The ‘Business’ of Australia’s Green Recovery – Key Drivers and Risks for 2022

Australia’s climate commitments have come under intense scrutiny once again following the recent floods in Queensland and New South Wales. This came on the back of COP26 (the UN Climate Change Conference in Glasgow) in October and November 2021, at which the Australian Government, despite setting a target of net zero emissions by 2050, received criticism from many nations for declining to revise its existing interim target of reducing emissions by 26-28% by 2030 to a level necessary to meet the Paris Agreement goal of limiting global warming to 1.5°C by the end of this century.  

While important, the reality is that the commitment to net zero emissions and the transition to a lower carbon economy is no longer primarily driven by governments. 

This has been a distinct shift which has occurred largely in the last 24 months – a hidden transition as COVID-19 has dominated global attention. At the same time, however, the pandemic has itself accelerated this shift, as governments and businesses collectively focus on ‘building back better’ in a new world.

We attribute the role of business in the green economic recovery to:

  1. environmental, social and governance concerns (ESG);
  2. decreased cost of generation; and
  3. energy security.

This series is divided into three parts. Part 1 deals with the ESG concerns and Part 2 deals with the decreased cost of generation and the necessity for energy security. Part 3 demystifies the Australian carbon market and focus on the distinction between net zero and carbon neutral, greenwashing and Australia’s potential as a carbon sink.

PART 1 – ESG concerns driving the green economic recovery

After the early beginnings in the form of ‘corporate social responsibility’, or ‘CSR’, decades ago, attention has now turned to the more tangible environmental, social and governance concerns, or ‘ESG’. 

Indeed, ESG is now a primary driver for businesses to align their operations with priorities that contribute towards a more sustainable, equitable and responsible future. 

These priorities range from diversity in gender, sexuality and ethnicity in the workforce and on boards, to action on modern slavery, implementing effective anti-money laundering and cybersecurity systems to protect against privacy and data breaches, and action on climate change.

It is climate change that has become one of the biggest focus points for financiers, insurers, investors, customers and employees.

The key point for businesses is that if they do not transition towards a net zero emissions operating model, they could soon find themselves without finance, insurance and investors. In the last 12 months, ANZ, IAG and Suncorp have been clear on this message and have prioritised a movement away from heavy emitting customers. There is also a strong presence from major Australian banks and insurers as signatories in global sustainability initiatives including the Equator Principles, the UN Principles for Sustainable Finance and Insurance and the UN Net Zero Banking Alliance.

Further, in October 2021, the Business Council of Australia laid out its own roadmap supporting net zero emissions by 2050 and calling for stronger short-term emissions reductions goals to provide investment certainty and prevent Australian businesses from needing to play ‘costly and damaging catch up’ on inevitable global change.

Investor groups have also agitated for climate advisory resolutions to be placed on AGM agendas and have turned up the pressure on boards to take action on climate change by the ‘back door’ method of voting down remuneration reports to force a spill of the board. In some cases, most notably BHP, ANZ and NAB, this shareholder pressure has led to enhanced commitments to transition to lower carbon projects, investments and customers and to undertake more diligent and comprehensive climate risk assessments and disclosure. 

Just this month, US fund manager Fidelity, which manages $20 billion of Australian assets, similarly announced that it would use its shareholdings to pressure Australian companies to reduce their exposure to coal and coal-fired power production, through shareholder resolutions and eventually by selling out of high emitting companies if meaningful action is not taken.   

Novel investor claims on climate change are also successfully progressing in courts around the world, including the Royal Dutch Shell ruling in The Hague in May 2021 which required a private company to comply with Paris Agreement emissions reductions targets originally intended for governments alone.  Also, in May 2021, the Federal Court of Australia recognised a novel duty owed by the Australian Environment Minister to take reasonable care to avoid causing injury to Australian children through inaction on climate change. While this finding was overturned by the Full Court on appeal in March 2022, if the matter is further appealed to the High Court of Australia, the original determination could potentially be reinstated given the High Court is typically willing to take a more expansive view of the law of negligence and to impose novel duties of care in new and emerging areas of concern to the Australian community. 

Regardless, there is considerable scope for climate-related litigation to further expand in Australia in coming years, and litigation funders, environmental groups, not for profit entities and private philanthropists are all potential funding sources for new test cases before the courts.     

Aside from potential corporate liability, directors too face the prospect of personal liability for breaching their duties to act in good faith in the best interests of the company if they do not assess and seek to mitigate climate risks facing the company – whether physical risks from a changing climate or broader ‘transitional risks’ such as reduced revenue linked to declining demand from consumers for products supplied by heavy emitting businesses.

All of this will see an increase in sustainability-driven capital transactions and restructures and this will be a major M&A growth area in 2022 and beyond. Corporate restructures will become the norm as companies are compelled to change their business models to become more environmentally friendly and sustainable. Companies will require access to new capital and there will be a strong pathway for companies to issue green bonds to investors in domestic and global debt markets linked to the implementation of identified sustainability and emissions reduction measures and the completion of renewable energy projects.  

There is also a growing market for green finance, with ANZ and CBA last month reporting a strong demand for green loans from customers. On the bank side, there is also a desire to provide that funding as both a business opportunity, as well as an expectation from the banks’ own investors that banks transition their lending and investment practices towards ‘green friendly’ projects and customers.

‘Green-driven’ takeover bids can also be expected to increase, building on the failed $8 billion consortium bid for AGL Energy led by Atlassian and Brookfield on the platform of ceasing coal-fired power production and moving solely to renewable energy by 2030.

In this sense, it is businesses that will now lead the transition towards net zero emissions in Australia and globally.

Origin Energy’s announcement last month that it will bring forward the closure of Australia’s largest coal-fired power station at Eraring in NSW to 2025, seven years ahead of schedule, is just the latest business-driven commitment to dedicated and tangible action on climate change in Australia, notwithstanding criticism levelled at Origin from many government sources.  

At the same time, directors need to tread careful ground. Even if directors do properly take into account the climate risks their company is facing, there are still clear liability risks. First, the required standard of disclosure of critical climate risks is currently underdeveloped, with ASIC and APRA still in the process of providing further guidance and a clear disclosure framework for directors incorporating stress testing, scenario analysis and uniform concepts based on the UN Task Force on Climate-Related Financial Disclosure standards. Without a clear disclosure framework, the manner in which climate risks are disclosed to the market may lead to a breach of continuous disclosure obligations and possible liability for misleading and deceptive conduct.

Further, directors who cause companies to make bold and broad-based commitments to net zero emissions – embellishing the company’s environmental credentials in the art of ‘greenwashing’ – without putting in place the structures and businesses processes and practices to actually achieve those commitments may also face liability for misleading and deceptive conduct in making statements without reasonable grounds. 

In this sense, while it is businesses that will provide the impetus for Australia’s transition to net zero emissions, it will be necessary for cooperation and close consultation between businesses, regulators and governments to ensure the required level of certainty, consistency and balance to maintain market stability, business efficiency and growth in Australia’s post-pandemic recovery.

For more information, please contact Brett Heading.

Brett Heading is a Corporate partner with a specialisation in Agribusiness.

Matt Baumgurtel leads the New Energy team.

James Delesclefs is a Corporate partner with a specialisation in carbon markets.

Adriaan van der Merwe is a senior associate in the New Energy team.