisations are aware that people are much more conscious of the impact of their choices, and ESG is businesses’ way of responding. For my work, it’s a recognition that responsible business is not just the right or nice thing to do but it’s good for business. It means that organisations are resourcing this work and giving it due respect.” Kirsten Gray, Chief Sustainability and External Affairs Officer for Treasury Wine Estates, develops the point: “International reputation research tells us the employer is the most trusted entity in people’s lives – more than governments or the media. Combine that with ESG emerging as the single most powerful indicator of whether the public is willing to trust a company – and that’s the strong case for meaningful investment in ESG beyond our own industries of wine and agriculture.”
HSF partner Jacqueline Wootton agrees: “An important dynamic to manage is that expectations rise year-on-year. Modern slavery reporting, for example, is driving companies to do and disclose more with each reporting cycle. And that’s without a further wave of changes that could be coming, following the Government’s current review of the legislation.” “The next challenge for companies in the modern slavery area is to be ready to answer not just questions about what needs to change or be uplifted to meet reporting and regulatory expectations, but how they are measuring whether their approaches are effective. Is all the effort actually driving positive change for those vulnerable to modern slavery?”
Tech x Time = competitive advantage
THE FUTURE OF WORK REPORT 2021
REMOTE/CONTROLLED
Greater investment in sustainable procurement across industry, both in capability and execution Mapping and understanding human rights risks across operations (including financing and investment) and supply chains Consistency of approach across governance accountabilities, commitments, operational policies, and supplier management (including onboarding, contracting and engagement)
Rising expectations for action throughout companies’ value chains
Deciding which ESG issues are material to the business, and deciding ‘where to play’ (not everywhere!) Mapping stakeholder expectations, and developing positions/objectives that align internal strategy with external landscape Clearer recognition that most social issues are not ‘political’ matters, but instead are legal compliance matters (eg human rights) or reputational risk issues (eg diversity and inclusion)
Increased expectations for private business to take positions on social issues
+
As Ferraro points out, Alumina’s joint venture with US industrials group Alcoa – AWAC, is the largest user of gas in Western Australia, and the largest user of electricity in Victoria, consuming close to 33% of domestic gas in WA and 10% of Victoria’s electricity supply. “There is a strong imperative to ‘green’ Alumina’s portfolio,” he observes. While confident this process will ultimately deliver positive financial returns, it is not AWAC’s key driver in the short term. “As a significant user of energy produced using fossil fuels, we have a commitment to both our shareholders and other stakeholders, and also potentially to new investors,” Ferraro reflects. “It is not about delivering, a 15% return next year. It is about making sure that over time we reduce our emissions. I believe we need to do it and we should do it. The world has moved on. The social licence to operate has moved on. It is a ticket to stay in the game.” But the doing is not always straightforward and AWAC faces practical hurdles in transitioning away from fossil fuels (AWAC uses mainly gas rather than oil or coal so less emissions intensive relatively). In particular, renewable energy as it currently stands, does not meet the supply volume, heat load and consistency needed to turn bauxite into alumina. “The biggest barrier we face is the time needed to advance technological developments,” says Ferraro. “At the moment, electricity cannot produce the heat we need in our processes compared to gas. Technology has not yet fully developed to use electricity generated from renewable sources that can produce the heat content and the load needed to fire our digestion process at the refining level.” He adds that even if electricity could be used in place of gas in the refining processes, renewable sources do not currently provide the necessary baseload.
Mike Ferraro, Managing Director of leading Australian resource company Alumina Limited, sees both drivers to embrace ESG investing – and practical hurdles along the road to net zero.
ARENA’s General Counsel for the Australian Renewable Energy Agency, Dr Cameron Kelly, notes that in Australia, the globally-recognised framework from the Task Force on Climate-Related Financial Disclosures (TCFD) is “the blueprint for how organisations have elected to report on their ESG credentials, adding that “the interesting part is the recent move to align our reporting regime against what is best practice internationally.” Dr Kelly notes that ARENA avoids supporting individual companies to rather focus on the broader idea that we need to, as a whole economy, transition towards net zero as quickly as possible. “We always require our funding recipients to share their learnings, both good and bad, over the life of the project. That is a real metric we measure over the life of the project, which could be 10, 15, even 20 years for something like a large-scale green hydrogen project.” However, fewer than 5% of business leaders surveyed by HSF turn to rating agencies to determine the ESG benefits of an investment. Glazebrook says there is a degree of cynicism in the area. “I talk to a lot of colleagues in the ESG space, and they point to some prima facie nonsensical outcomes in those ratings agencies. This leads people to say it’s all meaningless!" Despite such cynicism, Glazebrook says, “The broad thrust is very strong in the direction of ESG investing. In the interactions I see with people in venture capital and private equity – all the way up to big institutional capital, the train is running in that direction.” HSF's Partner and ESG Lead, Timothy Stutt assesses the future reporting and rating landscape: “There has been meaningful progress in the past 18 months with organisations such as the International Accounting Standards Board, the TCFD, the Sustainability Accounting Standards Board and Integrated Reporting working together to unify how companies report on ESG and sustainability. “It should become easier to measure and compare company reports and ratings in the future because companies will structure data in the same way. The net effects of ESG management will become more quantifiable and ratings organisations will have to be more accurate, more relevant and accountable for their ratings.”
Kate Glazebrook Head of Impact and Operating Principal at Blackbird
Fewer than five per cent of business leaders surveyed by Herbert Smith Freehills turn to rating agencies to determine the ESG benefits of an investment
Kate Glazebrook is Head of Impact and Operating Principal at Blackbird, a 10-year old venture capital fund that invests in early stage ventures across Australia and New Zealand, with a skew to impactful companies. In terms of the technological challenges of ESG investing, she points to the truism that we habitually overestimate what can be achieved in one year, while underplaying the potential of a decade. “That's probably true of deep tech,” says Glazebrook. “We tend to see technology roadblocks for ages, and then something happens. If that coalesces with a market shift, all-of-a-sudden you are in a completely different ball game.”
Kate Glazebrook Head of Impact and Operating Principal Blackbird
...from an investment standpoint, the market opportunity is so great, and the climate need is so great, and the upside is so large that there is enough incentive for the right technologists, the right capital players to get involved.”
“If you look at electric vehicles (EVs), for example, there is some scale challenge around distances, particularly in Australia. But from an investment standpoint, the market opportunity is so great, and the climate need so great, and the upside is so large that there is enough incentive for the right technologists, the right capital players to get involved.” Glazebrook notes that one of Blackbird’s differentiators, is “we think in decades, not days” She reflects, “If you really want to be a generational owner of generational companies, you can't just want to buy in and sell out in three years. That's not our main game, we want to hold for the long term.
Mike Ferraro Managing Director Alumina LIMITED
The biggest barrier we face is the time needed to advance technological developments.
Investment in ESG is underpinned by the ability to measure and report on the benefits realised. While some reporting frameworks exist, systems of measurement appear to be lacking.
In the interactions I see with people in venture capital and private equity – all the way up to big institutional capital, the train is running in that direction.”
of respondents stated that their due diligence processes expressly include ESG considerations
Glazebrook notes that every business makes decisions touching on ESG, positively and negatively. And regardless of whether a company has an impactful purpose, they all need to make decisions about how they operate which have impact, from their supply chains, to diversity, equity, inclusion, how they think about sustainability to how they view data ethics. She says, “Some investors who are just out to maximise profit, particularly over the short term, will rightly say, that the data is not clear that making an investment in ESG-aligned business, relative to one that doesn't care about ESG, will generate a greater success story for me over that short time horizon”. Despite facing technological difficulties in transitioning to green energies, Ferraro sees distinct advantages in ESG investing. “It improved our risk profile”. Ferraro adds that ESG investments can also make companies more climate change resilient and, in AWAC’s case, ensure systems keep running. “The money we spent enhancing and making our operations more resilient is money well spent. It helps protect the assets and keeps them running on a longer-term basis.”
"The storage capability and capacity that is available right now is not enough,” adds Ferraro.
“The social licence to operate has moved on. It is a ticket to stay in the game.”
AWAC’s need for consistent, reliable energy is well documented. In 2016, its smelter in Victoria was hit by a power outage due to storms that froze the aluminium pot lines. Bringing production back on stream took 12 months – and the whole exercise came at a cost of A$50 million. “People don't really understand the need for ‘firm’ power that is available 24/7 at a consistent level. So, storage ultimately has to be the solution, but you don't have enough battery materials to make that size storage,” says Ferraro. Technological constraints are often overlooked by investors as a potential barrier to ESG investing. Ferraro sees the need for investor/stakeholder education “The public thinks that if you just produce more solar and wind power, the problem is solved. But it is not because heavy industry like steel manufacturers, aluminium producers and others need a significant amount of energy that runs 24/7. It is not a matter of just reducing production. The system will shut down if the energy is not there – if the wind isn’t blowing or the sun is not shining.”
What will the market need in 10... 20... 50 years?
rely on rating agencies to calculate the ESG benefits of an investment
"The money we spent enhancing and making our operations more resilient is money well spent."
"And if you want to hold for the long term, then you're starting to think about what will the market need in 10 years... 20 years... 50 years...?”
Continuing focus on harmonising and improving sustainability reporting on ESG risks and opportunities Greater use of ‘life of project’ viewpoints, which balance short term outflows and long term returns (including weighting non-financial factors) Need for disclosure regime to facilitate greater ambition on targets and goals by better recognising inherent uncertainty for ESG reporting (ie timeframes, viability of technology, and future developments)
Complexity of ‘measuring’ ESG outcomes
Greater focus on long term returns, with investment weighted to reflect strategic significance and need for resilience Diversification of technologies and contractual mechanisms to ‘pivot’ approach Protection of investment returns through IP and commercialisation pathways
Pace and viability of key technology is uncertain
Intellectual property rights will also play a role in commercialising investments and sustaining ESG benefits over time. Rebekah Gay, HSF intellectual property partner, notes, “With a lot of the current focus on policy, capital allocation and market regulation, it can be easy to forget that someone needs to be prepared to make the huge investments required to develop the groundbreaking new technologies needed to power the energy transition across the board. That sort of innovation is often incentivised by IP rights, such as patents, which can support the pathways to commercialisation.” HSF intellectual property partner Emma Iles expands on this: “It is important for organisations to be aware of the power of IP, and for governments to continue to support robust IP regimes.”
Almost half of respondents say they have abandoned or delayed ESG related investment proposals due to barriers in last 2 years
Moreover, he says the work done to date has left AWAC better placed than competitors globally if a carbon tax is introduced. “We produce about half the emissions of our competitors. Nonetheless, it makes a lot of sense for us to continue greening our portfolio.”
“ESG reporting demands companies’ time and resources, but it is a vital tool for companies to be transparent with the market about how it is tackling risks and opportunities associated with a range of issues.” “However, the extent of forward looking info required under the proposed ISSB framework will pose some significant challenges for Australian companies in particular. Our system for regulating forward looking statements strictly requires reasonable grounds. What is “reasonable” is open to interpretation given the timeframes involved and the lack of certainty around outcomes for many ESG projects. We do a lot of work with clients trying to implement processes which will be credible and defensible, given the ‘hindsight’ with which disputes are prosecuted. Really, there needs to be a re-think about how we will regulate honest disclosure of this type of expansive E, S and G information.”
“So, the government has sent a very strong signal there. The subsidies that are in place are long-dated, more than 10-year horizons. The direct capital investment they are offering in some of the riskier technologies is really material, tens of billions of dollars. I can see that stimulating a lot of the supply side – and the demand side, investment in clean energy.” Dr Greig believes Australia needs to take similar initiatives. What happens to our national income as part of the transition to net zero? Dr Greig believes the Federal Government may be using the “language of, ‘We will become a clean energy exporting superpower’”. But as he notes, "When you unpack the capital needs of this you are looking at another US$6 trillion, or maybe US$10 trillion. “That is where the real problem lies. If we are going to transition both the domestic economy and exports, we are talking about a transition of similar scale in terms of capital flows to the US transition, which is mind blowing.” While 60% of respondents stated that they had a net zero target (2050 was the most commonly noted date), the majority had yet to quantify the level of investment required to meet its target. This suggests that there is still some work to do to understand how respondents will achieve their target. HSF’s Global Head of Mining Jay Leary believes climate change presents challenges and opportunities in equal measure. “There are challenges around making mining operations cleaner, and created by the closure of some mines. There is, however, an abundance of opportunity created by the long-term significant demand for future-facing mining commodities, such as nickel, copper, lithium and rare earths that are the key to many renewable and other technologies. I have great faith in the ability of the mining sector to develop and transform.”
Most companies are grappling with how to budget or fund their ESG goals. Yet the consensus remains: think big!
Dr Chris Greig Senior Research Scientist Adlinger Center for Energy & the Environment Princeton University
I don't think there is any way known that Australia will get to net zero without really material carbon capture and storage (CCS). It may not be required until the 2030s and 2040s, but it is not going to happen without government making strategic investments now.”
If we are going to transition both the domestic economy and exports, we are talking about a transition that is of similar scale in terms of capital flows to the US transition, which is mind blowing.”
“In the US, our capital spend on the supply side to 2050 looks like being somewhere up to US$15 trillion by 2050,” he observes. “In Australia, on the domestic economy, it will be substantially less, maybe US$1 trillion or US$2 trillion.”
Princeton’s Dr Chris Greig points to the need for governments to work with the private sector and agree what it is going to take to allocate the levels of capital needed to achieve net zero. “If you look to the US Infrastructure Investment and Jobs Act, and the Inflation Reduction Act, that is nearly half a trillion dollars of stimulus, which is largely going to support climate mitigation investments,” says Dr Greig. “This is going to stimulate a lot of investment in renewables, in hydrogen production, in electric vehicle uptake, in hydrogen fuel cell vehicle uptake, in carbon capture and storage.”
Dr Greig says the answer lies in “doubling down on wind and solar and transmission, transition home electricity sources and stimulating the uptake of electric vehicles. He notes plenty of subsidies are available on the demand side, particularly vehicles and the home, and suggests the supply side is, for the next decade, likely to be largely about wind and solar. Dr Greig, however, cautions: “I don't think there is any way known that Australia will get to net zero without really material carbon capture and storage (CCS). It may not be required until the 2030s and 2040s, but it is not going to happen without government making strategic investments now – securing the storage, understanding where we can store it and at what rate. Thinking about pipeline corridors and getting ourselves ready for when – not if – it is needed.” Dr Greig makes the point that in the 1970s and 1980s, Australia’s federal and state governments made strategic investments in ports and rail and were actively involved in the negotiations with large international companies to bring their finance and development expertise to Australia. “As a result of this strategic, government-led intervention, we have enjoyed a 40-year resource boom that would not otherwise have been possible. That is what we are looking at again. I feel governments have become much more timid and inclined to leave things to the market. But we need a return to nation-building, strategic investment.”
"We need a return to nation-building, strategic investment.”
Lorem ispum
SO WHAT IS THE KEY?
1 in 5 say they will need to grow investment by anywhere from 50% to 200% Plus
50-200%+
Greater linkages between outputs needed (eg storage, renewables, EVs) and investment into developing inputs (eg rare earths) Longer term supply arrangements, to de-risk investments and secure access to inputs Scale through collaboration, with more ambitious projects more likely to receive Government support and ‘streamlining’
Co-ordination and collaboration
Greater Government co-investing, seed funding and concessions to catalyse private sector capital flows Clearer delineation of material ESG risks and opportunities for each company, and channelling investment focus to mapping needs in those areas Top-down and bottom-up analysis, addressing pathways to achieve objectives but also accurately gauging ‘achievability’ and likely challenges
Scale of investment needed is unclear
Access to capital, enabling infrastructure and lack of agreed strategy were most selected in the top 3 barriers to investment.
of respondents say that their ESG investment plans have increased following the change in federal government
1/4
Regulatory uncertainty and inconsistency is cited as the only barrier unique to Australia
“In an operating environment where stakeholder expectations can often sit ahead of regulatory frameworks there is a chasm in which we have seen uncertainty grow. The positives are that there is agreement on the direction of travel and we are seeing freshness of approach in tackling some of the complexity across the ESG landscape. “ESG is a lens, not a prescriptive text. Therefore, ESG dimensions can lay over any business, in any sector, with any multitude of operational practicalities. Advising clients across the breadth of ESG concerns, we work with businesses who have been adapting their operations fundamentally, others who have limited ESG risks or opportunities, and some who are still recovering from the past two years of disruption and are yet to set their strategy on ESG. On HSF’s findings that ESG is on the agenda for 75% of business leaders’ investment decisions, Tim concludes: “Increased collaboration within the private sector alongside government directives will give boards the certainty they need to take their next leap of faith. Similarly, placing more trust in their governance processes in the fact of uncertain outcomes will also help take their ESG objectives from theory to implementation".
According to Australian lead for Herbert Smith Freehills’ ESG practice, partner Timothy Stutt: “ESG-aligned investment decisions are posing a trade-off between immediate financial outflows, versus long-term returns which may be unquantifiable or unclear, and appear risky. Building confidence to bridge this gap will be key for companies to deliver on their ESG ambitions.
EXECUTIVE SUMMARY
BACK TO HOME
DECARBONISING CITIES
Related reading
BANKS STRIVE TO STAY RELEVANT AND SATISFY REGULATORS IN THE TIKTOK AGE
#CUSTOMERISKING
General counsel and the dawning ESG revolution
Responsibility Incorporated
THE FUTURE OF WORK REPORT 2022
A SWEET SPOT FOR ESG?
DATA GOVERNANCE, PRIVACY AND TRUST
AICD and HSF Guide
Signing off on modern slavery statements
CLIENT TOOLS
Watch the webinar
Towards Net Zero Australia
Download guide
Bringing together ESG: Board structures and sustainability
Lorem ipsum Lorem ipsum
Download your keys to unlocking ESG investment in Australia
WHAT YOU NEED TO KNOW
COP27 LOOMS
Watch
On Just Terms
Hear from our experts
ESG in Australia
The Third Wheel Podcast Series
+61 7 3258 6569
Partner
Jacqueline Wootton
+61 3 9288 1544
Anthony Wood
+61 2 9225 5440
Mark Smyth
+61 3 9288 1058
MANAGING PARTNER, CORPORATE
Carolyn Pugsley
+61 2 9225 5085
EXECUTIVE PARTNER, ASIA AND AUSTRALIA
+61 2 9225 5492
Drew Pearson
+61 2 9322 4875
Special Counsel
Stephanie Panayi
+61 7 3258 6788
Kathryn Pacey
+61 2 9322 4830
Responsible Business Manager
Gemma McKinnon
+61 8 9211 7877 / +61 7 3258 6619
Head of global mining
Jay Leary
+61 2 9322 4448
Director of Culture & Inclusion
Danielle Kelly
+61 3 9288 1625
Emma Iles
+61 2 9225 5242
JOINT GLOBAL HEAD OF INTELLECTUAL PROPERTY
Rebekah Gay
+61 2 9322 4378
Patrick Gay
+61 3 9288 1870
Alison Dodd
+61 8 9211 7560
Melanie Debenham
+61 2 9225 5783
Malika Chandrasegaran
+61 3 9288 1710
Heidi Asten
+61 2 9225 5794
Partner, ESG lead, Australia
Key contacts
Listen
Read More +
a legal lens on ESG Investing as Corporate Australia readies
Operating in the Australian regulatory landscape is complex, to say the least. ESG is no longer a nice add-on, but a core thread that runs through the entire corporate strategy. Bigger corporations understand this, and the majority are leading the pack in embedding ESG considerations into everything that they do. Advisers to boards must endeavour to clarify and simplify what their clients need to do to move forward notwithstanding the level of uncertainty and pace of change in regulation, and to support them in understanding and mitigating potential risks. Activity is being held back due to difficulty in measuring ESG impacts and a shortage of people who hold a deep understanding of ESG-specific subject matter. Investing in talent and capability is key to unlocking investment in Australia, as well as building certainty. Boards need to have a higher risk tolerance and be able to rely on governance processes even with uncertain returns.
In Australia legal issues are considered one of the biggest hindrances to progressing ESG-related corporate strategies.
CORPORATE
Ground-breaking technologies are required to meet Australia’s climate commitments. Investments for the development and commercialisation of these technologies will need to come from multiple sources, public and private. When it comes to private sources, intellectual property is one of the tools that can unlock investment. The existing legal system and regulations of intellectual property are well placed to deal with this but there is a potential problem of perception when it comes to the energy sector. Our experience suggests the perception is that either IP is not relevant, it’s a barrier to innovation, or it’s a tool that can only be used to monopolise the technology exclusively. When we look at other sectors, particularly the pharmaceutical and tech sectors, we see that. IP in practice is used in far more nuanced ways. IP is an untapped opportunity, for many in the energy sector.
INTELLECTUAL PROPERTY
Ultimately employers aspire to attract and retain the best talent. Ever-increasing efforts are required to understand what employees want, what their representatives advocate and shareholder interests, as well as the organisation’s broader community contributions. Balancing local rights under Australia’s industrial relations framework against International Labor Organisation Obligations provides an added challenge. Striking the right balance between the two – the legal and regulatory obligations, as well as ESG considerations, can cause friction but is an important hurdle to overcome. Employers must progressively grow their understanding of what their people want – from employees to stakeholders. Strengthened insights into industrial strategies, their people strategies, and mapping out the various sources of obligations, alongside community expectations, will maximise investment.
EMPLOYMENT
The ACCC has included as an enforcement priority for 2022-2023 consumer and fair trading issues concerning environmental, greenwashing and sustainability claims. It will be carefully scrutinising these claims by companies and has recently announced an internet sweep targeting greenwashing and sustainability claims. When making environmental and sustainability claims, businesses should ensure those claims can be substantiated and that customer communications are clear. With ESG front of mind and the transition to renewables on socially aware corporate agendas, we can expect industry consolidation and collaborations. From a competition perspective collaboration and consolidation needs to be planned and structured carefully. Early advice on proposed joint venture arrangements and the availability of processes like the ACCC’s authorisation process is important to ensure that well intentioned businesses do not fall foul of competition laws.
COMPETITION, REGULATION AND TRADE
An opportunity to promote ESG investment should come via the review of the environmental laws the Federal Government is undertaking. The anticipation is it will result in the promotion of approvals and processes for decarbonisation projects in renewables. For environment and planning a key barrier to progress in ESG activities remains ambiguity around support, funding, incentives, and certainty around biodiversity. Elements essential for investments to occur, and ESG initiatives to be unlocked are certainty regarding conditions, cost, longevity, and offsets. For example, access to land, environmental approvals, and stakeholder engagement processes. First Nations people are a very important stakeholder. The question to be asked in this regard is what are the opportunities that can flow with a different type of engagement, perhaps a deeper engagement with the host communities within which we operate.
ENVIRONMENT AND PLANNING
As modern slavery legislation is relatively recent, each year companies are being asked to disclose more. The challenge in this area is to be ready to answer two key points. Firstly, how is the organisation measuring success, and is the strategy effective in driving positive change for those vulnerable? And what needs to be elevated to meet intensifying reporting and regulatory expectations? Avoiding falling short of modern slavery reforms is notably a consideration and risk for the Australian clean energy sector because many raw materials, especially solar can come from jurisdictions with a high risk of modern slavery. As this landscape progresses, observing current reforms under consideration is important so that organisations don’t get it wrong.
MODERN SLAVERY
Setting and announcing ESG ambitions is critical to effecting corporate change and signalling direction to investors. But legal risks can arise in setting ambitious long-term ESG commitments. It’s important to have strong governance processes in place and a challenge culture to ensure ESG commitments are carefully framed, achievable and based on appropriate assumptions. Internal and external expertise should be brought to bear where necessary as part of this governance process. The metrics by which we measure ESG are not always as clear-cut, particularly in comparison to more traditional activities boards would assess, associate timing, and measure return on investment. Boards are increasingly focused on embedding ESG risks and opportunities into decision-making, and giving ESG considerations appropriate weight against and as part of short- and long-term assessments of financial return and shareholder value.
DISPUTES
Tax has been at the forefront of ESG activities in Australia with many Australian taxpayers leading the way with tax transparency initiatives. The next big thing on the horizon is the energy transition. We are already seeing large investments in Australia from overseas to support that transition. However, having the tax settings right will obviously be important in ensuring we continue to attract that capital. At present there are no real tax incentives to support such activities and our corporate tax rate is relatively high on a global stage. Offshore funding can and has been used to get the effective tax rates on such investments to more competitive levels. However, reforms to Australia’s thin capitalisation rules will severely curtail that opportunity. If these changes go through then Australia may need to see some specific concessions to target the investment needed in this area.
TAX
In an elevated cyber threat environment, ESG practices and cyber risk management are increasingly aligned. The damage to a company from a cyber-attack is significant and includes the loss of consumer and investor confidence, adverse regulatory findings, revenue loss, and long-term reputational harm. Well tested incident response plans, clear data governance and an engaged Board are critical for any company to successfully prepare for, and recover from, a cyber-attack. Investors are more astute to cyber risk and companies that fail to demonstrate a strong cyber risk management culture are likely to be at a significant competitive disadvantage. Following some recent high profile data breaches in Australia, public and government sentiment regarding privacy, data collection and data retention practices is at the forefront of government and consumer consciousness. Legislative change to the privacy landscape has commenced and a revised Cyber Security Strategy (and consultation process) will follow.
CYBER SECURITY
