A Horizon Scan for ESG Litigation in Australia
Companies are transiting from fossil fuels in line with net zero by 2050. Investors are demanding disclosure of climate change risks and aligning their investment portfolios with the Paris Agreement. Governments are aware that regulation governing environmental, social and governance (ESG) issues is increasingly necessary.
ESG concerns are becoming increasingly mainstream. ESG refers to the “inclusion of environmental (E), social (S) and governance (G) criteria into investment decisions taken by companies as a manifestation of responsible or sustainable investment practices” (Câmara and Morais 2022, p.4). With this, ESG-related litigation is well and truly on the horizon. This blog post discusses some trends in ESG-related litigation and identifies some case study examples in Australia.
Over 2000 climate change cases have been filed worldwide (Setzer and Higham 2022, p.1). Australia has the second highest number of climate cases in the world. A sub-set of these cases relate to ESG concerns. Several prominent themes have emerged, or might emerge in the future, including:
- Disclosure and prudent financial management cases: These are cases raised against entities that fail to disclose relevant information, or that provide inadequate disclosure of information (Solana 2020, p.117-118). Cases also relate to the meaning of prudential financial management in the transition to a low-carbon economy (Setzer and Higham 2022, p.39)
- ‘Greenwashing’ or ‘climate-washing’ cases: These cases are brought against entities who provide misleading information about their climate commitments, product attributes, climate investments, and financial risks and harm caused (Benjamin et al, 2022, p.6).
- Personal responsibility cases: Directors and officers, or investors, face claims that they have failed to fulfil their legal duties, for example, their duty of care, or duty to act in the best interests of the company or beneficiaries (Climate Governance Initiative and Commonwealth Climate and Law Initiative 2022).
- Cases to enforce climate standards: Cases might be brought in relation to specific projects, arguing, for example, that the investment is not climate-aligned. Cases might also relate to an entity’s policies in relation to a specific area or aspect of its value chain (Setzer and Higham 2022, p.21).
- Contractual disputes: The low carbon energy transition may result in disputes over novel aspects of investments and projects, new suppliers and manufacturers, or from a new regulatory environment. Disputes might arise from failure to perform obligations due to climate-related weather events (Norton Rose Fulbright 2021).
Case examples in Australia
As an example of a disclosure and personal responsibility case, in McVeigh v REST, Mark McVeigh argued that his superannuation fund, REST, had breached its trustee duties to act with care, skill and diligence, and to act in the best interest of beneficiaries. He also argued that REST had failed to disclose climate risks and plans to address those in breach of Australian company law. The parties settled prior to trial with REST acknowledging climate change as a material financial risk and committing to action.
Greenwashing complaints have been made by civil society against several companies including Santos, Glencore, and Ampol. In addition, in October 2022, one of Australia’s corporate regulators, ASIC, took its first action for greenwashing against a listed energy company, Tlou. Tlou paid $53,280 to comply with four infringement notices over alleged false or misleading sustainability-related statements made to the Australian Securities Exchange.
Cases might also be brought against specific projects to enforce climate standards. As an example of litigation potentially on the horizon, legal letters have been sent to UniSuper and HESTA arguing that their investments in fossil fuel companies may amount to a breach of their legal obligations and their stated climate commitments.
Finally, climate change may lead to contractual disputes and disclosure cases. For example, the collapse of the Fundão tailings dam in Brazil and subsequent fall in BHP’s share price has led to shareholder litigation to recover losses, including in Australia (Vince Impiombato and Klemweb Nominees Pty Ltd as trustee for Klemweb Superannuation Fund v BHP Group Ltd). It is foreseeable that disputes may arise in the future where climate-related disasters have impeded contractual performance, or where losses have arisen due to failure to disclose climate-related risks.