The future of biodiversity risk assessment for corporations - Climate Change

Biodiversity and climate change are now fundamental aspects of a corporation's risk assessment and strategic planning.

A number of upcoming regulatory changes and legal developments are driving the future of biodiversity regulation and sustainable financing in the Australian corporate space. What strategies can directors adopt now to stay ahead of the game?

Mandatory climate-related disclosures

The Taskforce on Climate-related Financial Disclosures (TCFD) was established to develop global recommendations on the types of financial information which should be disclosed by a corporation to allow investors, lenders and insurance underwriters to properly assess and price risks relating to climate change.

Climate-related disclosures are increasingly becoming part of 'business as usual' reporting. In this regard, the International Sustainability Standards Board (ISSB) is developing a global baseline of sustainability disclosures which builds on the climate disclosure themes developed by the TFCD. In late June 2023, the ISSB released its inaugural global sustainability disclosure standards. It is expected that these will be implemented in jurisdictions globally and become the globally accepted benchmark for the minimum standard of disclosures expected by corporations worldwide.

Since the emergence of the TCFD framework, the percentage of international and Australian companies making climate-related disclosures has steadily increased.¹ The disclosures not only require companies to make an assessment of their own climate related risks (and create policies to mitigate that risk), but are an increasing requirement of investors who consider the risks of climate change in making financial decisions. To date, however, climate-related disclosure has been voluntary in Australia.

That said, the move towards implementing a mandatory climate-related disclosures framework in Australia is in motion. In December 2022, the Australian Treasury released a consultation paper seeking views on the design and implementation of internationally aligned mandatory requirements for climate-related disclosure.² The discussion is not on whether mandatory reporting is required, but what form that reporting should take and the extent to which the global baseline set by the ISSB will be adopted in Australia. The submissions on the consultation are currently being reviewed to inform a specific design proposal which will be the subject of further consultation in 2023. Large businesses should expect mandatory climate-related disclosures in the future.

Mandatory nature-related disclosures

The Taskforce on Nature-related Financial Disclosures (TNFD) is similar to the TCFD and aims to provide clear, structured guidance to organisations to report on nature- related risks. The TNFD aims to navigate global finance away from harmful impacts on nature and toward more nature positive impacts. While the TNFD framework is still in the design phase, like with the TCFD, we expect that reporting on nature loss and nature risk will become mandatory in the next few years. The final framework is set for release in September 2023.

Sustainable financing

The Commonwealth Government announced in April 2023 that, in partnership with the Australian Sustainable Finance Institute, it will co-fund the initial development phase of an Australian Sustainable Finance Taxonomy (ASFT).

Sustainable finance taxonomies are classification systems, including a set of common definitions, which are used to define sustainable investments. The ASFT project builds on work done on equivalent sustainable finance taxonomies internationally, including in the European Union. Once established, it is expected that the ASFT will assist companies by:

helping them to determine which of their existing economic activities and investments can be considered 'sustainable' within an Australian climate, environmental and social context;
providing more certainty around how existing economic activities and investments will subsequently need to transition to continue to be classified as sustainable;
increasing the integrity of so-called 'green investments'; and
providing clarity around opportunities to create sustainable assets and to target particular sustainability objectives as part of standard operating practice.

The ASFT will also make it easier for investors to compare sustainability claims between investment products and portfolios. The ability to refer to a widely accepted common classification system may also assist companies and directors better to manage the risk that regulators, competitors or the general public characterise marketing or business activities directly or indirectly linked to sustainability objectives as greenwashing.

Increased risk of climate and biodiversity litigation

The other side of increased regulation of climate and nature-related disclosures is the increased threat of litigation. Corporations need to be cautious when reporting on climate and nature-related disclosures not to make misleading 'greenwashing' disclosures which amount to misleading or deceptive conduct.

Climate and biodiversity litigation is also developing outside of consumer law. We have seen administrative law challenges to planning approvals on climate grounds, including on the basis that a decision-maker failed to consider impacts of a proposed development on scope three greenhouse gas emissions, and on the grounds that an application for a proposed coal mine should be refused given the mine's contribution to climate change.³

Another form of climate change litigation, not yet seen in Australia, arises in shareholder class actions, where shareholders seek to recover their losses from directors, auditors and advisers who have not adequately confronted climate change risks. Shareholder class action climate change litigation has been seen in the UK. While there are some differences between the UK and Australia, Australian law enables shareholders to bring actions on behalf of the company on similar allegations, namely via a 'derivative action' available under Part 2F.1A of the Corporations Act 2001 (Cth).

Strategies for directors

In this quickly changing corporate environment, there are clear financial and reputational benefits for corporations that can respond proactively. Businesses can benefit by protecting and enhancing their social capital and reputation and avoid shocks associated with the introduction of mandatory reporting and litigation.

We have identified the following ways in which directors can protect and propel their companies forward economically, socially and sustainably in light of the upcoming changes:

By carrying out risk assessment of nature and climate-related impacts and dependencies within the business. The implementation of mandatory nature and climate-related disclosures is impending, with introductory action set to assist business to prepare and implement systems which can manage any future financial risk disclosure requirements.
By implementing or improving environmental, social and governance metrics and sustainable practices into credit and risk analysis.
By increasing accessibility of debt financing.
By assigning responsibility within the business, or through sustainability consultants, for developing an understanding of how structural reforms to environmental policy, management and objectives in Australia will impact the business and its operations.
By identifying any market opportunities that may arise as a result of implementing robust biodiversity conservation, for example, nature markets or sustainability-linked loans.
By identifying its current investment policies so these can be assessed and benchmarked against those in the ASFT once released.

Footnotes

¹ ACSI, Taskforce on Climate-related Financial Disclosures Annual Report, 'Promises, pathways & performance – climate change disclosure in the ASX200', 25 July 2022.

² Australian Treasury, 'Climate-related financial disclosure – consultation paper', December 2022.

³ See Australian Conservation Foundation Inc v Minister for the Environment [2017] FCAFC 134, Mullaley Gas and Pipeline Accord Inc v Santos NSW (Eastern) Pty Ltd [2021] NSWLEC 110 and Gloucester Resources Limited v Minister for Planning [2019] NSWLEC 7.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.