NET ZERO, NATURE POSITIVE AUSTRALIAN COMPANIES – THE EVOLVING REGULATORY CONTEXT

Anita Foerster and Ella Vines, Monash Business School Green Lab

Executive Summary

The net zero and nature positive goals derived from the international Paris Agreement1 and Global Biodiversity Framework2 have catalysed a range of regulatory developments which influence the approach that Australian companies take to climate change and biodiversity loss. Companies face increasing regulatory pressure not only to manage the climate and nature-related financial risks posed to their business, but also to address the environmental and social harms to which their business activities contribute, in line with these global goals.

This report explores the origins of the global net zero and nature positive goals and the way in which they translate to legal obligations and associated regulatory pressure for Australian companies. It maps five intersecting domains within this regulatory context. This includes legal obligations to disclose and manage climate and nature-related risks as well as legal obligations and associated market mechanisms designed to mitigate adverse impacts on climate change and biodiversity. These domains also include two areas of regulatory activity which interact with these legal obligations to shape best practice compliance expectations and pressure companies to align their risk and impact management with global goals –soft law instruments (such as voluntary industry standards) and stakeholder advocacy and engagement activities (such as shareholder resolutions and investor engagement coalitions). Within each domain, this report identifies key actors, regulatory instruments, and activities and explores their potential to influence the approach that companies take to the management of climate and nature-related risks and impacts.

The preliminary findings outlined in Table 1 below provide a foundation for further empirical work to track and analyse real-world company responses to shifting regulatory pressures. Empirical understanding of company approaches to climate and nature-related risks and impacts can usefully inform future policy and law reform in the areas of corporate law and substantive environmental and climate change law (including regulation of carbon and biodiversity markets). It can also inform the risk disclosure and management activities of companies and the associated advocacy and engagement activities of company stakeholders such as investors, which seek to influence company risk disclosure and management.

Table 1: Summary of regulatory instruments and activities and their influence on Australian companies

Regulatory

Corporate law obligations –require companies to disclose and manage climate and naturerelated financial risks.

Corporations Act 2001 (Cth) (as amended by Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024 (Cth)) –directors’ duties and disclosure obligations

Australian Accounting Standards Board, Exposure Draft ED SR1 Australian Sustainability Reporting Standards – Disclosure of Climate-related Financial Information (Oct 2023)

Corporate law obligations focus on financial risks posed by climate change and biodiversity loss to the company and incentivise companies to take steps to address these risks. They do not focus directly on mitigating adverse climate or biodiversity-related impacts. However, where a company’s activities contribute to these adverse impacts (e.g., GHG emissions, habitat destruction), this can be a source of risk at the company scale. Financial risks at the entity scale will intensify as climate change and biodiversity loss worsen, law and policy responses develop, and markets shift in response.

While there is now a well-developed understanding of climate-related risks, it is unclear how understanding of nature-related risks and their materiality will develop.

Companies and their directors are granted considerable discretion to determine the materiality of climate and nature-related risks to the company and their approach to managing these risks. However, this discretion is increasingly constrained by the development of new mandatory disclosure standards. Further, the standard of care expected of company directors in terms of risk management is also shifting because of law and policy developments, market expectations, advances in scientific understanding of impacts and associated strategic litigation. Again, these developments are more advanced for climate-related risks.

Regulatory instruments and activities

Influence on corporate risk and impact management

When viewed in isolation, corporate law obligations provide relatively weak incentives for companies to align their risk and impact management with the net zero and nature positive goals. However, these incentives have been strengthened through recent law reform, and are also increased by intersecting voluntary industry standards and stakeholder engagement and advocacy activities.

Environmental and climate change law obligations – require companies to mitigate adverse climate or biodiversity impacts associated with company activities.

Australia’s 2022 NDC under the Paris Agreement

Climate Change Act 2022 (Cth)

National Greenhouse and Energy Reporting Act 2007 (Cth) – emissions reporting and Safeguard Mechanism

Australian Government Net Zero Plan and associated sectoral plans

Environment Protection and Biodiversity Conservation Act 1999 (Cth) – including planned reforms outlined in Australia’s Nature Positive Plan (2022)

Environmental market schemes for carbon and biodiversity – provide flexible pathways for companies to mitigate adverse climate or biodiversity impacts.

Australian Carbon Credit Units Scheme (ACCU Scheme) – as established by the Carbon Credits (Carbon Farming Initiative) Act 2011 (Cth)

Nature Repair Market as established by the Nature Repair Act 2023 (Cth)

Recent reforms to the Safeguard Mechanism have introduced direct emissions reduction obligations on high-emitting companies. These obligations are somewhat aligned to the net zero goal because they are linked to Australia’s climate targets under the Paris Agreement. However, several weaknesses within these obligations reduce their capacity to influence companies to align with net zero. For example, these obligations only apply to a subset of Australian companies – the highest industrial emitters at the facility scale – and include substantial flexibility measures, such as unlimited use of carbon credits, which have the potential to undermine their effectiveness.

National environmental impact assessment and approval regimes used to address biodiversity loss grant considerable discretion to government decision-makers to approve harmful projects, relying on offsets and other conditions to minimise harm. This regulatory approach has been shown to be ineffective and comprehensive reform is urgent.

National environmental and climate change laws provide limited constraints on company activities that lead to adverse impacts on climate change and biodiversity. These laws also provide relatively weak incentives for companies to align their risk and impact management with net zero and nature positive goals. These incentives are stronger in relation to climate change impacts and may develop in relation to biodiversity impacts as law reform progresses.

The Australian carbon market, while still emerging, is more developed than the nascent biodiversity market. The ACCU scheme is explicitly linked to the Safeguard Mechanism, providing companies with flexibility in meeting their legal obligations to reduce emissions and reach net zero goals. Yet there have been serious integrity concerns raised about the scheme, which are salient because carbon credits can be used as offsets to meet compliance obligations. There remain serious questions about the effectiveness of the scheme in supporting the realisation of net zero goals at both company and national scales.

Unlike the ACCU scheme, the recently introduced Nature Repair Market does not interface with legal obligations to mitigate adverse impacts on biodiversity, as biodiversity credits generated under the scheme cannot be used as offsets. This approach certainly aligns strongly with the nature positive goal, but it is unclear whether there will be a sufficient market for biodiversity credits as a result. Experience with biodiversity markets and the use of biodiversity offsets as a compliance mechanism to date, suggest similar integrity issues may arise for this scheme in the future.

Although there is some interaction between the ACCU and Nature Repair schemes, they have not been designed in a way which would easily allow companies to achieve climate and biodiversity goals concurrently, and which would ensure that climate change outcomes are not achieved at the expense of biodiversity outcomes. One major challenge is the different approach to crediting outcomes – a single ACCU represents 1t CO2-e and multiple ACCUs are awarded for each project; whereas each eligible biodiversity project under the Nature Repair scheme will be issued a single biodiversity certificate representing diverse biodiversity outcomes.

National carbon and biodiversity markets have the potential to undermine progress towards net zero and nature positive goals at both company and national scales due to integrity concerns and limited regulation of the use of offsets.

Regulatory instruments and activities Influence on corporate risk and impact management

Voluntary industry standards – guide company target-setting, transition planning and the use of carbon or biodiversity credits.

Taskforce on Climate-Related Financial Disclosures (TCFD)

Taskforce on Nature-related Financial Disclosures (TNFD)

Science Based Target Setting Initiative (SBTi)

Science Based Target Network (SBTN)

Voluntary Carbon Markets Integrity Initiative (VCMI)

There is relatively strong substantive alignment on core criteria across voluntary industry standards for target-setting, transition planning and the use of carbon or biodiversity credits. These standards place emphasis on aligning risk and impact management at the entity scale to global net zero and nature positive goals, although best practice expectations continue to evolve in relation to the use of offsets towards these goals.

Voluntary standards for climate risk reporting have already shaped company responses and contributed to strengthened corporate law obligations. Similar developments can be expected in relation to naturerelated risk disclosure.

Nature-related standards appear to be developing in similar ways to climate standards, although they do place more emphasis on moving beyond financial risk management at the entity scale to encouraging actions which reduce adverse impacts of company activities throughout value chains.

While uptake of voluntary climate disclosure standards has been high, in practice this led to variable disclosure practices. Uptake of climate targetsetting standards which seek to mitigate adverse impacts in line with global goals is much lower. It remains unclear how companies will engage with emerging nature-related standards.

Industry standards have played an important role in developing best practice expectations for climate risk disclosure and can be expected to do the same for nature risk disclosure. These standards also support the alignment of risk and impact management with global net zero and nature positive goals but appear to have had less influence on this aspect of company behaviour to date.

Advocacy and engagement activities undertaken by investors, civil society, and other external stakeholders, focused on aligning company risk management with net zero and nature positive goals.

Climate Action 100+

Nature Action 100

Shareholders resolutions – under the Corporations Act 2001 (Cth) Say on Climate

Investor-led advocacy and engagement on climate change in Australia has increased in intensity and become more public-facing. As understanding of the financial materiality of nature-related risks develops, similar nature-focused activities are emerging.

These advocacy and engagement activities draw heavily on core criteria articulated through voluntary industry standards for company targetsetting, transition planning and the use of carbon and biodiversity offsets; and in turn influence the ongoing development of these standards.

Investor-led advocacy and engagement activities reflect an increasing expectation that companies align their risk and impact management to global net zero and nature positive goals, which intensifies pressure on companies to contribute in a timely and proportionate way to reducing adverse climate and biodiversity impacts. However, variable investor voting practice and reluctance to support more radical engagement initiatives (such as voting against company board appointments) suggests that the pressure that investors may place on companies to reduce negative climate and biodiversity impacts in the short to medium term will be variable.

1 Introduction

Worldwide, companies are facing increasing regulatory pressure to address risks posed by climate change and reduce greenhouse gas (GHG) emissions in line with the ‘net zero’ goal of the Paris Agreement. Regulatory influences include new climate-related disclosure obligations, best practice industry standards for climate targets and transition plans, increased investor engagement and advocacy on climate issues, and growth in carbon markets providing companies with flexible pathways to achieve net zero emissions. Following the adoption of the Kunming-Montreal Global Biodiversity Framework in 2022 (Global Biodiversity Framework) under the international Convention on Biological Diversity (CBD), 3 companies also face increased pressure to address risks posed by biodiversity loss and to reduce their negative impacts on nature in line with emerging ‘nature positive’ goals. Regulatory influences on company approaches to nature are developing along a similar trajectory to the net zero goal and include disclosure expectations and standards, target-setting platforms, and emerging markets for biodiversity credits.

Corporate responses to these pressures and opportunities are rapidly evolving. Many companies have set ambitious net zero emissions targets and are providing climate risk disclosures including transition plans.4 Some leading companies are now setting biodiversity targets and disclosing nature-related risks.5 However, there are concerns about greenwash and heavy reliance on environmental offsets,6 which detract from managing risks and reducing adverse impacts in a timely way. There are also concerns that increased regulatory pressure may have a chilling effect on some companies, leading to green hush.7

This report explores the complex regulatory context for Australian companies in relation to their management of climate and nature-related risks and impacts and their alignment to net zero and nature positive goals. By identifying and explaining the most relevant and influential instruments and activities and by exploring links and intersections between them, this report creates a regulatory map designed to underpin further empirical and interdisciplinary research exploring company responses to these regulatory influences. Empirical understanding of the effect of these regulatory influences on company behaviour can inform law and policy reform discussions as well as the advocacy and engagement activities of investors and other stakeholders.

While net zero and nature positive goals derive from instruments of international law – namely the Paris Agreement and the Global Biodiversity Framework – they find expression in, and are shaped by, a wide range of regulatory instruments and activities at different scales. This report focuses on the regulatory influences that are most relevant for Australian companies with significant exposure to climate and/or nature-related risks, and for Australian companies which contribute significantly to climate change and loss of biodiversity through high-emitting or otherwise damaging activities, through their direct operations and their value chain. These regulatory influences are grouped into 5 main categories:

• Corporate law obligations, which address the disclosure and management of climate and nature-related financial risks. These obligations are developed and enforced via litigation and other enforcement activities.

• Environmental and climate change law obligations, such as environmental impact assessment and approval frameworks and emissions reduction obligations embodied in emissions trading schemes which seek to reduce adverse climate or biodiversity impacts associated with company activities.

• Environmental market schemes for carbon and biodiversity, which provide flexible pathways for companies to mitigate adverse impacts.

• Voluntary industry standards, which guide company target-setting, transition planning and the use of carbon or biodiversity credits.

• Advocacy and engagement activities undertaken by investors, civil society, and other external stakeholders, focused on aligning company risk management with net zero and nature positive goals.

3 Convention on Biological Diversity.

4 United Nations High-Level Expert Group on the Net Zero Emissions Commitments of Non-state Entities, Integrity Matters: Net Zero Commitments by Businesses, Financial Institutions, Cities and Regions (‘Integrity Matters Report’).

5 Sophus OSE zu Ermgassen et al, ‘Are biodiversity commitments consistent with delivering ‘nature positive’ outcomes? A review of ‘nature-positive’ definitions, company progress and challenges’ (2022) 379(2) Journal of Cleaner Production 134798.

6 See, eg, Australian Senate, Greenwashing Inquiry (2023)

7 AFR, Why the greenwashing crackdown means more green hushing (4 May 2023)

This report is structured as follows:

Part 2 discusses the development of the net zero and nature positive goals within the international climate and biodiversity regimes, noting features that are relevant to company approaches to climate change and biodiversity loss.

Part 3 maps the regulatory instruments and activities which influence the approach that Australian companies take to climate and nature-related risks and impacts, highlighting their purpose, coverage, regulatory approach, and the key actors involved.

2 The relevance of global goals at the company scale

Net zero and nature positive goals derive from international agreements – the Paris Agreement on climate change under the United Nations Framework Convention on Climate Change (UNFCCC), and the Global Biodiversity Framework under the CBD. Broadly, these goals are intended to catalyse action to align human activity with best available science on what is required to address climate change and loss of biodiversity and associated ecosystem services.8

In this Part, we outline the origins of the net zero and nature positive goals, highlighting features that are relevant for evaluating company approaches to climate change and biodiversity loss. This provides a foundational understanding for Part 3’s exploration of regulatory instruments and activities that influence company approaches to climate and nature-related risk and impact management and their alignment with global goals.

2A The Net Zero Climate Change Goal

The central goal of the Paris Agreement is to limit global warming to well below 2°C above pre-industrial temperatures (and pursue efforts to limit warming to 1.5°C above pre-industrial temperatures) to avoid dangerous climate change (article 2.1(a)). In support of this temperature goal, article 4.1 provides that state parties aim to achieve ‘a balance between anthropogenic emissions by sources and removals by sinks of GHG in the second half of this century’, thereby setting a goal of carbon neutrality. This objective has become known as ‘net zero by 2050.’

Important features of the net zero goal that are relevant to shaping company behaviour include: Timeframe and peaking year – Dynamic interplay between the international climate regime and Intergovernmental Panel on Climate Change (IPCC) science has led to the tightening of the ‘second half of the century’ wording in article 4.1 to 2050. Though the Paris Agreement refers broadly to the second half of the century, according to the IPCC, limiting warming to 1.5°C implies reaching net zero carbon dioxide (‘CO2’) emissions globally around 2050.9 Over time, the international climate regime has clarified this ambiguity in relation to article 4.1. For example, the UAE Consensus reached by the UNFCCC conference of the parties (COP) in 2023 refers to reducing GHG emissions by 43 per cent by 2030 and 60 per cent by 2035 relative to the 2019 levels and reaching net zero CO2 by 2050 to limit warming to 1.5°C (at [27]).10 Article 4.1 also provides that the parties ‘aim to reach global peaking of GHG emissions as soon as possible…and to undertake rapid reductions thereafter’. This introduces the concept of a ‘peaking year,’ which is the year that emissions peak before beginning to decline to net zero. The IPCC advises that 2025 is the latest year by which global GHG emissions must peak to limit warming to both 1.5 and 2 °C temperature limits.11

Flexibility – The Paris Agreement affords considerable flexibility as to how the net zero goal is to be achieved, including setting out broadly framed procedural obligations for nation states, providing scope for carbon abatement, and endorsing market mechanisms:

• Procedural Obligations – State parties to the Paris Agreement must prepare and communicate Nationally Determined Contributions (NDCs) outlining progressively more ambitious climate change mitigation measures every five years (article 4.2, 4.3). However, there is flexibility in relation to the mitigation approaches states can volunteer and there is no penalty for failing to achieve the measures contained in the NDC.12 This managerial approach seeks to enhance state ambition by generating normative pressure to achieve emissions reductions rather than enforce non-compliance. The Paris Agreement does however link the individual ambition of each five yearly NDC to a ‘global stocktake’

8 The Paris Agreement’s temperature goals are based on best available scientific opinion on global planetary boundaries in relation to the atmosphere and climate. See generally, J Rockstrom et al, ‘A safe operating space for humanity’ 461(7263) (2009) Nature 472-475; TM Lenton et al, ‘Climate tipping points – too risky to bet against’ 575(7784) (2019) Nature 592; Rockström et al, ‘Safe and Just Earth System Boundaries (2023) 619(7968) Nature 102. The Global Biodiversity Framework responds to the IPBES’ Global Assessment Report on Biodiversity and Ecosystem Services of the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (2019).

9 IPCC, Global Warming of 1.5°C (Special Report) 95. See further, Sam Fankhauser et al, ‘The meaning of net zero and how to get it right’ (2022) 12 Nature Climate Change 15, 15.

10 UAE Consensus [28].

11 IPCC, Mitigation of Climate Change 2022 (Summary for Policy Makers) (‘2022 SPM’) [C.1].

12 Article 4.2 is an obligation of conduct, and not result. See, eg, Benoit Mayer, ‘International Law Obligations Arising in relation to Nationally Determined Contributions’ (2018) 7(2) Transnational Environmental Law 251, 256-262.

during which the COP assesses ‘the collective progress towards achieving the purpose’ of the Paris Agreement (article 14). The first global stocktake in 2023 exposed the global ambition deficit that needs to be reduced to meet the net zero goal.13

• Carbon abatement – The reference to a balance between anthropogenic GHG emissions and removals by sinks denotes that the net zero goal isn’t solely to be achieved by direct emissions reductions, but some emissions reductions can be balanced by carbon abatement. Carbon abatement refers to ‘human interventions that reduce the amount of GHG that are released from fossil fuel infrastructure to the atmosphere,’14 such as carbon capture and utilisation and storage (‘CCU/CCS’) or CO2 removal (‘CDR’). There is no guidance in the Paris Agreement itself on the role that carbon abatement should play in reaching net zero. While IPCC modelling for aligning global warming with the 1.5 and 2°C temperature limits includes the use of CCS and CDR, the deployment of these remains below that required by these modelled pathways.15 There has been more experience with CDR, for example through reforestation, however, CDR remains controversial.16 Further, CCS/CCU is yet to be proven at scale, and there are concerns that projects do not lead to an overall reduction in GHG emissions.17

• Market mechanisms – Article 6 of the Paris Agreement refers to a voluntary mechanism for the international transfer of carbon credits earned from GHG emissions reduction to assist states to meet their mitigation goals under NDCs. This encourages both international and domestic market mechanisms for the generation and transfer of carbon credits. Market mechanisms pursuant to article 6 must generate emissions reductions and removals that are ‘real, verified and additional.’18

Non-sector-specific – The net zero goal, and the Paris Agreement generally, are drafted in non-sectorspecific terms. For example, article 4.1 does not refer to types of emissions sources that must be reduced. While this dilutes the focus on emissions from fossil fuels, which scientific and economic modelling have found must be reduced as a priority,19 it is intended to encourage economy-wide emissions reduction efforts. However, several sectoral responses have developed alongside the core climate negotiations, including the Global Methane Pledge,20 Beyond Oil and Gas Alliance,21 the Global Coal to Clean Power Transition Statement.22 Sectoral responses have also emerged from decisions of the UNFCCC COP which augment the Paris Agreement, 23 and have the capacity to influence corporate behaviour. For example, the UAE Consensus refers to transitioning away from fossil fuels in energy systems,24 and the 2021 Glasgow Climate Pact refers to phasing down unabated coal-fired power.25 Further, though the net zero goal itself is non sector-specific, the Paris Agreement does expressly refer to conserving and enhancing GHG sinks including forests (art. 5.1), and provides for policies to reduce emissions from deforestation and degradation (‘REDD+’) (art. 5.2). This provides opportunities for interlinkages with the nature positive goal.

GHG emissions accounting system: State parties to the Paris Agreement report their GHG emissions pursuant to the UNFCCC’s territorial emission-based accounting system. This covers GHG emissions from fuels burned or removed by sinks only within their territory,26 encompassing scope 1 (direct emissions) and scope 2 (indirect emissions from the generation of purchased electricity steam, heat and cooling consumed).27 This excludes scope 3 emissions (all other indirect emissions, for example emissions embedded in exported products and consumed overseas) from national emissions inventories, even though scope 3 emissions can far outweigh scope 1 and 2 emissions in some sectors.28 This system is mirrored in domestic legal obligations, including corporate GHG emissions reporting and emissions reduction obligations under the National Greenhouse and Energy Reporting Scheme and Safeguard Mechanism which only cover scope 1 and 2 emissions (see Part 3B.1). Voluntary industry standards are however shifting to encompass scope 3 emissions corporate reporting and target setting (see Part 3D) and scope 3 emissions is recognised as an important indicator of climate risk exposure in climate reporting rules (Part 3A).

13 UAE Consensus [18].

14 IPCC, 2022 SPM (n 11) 16 n 34.

15 IPCC, AR6 Synthesis Report: Climate Change 2023 (Summary for Policymakers) nn 47 and 48.

16 Kevin Anderson et al, ‘Controversies of carbon dioxide removal’ (2023) 4 Nature Reviews Earth & Environment 808.

17 See, eg, Pete Smith et al, ‘Biophysical and Economic Limits to Negative CO2 Emissions’ (2016) 6(1) Nature Climate Change 42.

18 UNFCCC, ‘Guidance on cooperative approaches referred to in Article 6, paragraph 2, of the Paris Agreement’15.

19 Mitigation Pathways Compatible with 1.5°C in the Context of Sustainable Development’, in IPCC, Global Warming of 1.5°C 96–7; IPCC, Mitigation of Climate Change 2022 (Summary for Policy Makers) (n 11) 16 [B.7.2]; IEA, Net Zero by 2050 A Roadmap for the Global Energy Sector (Report, May 2021) 21.

20 Global Methane Pledge.

21 Beyond Oil and Gas Alliance.

22 Global Coal to Clean Power Transition Statement.

23 Daniel Bodansky, Jutta Brunnée and Lavanya Rajamani, International Climate Change Law (Oxford University Press, 2017) 92-94; Maureen Tehan, et al., The Impact of Climate Change Mitigation on Indigenous and Forest Communities: International, National and Local Law Perspectives on REDD+ (Cambridge University Press, 2017), 13, 23, 29.

24 UAE Consensus [28(d)].

25 Glasgow Climate Pact [36].

26 Georgia Piggot et al ‘Swimming Upstream: Addressing Fossil Fuel Supply under the UNFCCC’ (2018) 18(9) Climate Policy 1189, 1193-1194; Karl W Steininger et al ‘Multiple Carbon Accounting to Support Just and Effective Climate Policies’ (2016) 6(1) Nature Climate Change 35, 35.

27 As defined in the Greenhouse Gas Protocol. The IPCC has adopted this definition in its Glossary

28 For example, IEA data shows Australia exports more coal and gas than it consumes.

Legal Status – The net zero goal derives from an international treaty – the Paris Agreement. Treaties can place binding legal obligations on nation state parties. However, the Paris Agreement itself places very few substantive obligations on state parties, and these do not include an obligation to require the companies operating in state jurisdiction to reduce GHG emissions.29 State parties may volunteer to do this via their NDCs, and domestic legislation enacted to achieve these. In this way the Paris Agreement can influence the behaviour of companies. For example, Australia’s approach has been to require GHG emissions reductions by high emitting companies and count these towards its national emissions reduction target (see further discussion of Australia’s NDC and the Safeguard Mechanism in Part 3B.1).

2B The Nature Positive Biodiversity Goal

The nature positive goal was developed as a concerted effort by scientists and civil society leading up to the negotiation of the post-2020 Global Biodiversity Framework under the CBD to address alarming rates of biodiversity loss worldwide.30 The intent was to address a gap in the international biodiversity regime, which lacked a science-based approach with equivalent normative force to the net zero goal in the climate regime; and to galvanise responses across levels of governance and public and private actors.31

Although the goal is not expressed verbatim in the Global Biodiversity Framework, it is consistent with several references dispersed throughout the text.32 The purpose of the framework refers to halting and reversing biodiversity loss (section B[4]), and the vision expressly attaches a timeframe of 2050 (section BF[10]). The mission is framed as an interim goal with a 2030 timeframe: to take urgent action to halt and reverse biodiversity loss to put nature on a path to recovery for the benefit of people and planet ...(section F[11]). The framework is further specified through goals and action-oriented targets, which vary in their formulation with some more specific and quantified than others:

• Goal A aims to maintain, enhance, or restore the integrity, connectivity and resilience of all ecosystems and substantially increase the area of natural ecosystems by 2050, and to halt human-induced extinction and reduce the extinction rate and risk of all species tenfold by 2050.

• Target 2 provides that parties will ensure that, by 2030, at least 30% of areas of degraded terrestrial, inland water and marine and coastal ecosystems are under effective restoration.

• Target 3 provides that parties will ensure and enable that by 2030 at least 30% of terrestrial and inland water areas, and of marine and coastal areas are effectively conserved and managed for conservation.

• Target 7 provides that parties will reduce pollution risks and the negative impact of pollution from all sources by 2030 and requires parties to consider cumulative effects.

• Target 15 provides that parties take legal, administrative or policy measures to encourage and enable business to progressively reduce negative impacts on biodiversity, increase positive impacts, reduce nature-related risks to business and financial institutions, and promote actions to ensure sustainable patterns of production.

Important features of the nature positive goal that are relevant for shaping company behaviour include: Evolving understanding and concept development – Reflecting its recent development and the inherent complexity of nature and biodiversity, understandings of the term ‘nature positive’ are still emerging and there are a range of differing interpretations, which may reduce its normative value.33 While not expressed verbatim in the Global Biodiversity Framework itself, the definition provided by the Nature Positive Initiative is gaining global traction:34

Nature Positive is a global societal goal defined as ‘Halt and Reverse Nature Loss by 2030 on a 2020 baseline and achieve full recovery by 2050’. To put this more simply, it means ensuring more nature in the world in 2030 than in 2020 and continued recovery after that. Delivering the Nature Positive goal requires measurable net-positive biodiversity outcomes through the improvement in the abundance, diversity, integrity and resilience of species, ecosystems, and natural processes. The Nature Positive goal is designed to drive society to deliver a measurable absolute improvement in the state of nature against a defined baseline, which will in turn improve nature’s ability to contribute to human wellbeing.

29 Mayer (n 12) 252.

30 The Global Biodiversity Framework follows previous strategic planning initiatives under the CBD including the Strategic Plan for Biodiversity 2011-2020 and its Aichi Targets. It responds specifically to the IPBES Global Assessment Report on Biodiversity and Ecosystem Services of the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (2019).

31 See, eg, Nature Positive Initiative, A Nature-Positive World: The Global Goal for Nature (Report, 2021) (‘NPI Report’) 5-6, 8.

32 See, eg, IUCN, Nature positive for business: Developing a common approach (Report, 2023) (‘IUCN Report’) 3.

33 Ibid IX, 5; E J Milner-Gulland, ‘Don’t dilute the term nature positive’ (2022) 6 Nature Ecology and Evolution 1243-1244.

34 NPI Report (n 31) 7.

Definitions such as this focus on the living components of nature (species, ecosystems) and highlight indicators of improvement such as diversity, abundance, integrity, and resilience, which provide focal points for measurement and verification. However, inherent in this definition is a recognition that nature encompasses both living and non-living (soil, water, air, climate) elements and the complex interactions between them. Indeed, improvements in the condition of soil, water, air, and associated processes is required to underpin improvements in biodiversity and vice versa; and climate change is a major threat to biodiversity.35 The term biodiversity refers to the diversity within species, between species and of ecosystems.36 However, it is often used as a proxy for broader references to nature and natural processes in recognition of this interconnection and complexity.37

Focus on net-gains – While the net zero goal seeks to stabilise global warming and achieve a balance between GHG emissions and sinks,38 the nature positive goal seeks achieve net gains for nature through halting and reversing biodiversity degradation. The nature positive goal acknowledges that there will continue to be some nature loss due to human development, but that these losses must be balanced by equal and additional gains so that there will be more nature in the future than there is now.39 This implies an important role for regeneration and restoration.

Flexibility – Similar to the Paris Agreement, the CBD and Global Biodiversity Framework embed considerable flexibility in relation to the attainment of the nature positive goal, including by setting procedural obligations, supported by transparency measures to drive implementation,40 and envisaging the use of market mechanisms:

• Procedural Obligations – The CBD requires parties to develop national biodiversity strategies, plans or programmes (NBSAPs) and integrate these as far as possible in relevant sectoral or cross-sectoral policies (e.g., protected area strategies and environmental impact assessment and approval regimes), and to report to the CBD COP on measures taken to implement the provisions of the CBD (articles 6, 26). Like the Paris Agreement, there is no penalty for failing to achieve objectives set out in NBSAPs.41 Under the Global Biodiversity Framework, parties are required to revise and update their NBSAPs to reflect the new goals and targets, to communicate their own new national targets in a standardised format by October 2024, and to report against these targets to allow for global review of collective progress (articles 16 & 17). Yet the framework expressly notes that each party’s contribution to the global goals and targets will be ‘in accordance with national circumstances, priorities and capabilities’ (article 7(d)).

• Market Mechanisms – Although not provided in detail, the Global Biodiversity Framework endorses international and domestic market mechanisms such as payment for ecosystem services, green bonds, biodiversity offsets and credits, and benefit-sharing mechanisms, with the caveat that these have appropriate environmental and social safeguards (Target 19(d)).

Express recognition of drivers of biodiversity loss and associated sectoral activities – The Global Biodiversity Framework is generally sector non-specific. It refers to integration of biodiversity principles within and across all levels of government and across all sectors (Target 14) and has broad application to restoring the biodiversity of terrestrial, inland water, and coastal and marine ecosystems (Target 2). However, the framework does note that the most significant drivers of biodiversity decline worldwide are changes in land and sea use, natural resource exploitation, climate change, pollution, and invasion of alien species (Art 2). It also makes express references to associated sectoral activities which significantly contribute to biodiversity loss: agriculture, aquaculture, fisheries and forestry (Target 10).

Stronger links with sustainable development and climate change goals – The Global Biodiversity Framework recognises the interrelated nature of biodiversity, climate and human development goals and highlights the relationship between the Paris Agreement and the UN Sustainable Development Goals.42 In contrast, the net zero goal in the Paris Agreement refers to sustainable development (article 4.1) but does not refer to nature or biodiversity. This reflects the targeted approach historically taken in the international climate regime, underpinned by concerns that incorporating biodiversity goals into climate goals would

35 IUCN Report (n 32) 10, 17. See also, NPI Report (n 31) 4-10. ‘Nature-positive includes a focus on species distribution, abundance, functional traits, genetic diversity, and demographic trends as well as the intactness and integrity of ecosystems and biomes. It also includes the functioning of ecological and global processes such as hydrology, rainfall patterns and migration that support biodiversity, maintain drinking water supplies, sustain agriculture, and ensure a stable climate. … Abundance and functionality, across scales from local ecosystems to the entire Earth system, should be our goal for all life on Earth.’

36 CBD art 2.

37 IUCN Report (n 32) 17

38 IPCC, Global Warming of 1.5°C (Special Report, 2018) 394, FAQ 4.2

39 IUCN, Measuring Nature Positive: Setting and implementing verified, robust targets for species and ecosystems (Consultation Draft, Version 1.0, 23 November 2023) 9.

40 Christina Voigt, ‘International Environmental Responsibility and Liability’ in Lavanya Rajamani and Jacqueline Peel (eds) The Oxford Handbook of International Environmental Law (Oxford University Press, 2nd edition, 2021) 1003, 1008-1009.

41 Ibid 1016. The CBD sets out a procedure through which state parties can seek to resolve disputes concerning the interpretation or application of the CBD, but this is yet to be utilised. Philippe Sands and Jacqueline Peel, Principles of International Environmental Law (Cambridge University Press, 2018) 397.

42 NPI Report (n 31) 4-5.

dilute the treaty’s capacity for mitigating and adapting to climate change.43 However, this is beginning to shift with increasing acknowledgement of biodiversity goals within the climate regime opening pathways for a more integrated approach. For example, the UAE Consensus emphasises the ‘importance of conserving, protecting and restoring nature and ecosystems towards achieving the Paris Agreement temperature goal’ and expressly refers to the Global Biodiversity Framework 44

Legal Status – The Global Biodiversity Framework is not a treaty capable of placing legally binding obligations on states like the Paris Agreement. Rather, it is a CBD COP decision, adopted by 188 state parties including Australia, and framed as a strategic plan for the implementation of the convention to 2030. However, just as it is possible that the Glasgow Climate Pact, or the UAE Consensus discussed above, have the capacity to update the interpretation of legal obligations held by states parties under the Paris Agreement, the Global Biodiversity Framework has a similar capacity in relation to the CBD. 45 Further, the legal status of a regulatory framework is not necessarily indicative of its impact.46 The Global Biodiversity Framework does not add to the mechanisms by which biodiversity goals are to be achieved by state parties under the CBD, and relies on states to develop and implement these under their NBSAPs.

2C The relationship between net zero and nature positive goals

Although only partially articulated in the international instruments described above, the relationship between the net zero and nature positive goals is increasingly acknowledged in related fora and policy development processes.

If nature’s capacity to absorb carbon is diminished, or if the carbon stored in nature is disturbed, then that carbon is released to the atmosphere. Indeed, human-induced GHG emissions do not come exclusively from fossil fuel consumption and associated industrial processes; agriculture, including deforestation, is a very significant source of emissions globally.47 With approximately 50% of natural terrestrial ecosystems already converted into urban areas, farmland or for natural resource extraction and infrastructure, preservation of remaining ecosystems becomes crucial to meeting climate goals.48 Locke et al note that ‘the only way to preserve… existing carbon stocks and maintain the carbon sequestration function in both land and ocean ecosystems, is to preserve ecological functions provided by biodiversity and the natural processes they depend on.’49 Natural climate solutions (regreening and avoiding further degradation of intact natural systems) therefore have a significant role to play in achieving the net zero goal. At the same time, depending on their design and location, some decarbonisation strategies (e.g., plantation-based carbon offsets, biofuel production, extraction of raw materials for renewable energy technology, location of renewable energy technology) have the potential to lead to further loss of biodiversity, undermining the nature positive goal.50

As we explore in Part 3, regulatory instruments and activities that influence company approaches to climate change and biodiversity loss do not always recognise these linkages, and either address climate and biodiversity risks and impacts in isolation or prioritise one over the other.

2D Translating global goals to the company scale?

Net zero and nature positive are global societal goals. Translating these goals to different scales – national, subnational and company level – is necessary to realise them in practice.51 However, this translation is complex, involves significant normative judgements regarding the allocation of responsibility and is therefore highly contested. Indeed, there is an ongoing debate about whether individual companies can be net zero or nature positive at the entity scale, or whether a better framing is that businesses can take actions which contribute to net zero and nature positive goals.52 Methods for translating the nature-positive goal are less developed than for the net zero goals,53 and arguably pose greater challenges given the inherent complexity and multi-faceted nature of biodiversity.

43 See generally, S Maljean-Dubois and M Wemaere, ‘Climate change and biodiversity’ in E Morgera and R Jona (eds) Biodiversity and Nature Protection Law (Edward Elgar, 2017) 978. Charlotte Streck, ‘Synergies between the Kunming Montreal Global Biodiversity Framework and the Paris Agreement: the role of policy milestones, monitoring frameworks and safeguards’ 23(6) (2023) Climate Policy 800, 802.

44 UAE Consensus [33].

45 See further Maureen Tehan, et al (n 23) 13, 23, 29 in relation to the capacity for COP decisions to update the interpretation of the related treaty.

46 Streck (n 43) 804.

47 Per the IPCC 6th assessment report, ‘agriculture, forestry and other land use’ accounted for 13-21% of global anthropogenic GHG emission in 2010-2019.

48 See generally, J Riggio et al, ‘Global human influence maps reveal clear opportunities in conserving Earth’s remaining intact terrestrial ecosystems’ (2020) 26(8) Global Change Biology 4344.

49 NPI Report (n 31) 7.

50 zu Ermagasson et al (n 5) 6.

51 Fankhauser et al (n 9)16-17.

52 IUCN Report (n 32) 9.

53 Rockström et al, ‘Safe and Just Earth System Boundaries’ (n 8) 109.

Net Zero at the national scale – For example, the Paris Agreement sets global temperature goals, which allow for the calculation of global emissions budgets and emissions reduction trajectories that are consistent with these goals.54 However, the Paris Agreement does not specify emissions reduction obligations for state parties, nor allocate the global emissions budget between parties. The treaty merely provides that developed nations should take the lead in achieving economy wide emissions reductions in line with overarching principles of common but differentiated responsibility (articles 4.3 & 4.4). Transposing the collective global temperature goals to targets or emissions budgets at a disaggregated, national level is highly contested and there are no agreed guidelines on what would constitute a ‘fair share’ of the global emissions reduction effort.55 There are however a large number of studies focused on effort sharing, which offer different perspectives on the way in which historical responsibility, capability and equality should be taken into account in determining a fair share contribution,56 and which can be used to guide climate target setting at a national scale. For example, in late 2021, an independent Climate Targets Panel argued that to do its fair share in limiting global warming to below 1.5°C this century, Australia must cut emissions by 75% below 2005 levels by 2030.57 Similar analysis has been used to underpin subnational climate targets in Australia.58 Beyond the national scale, emissions budgets are also often translated to the sectoral scale, to guide the development and implementation of emissions reductions activities over time, taking into account factors such as availability of fuel switching, electrification, energy efficiency and other decarbonisation methods.59

Net Zero at the company scale – Considerable attention is being given to transposing the global temperature goals directly to emissions reduction budgets and targets at scales beyond the nation state – including companies, financial institutions, cities and regions.60 Transposing these goals to individual companies involves a range of assumptions about the timing and magnitude of emissions reduction and how this should be allocated to companies and sectors.61 There is no broadly agreed approach to calculating a company’s ‘fair share’ of allowable emissions and different methods take different approaches to the choice of global emissions reduction scenario, allocation principles (e.g., grandfathering, economic contribution, cost minimisation or responsibility for historical emissions), scope of application (regions, sectors, GHGs) and company variables (baseline years, target years, emissions intensity).62

Voluntary industry standards are playing a key role in standardising approaches to net zero at the company scale.63 For example, the Science Based Targets Initiative (SBTi) (see Part 3D),64 sets out methods to underpin the calculation of long term and interim emissions reduction targets for companies that are aligned to the 1.5°C temperature goal.65 These include the cross-sector absolute reduction method which is promoted as best practice (whereby companies across all sectors reduce absolute scope 1 and 2 emissions by a minimum of 4.2% per year and reduce scope 3 emissions by 2.5% per year),66 and a range of sector-specific methods. These sectoral methods align emissions reductions to sector-specific pathways which recognise a range of factors including availability of decarbonisation technologies.67

Nature Positive at the national scale – The Global Biodiversity Framework does not trigger discussions about global effort sharing between nation states in the same way as the international climate regime. This can be explained by the location-specific nature of many biodiversity impacts and necessary responses that occur within nation state jurisdiction (as distinct from the global commons of the atmosphere), as well as less-developed understanding of quantitative global limits for biodiversity loss and associated natural processes and methods to translate these to different scales.68 Indeed, the goals of the Global Biodiversity Framework are largely expressed in qualitative terms, with only some quantified targets related to restoring degraded ecosystems and protected areas (e.g., Targets 2 & 3). These quantified targets can be relatively easily translated to national or subnational scales. For example, following the adoption of the Global Biodiversity Framework and in line with its Target 3, the Australian Government committed to protect 30% of Australia’s terrestrial and ocean environments by 2030.69 Yet even this relatively simple quantified target

54 A global emissions budget is an estimate of the total cumulative amount of GHG that could be emitted consistent with a certain likelihood of keeping global temperature rise within a set limit above pre-industrial levels by 2100 (e.g. 1.5°C or 2°C). See IPCC Global Warming of 1.5°C (n 38) (Summary for Policymakers 2018) 24.

55 See generally, Yann Robiou du Pont et al, ‘Equitable Mitigation to Achieve the Paris Agreement Goals’ (2017) 7(1) Nature Climate Change 38; Xunzhang Pan et al, ‘Exploring Fair and Ambitious Mitigation Contributions under the Paris Agreement Goals’ (2017) 74 Environmental Science and Policy 49.

56 See, eg, ‘Comparability of Effort’, Climate Action Tracker

57 Climate Targets Panel, Shifting the Burden: Australia’s Emissions Reduction Tasks over Coming Decades (2021).

58 See, eg, DEECA, Victoria’s 2035 Emissions Reduction Target – Supporting Analysis (May 2023).

59 See, eg, ClimateWorks Australia, Decarbonisation Futures – Solutions, actions and benchmarks for a new zero emissions Australia (March 2020). As part of its Net Zero Plan, the Commonwealth Government is also developing sectoral decarbonisation strategies

60 Integrity Matters Report (n 4).

61 Oskar Krabbe et al, ‘Aligning corporate greenhouse-gas emissions targets with climate goals’ 5 (2015) Nature Climate Change 1057.

62 Anders Bjorn et al, ‘From the Paris Agreement to corporate climate commitments: evaluation of seven methods for setting ‘science-based’ emission targets’ (2021) 16 Environmental Research Letters 054019.

63 Alexis McGivern et al, Defining Net Zero: How do climate criteria align across standards and voluntary initiatives? (Report, 2022) 3.

64 Science Based Targets Initiative Net Zero Standard

65 See also, Simon Dietz et al, ‘An assessment of climate action by high-carbon global corporations’ (2018) 8 Nature Climate Change 1072.

66 SBTi, Corporate Net Zero Standard (Version 1.2 March 2024), Annex B.

67 Ibid. Sector-specific absolute reduction method is available for currently available for agriculture, power, cement, steel and residential & service buildings. The Sectorspecific intensity convergence method is for heavy emitting sectors to converge to an agreed emission intensity. Methods are also provided for renewable energy uptake (as an alternative to scope 2 targets) and for scope 3 emissions (addressing physical emission intensity, economic intensity reduction and supplier and/or customer engagement targets).

68 Rockström et al, ‘Safe and Just Earth System Boundaries’ (n 8).

69 DCCEEW, Discussion Paper: Updating Australia’s Strategy for Nature (2024)

masks considerable underlying complexity. Achieving biodiversity outcomes through protected areas is not simply a matter of the quantity of land or ocean protected. Also critical are the diversity and quality of landscapes and biodiversity protected, as well as spatial attributes such as location, size and connectivity.70 There is a well-established scientific basis for ensuring that protected areas are comprehensive, adequate, and representative of different species and ecosystems, which can guide the realisation of simple quantitative targets in practice.71 Further, given the relationship between living and non-living components of nature, reversing biodiversity decline will also depend on addressing other more diffuse drivers including pollution and invasive alien species, and targets addressing these drivers will also be expected as part of revised NBSAPs.72

In June 2024, the Australian Government introduced a key part of its environmental law reforms (discussed further in Part 3C.2). The proposed legislation includes what may become the first definition of ‘nature positive’ enshrined in Australian law: ‘Nature positive is an improvement in the diversity, abundance, resilience and integrity of ecosystems from a baseline’ (s 6(1)) and ‘regard is to be had to whether there has been an improvement in the diversity, abundance and resilience of species that form part of ecosystems’ in determining whether nature positive is being achieved (s6(2)).73

Nature Positive at the company scale: Considerable scientific effort is also being invested in developing methods to determine a company’s fair share of effort towards global nature goals and to convert that allocated share into actionable indicators that can be measured and tracked by companies.74 While there is no settled approach, two relevant initiatives below illustrate likely developments:

• IUCN method for measurable, verifiable outcomes for species and ecosystems75 – The International Union for the Conservation of Nature (IUCN) frames three levels of company responsibility in relation to the nature positive goal – mitigating ongoing and new impacts; compensating for historical impacts; and contributing to addressing indirect and diffuse impacts and supporting systemic change. For ongoing impacts, arising from recurrent and continuing company activity, companies should reduce impacts as far as feasible, providing full compensation for residual impacts. For new impacts arising from expanded footprint or recurrent impacts through expanded corporate activities, companies should avoid footprint impacts (i.e., no future conversion of natural habitats), avoid and reduce recurrent impacts as far as feasible, and ensure net gain for residual impacts. For historical impacts, such as already existing, non-recurrent impacts from habitat conversion or degradation, companies should set targets to regenerate lands and water, reduce footprint impacts and make a sector-specific proportional contribution (to be defined) to restoration and addressing indirect, diffuse impacts.76 The IUCN notes that ‘companies need to know which impacts must be avoided entirely, how much residual impacts must be reduced and what level of positive contribution is equitable.’77

• SBTN Framework for verified contributions to conservation and restoration78 – The Science Based Target Network (SBTN)79 approach focuses on the five key drivers of biodiversity loss highlighted in the Global Biodiversity Framework – land/ water/ sea use change, resource exploitation, climate change, pollution, and invasive alien species. Companies should identify impacts on nature over which they have control (through direct operations) or significant influence (through the value chain) in relation to these drivers.80 These impacts should be prioritised for target-setting, including by considering the importance of biodiversity impacted in different locations (e.g., species extinction risk, species richness and endemism, ecosystem condition) and where drivers have a disproportionate impact on biodiversity loss.81 The aim of prioritisation is to select targets that will effectively mitigate the most significant negative impacts on biodiversity and increase potential positive impacts. This recognises that it will not be practical for business to adopt targets relating to all the elements of biodiversity, at least initially.82

70 James Fitzsimons et al, Protecting Australia’s Nature: Pathways to protecting 30 per cent of land by 2030 (Report, 2023), 9

71 Ibid, 13.

72 Australian Government Dept. Climate Change, Energy, the Environment and Water, Discussion Paper: Updating Australia’s Strategy for Nature (2024). Leading up to the 2024 meeting of the CBD COP, the Australian Government is revising its strategy for nature and has committed to set new biodiversity targets, including in relation to restoration of degraded ecosystems, tackling invasive species, building a circular economy to reduce resource use, waste and pollution (especially plastics), minimising the impact of climate change on nature and working towards zero new extinctions.

73 Nature Positive (Environment Protection Australia) Bill 2024

74 SBTN, Science-Based Targets for Nature – Initial Guidance for Business (Sept 2020) 6.

75 IUCN, Measuring Nature-Positive: Setting and implementing verified, robust targets for species and ecosystems (Consultation Draft, Version 1.0, November 2023).

76 Ibid, 61-63.

77 Ibid, 43.

78 SBTN Framework

79 The SBTN is a collaboration of over 80 leading global non-profits and mission-driven organizations, working together to co-develop and test scientifically rigorous and actionable methodologies for setting science-based targets to complement the work of the SBTi on climate targets.

80 SBTN, Technical Guidance, Step 1 Assess (Version 1, October 2023) (‘SBTN Step 1’) 14-29.

81 Ibid 29-33; SBTN, Biodiversity in the First Release of SBTs for Nature and an Approach for Future Methods (Biodiversity Short Paper, May 2023) (‘SBTN Biodiversity Short Paper’) 5-6.

82 zu Ermgassan et al (n 5) 3.

SBTN has developed initial target-setting methods to address the primary anthropogenic pressures driving biodiversity and nature loss – land use change,83 freshwater use and pollution84 – with further method development underway. Notable aspects of both the IUCN and SBTN approaches include the deliberate scoping of company responsibility beyond direct operational impacts to encompass value chains and the embodied impacts of a company’s material consumption; and the shift from mitigating direct adverse impacts alone towards providing measurable contributions to biodiversity improvements through a variety of pathways.

Table 2: Comparison of the net zero and nature positive goals

Feature Net zero

Reference in international agreement

Legal status

Flexibility –implementation, compliance, and market mechanisms

Not referred to verbatim. Derived from articles 2 and 4.1 of the Paris Agreement.

This goal is embedded in a treaty. Treaties place binding legal obligations on state parties (though there are very few of these in the Paris Agreement).

Nature positive

Not referred to verbatim. Derived from several references dispersed throughout its structure of Purpose, Vision, Mission, Goals and Targets.

This goal is embedded in a decision of the CBD COP. It is not legally binding like a treaty.

However, the Global Biodiversity Framework can still be influential. For example, it can update the interpretation of the CBD which does place binding legal obligations on state parties (again, there are very few of these in the agreement).

Application to companies

State parties prepare NDCs detailing the measures they plan to take to reduce GHG in line with the goals of the Paris Agreement

Net zero goal envisages carbon abatement (alongside direct emission reductions) to be deployed in achieving the goal.

Market mechanisms are endorsed as a pathway to achieve net zero.

Does not directly bind companies.

Pathways to influence company behaviour depend on measures used by state parties to implement.

Timeframe Peaking year: 2025

Achievement of net zero: 2050 (neither of these timeframes are referred to in the Agreement but have been set by the IPCC).

State parties prepare NBSAPs detailing measures they plan to take to meet biodiversity goals in line with the CBD Market mechanisms are endorsed as a pathway to achieve the nature positive goal (though there is express reference to environmental and social safeguards).

Does not directly bind companies.

Pathways to influence company behaviour depend on measures used by state parties to implement.

Halt and reverse nature loss: 2030

Full recovery: 2050 (expressly provided).

Outcomes sought

References to other international goals and agreements

Stabilise global warming. This is not a goal to achieve net negative emissions.

Net gains for nature (both halting and reversing biodiversity degradation).

Refers to sustainable development. Intended to link biodiversity, climate, and sustainable development goals.

83 SBTN, Technical Guidance Step 3 Measure, Set & Disclose: Land (Version 0.3, 2023). This method is intended to apply to companies that identify terrestrial ecosystem use or change or soil pollution as material during their materiality assessment. It sets out three targets: no conversion of natural ecosystems; reduction in absolute land footprint or intensity of existing footprint; and landscape engagement (engage and contribute to 1-2 materially relevant landscape initiatives that cover an estimated 10% of their land footprint in the first 1-2 years).

84 SBTN, Technical Guidance, Step 3 Measure, Set & Disclose: Freshwater (Version 0.1). This method is intended to apply to companies that identify water quantity or quality as material during the assessment phase. Companies are advised to prioritise action on freshwater targets in water basins that are critical for mitigating biodiversity loss.

Drafted in sector nonspecific terms?

Yes, in relation to the net zero goal, though express references are made to coal-fired power and fossil fuels in subsequent COP decisions.

Further, the broader Paris Agreement makes express reference to REDD+.

Adaptable to different scales – national, subnational, company?

Debatable, but can be achieved through a carbon budget approach.

Yes – refers to the integration of biodiversity principles within and across all levels of government and across all sectors, and applies broadly to restoring the biodiversity of terrestrial, inland water, and coastal and marine ecosystems.

However, there are some express references to key drivers of biodiversity loss and the impact of sectoral activities including agriculture, aquaculture, fisheries and forestry.

Debatable. Approaches are still developing.

3 Regulatory influences for net zero, nature positive companies

There are many different regulatory influences on company approaches to climate change and biodiversity loss and corporate alignment with net zero and nature positive goals. In this Part, we identify a selection of regulatory instruments and activities that are likely to significantly influence the way that Australian companies address and manage:

• the material financial risks posed to companies by climate change and biodiversity loss;

• the risks and impacts posed by companies to people and the environment (e.g., GHG emissions, destruction of habitat), which in turn contribute to system-wide risks posed by climate change and biodiversity loss.

Climate and nature-related risks and impacts are linked in important ways. The adverse impacts of a company’s activities on the climate or on nature contribute to systemic risks posed by climate change and biodiversity loss, but do not always lead to material financial risks to the company’s business, at least in the short-medium term. In large part this will depend on how these impacts are regulated and treated by the market and the relevance of physical impacts of climate change and biodiversity loss to a company’s operations (e.g., extreme events associated with climate change, decline in pollinator species associated with biodiversity loss). However, as these problems worsen, these systemic risks will become more and more relevant at the company scale for a wider range of companies, both through physical impacts on supply chains and operations and through the evolving regulatory and market responses to these issues which place increasing constraints on harmful impacts. To inform the development of regulatory responses, we are also interested in better understanding the risk that actions taken to mitigate impacts posed by companies to people and the environment do not deliver the anticipated benefits.

This Part groups relevant regulatory instruments and associated activities in five categories:

• Part 3A – Corporate law obligations, which address the disclosure and management of climate and nature-related financial risks. These obligations are developed and enforced via litigation and other enforcement activities targeting companies on their approach to risk disclosure and management.

• Part 3B – Environmental and climate change law obligations, such as environmental impact assessment and approval frameworks and emissions reduction obligations embodied in emissions trading schemes which seek to reduce adverse climate or biodiversity impacts associated with company activities.

• Part 3C – Environmental market schemes for carbon and biodiversity, which provide flexible pathways for companies to mitigate adverse impacts.

• Part 3D – Voluntary industry standards which guide company target-setting, transition planning and the use of carbon or biodiversity credits.

• Part 3E – Advocacy and engagement activities, undertaken by investors, civil society, and other external stakeholders, focused on aligning company risk management with net zero and nature positive goals.

The regulatory instruments and activities selected for discussion are most relevant for large Australian companies that are highly exposed to climate and biodiversity risks and/or responsible for significant GHG emissions and/or adverse biodiversity impacts, either through their direct operations or value chain. This includes companies in the metals and mining, manufacturing, transport, property, and agricultural sectors.85

In a federal jurisdiction like Australia, where national and subnational governments have a joint role in the regulation of the environment,86 there are also a range of subnational laws and policies which will influence corporate alignment with net zero, nature positive goals.87 However, this report focuses on regulatory

85

86

87

instruments and activities at the international or national scales, given their more universal relevance and in light of the fact that the federal government is the entity that enters into and is bound by the international agreements from which the net zero, nature positive goals are derived.

3A Corporate Law Obligations

Australian companies have obligations under corporate law to identify, disclose and manage material financial risks to the company that arise because of climate change or biodiversity loss. Following the Taskforce on Climate-related Financial Disclosures (TCFD), these risks are typically categorised as physical risks (associated with the physical impacts of climate change or biodiversity decline on company operations, supply chains or assets), and transition risks (associated with law and policy change to address climate change or biodiversity loss, related technological or market developments and reputational harm). Such risks can result in financial impacts such as reduced revenue, increased expenditure, lower asset values or stranded assets.88 Understanding of the financial materiality of climate-related risks is significantly more developed than for nature-related risks.

Relevant obligations derive from two main areas of corporate law – financial reporting requirements and directors’ duties. These are generally obligations of process or conduct, and do not dictate how a company must manage climate or nature-related risks. However, litigation and other enforcement activities, as well as voluntary industry standards (Part 3D) and advocacy and engagement (Part 3E) play important roles in establishing more substantive standards for climate and nature-related risk disclosure and management. These standards and activities exert pressure on companies to align their risk management with net zero and nature positive goals. Further, recent and ongoing law reform has introduced more explicit and standardised risk reporting and management obligations.

Table 3: Regulatory instruments and key actors – Corporate Law Obligations

Regulatory Instruments Key Actors

Corporations Act 2001 (Cth) (as amended by Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024 (Cth)). This Bill was introduced to parliament in March 2024. It has not yet been passed.

Australian Accounting Standards Board (AASB), Exposure Draft ED SR1

Australian Sustainability Reporting Standards – Disclosure of Climaterelated Financial Information (Oct 2023).

Associated regulatory guidance:

Australian Securities and Investment Commission (ASIC), Effective Disclosure in an Operating and Financial Review (Regulatory Guide 247, August 2019)

AASB and Auditing and Assurance Standards Board (AUASB), Climaterelated and Other Emerging Risks

Disclosures: Assessing Financial Statement Materiality Using AASB/IASB Practice Statement 2 (April 2019)

ASIC, Information Sheet 271: How to Avoid Greenwashing When Offering or Promoting Sustainability-Related Products (June 2022)

Australian Securities and Investment Commission (ASIC) –regulates the conduct of Australian companies, financial markets, and financial services, including oversight of financial reporting and climate-related risk disclosure. ASIC can take action to enforce disclosure obligations and directors’ duties.

Australian Accounting Standards Setting Board (AASB) –responsible for developing, issuing, and maintaining accounting standards that apply under the Corporations Act, including climaterelated risk disclosure standards.

Auditing and Assurance Standards Board (AUASB) – responsible for developing, issuing, and maintaining audit and assurance standards, including for climate-related risk disclosure.

Australian Government Treasury – leading the development of Australia’s Sustainable Finance Strategy, which includes reforms to corporate law to support robust management of sustainability risks and alignment of private capital to international sustainability goals such as those in the Paris Agreement.

Australian Competition and Consumer Commission (ACCC) –As the competition and national consumer law regulator, ACCC takes enforcement action against companies for misleading and deceptive conduct.

Ad Standards – a non-governmental organisation that administers a national system of advertising self-regulation under the Australian Association of National Advertisers Environmental Claims Code. Ad Standards receives and determines greenwashing complaints made in respect of corporate advertising.

Australian Securities Exchange (ASX) – guides compliance of ASX listed companies with reporting and risk disclosure obligations and can enforce breaches of the ASX Listing Rules. In this capacity, the ASX receives requests to investigate alleged greenwashing by listed companies (Part 3A.3).

3A.1 Disclosure of climate and nature-related risks

Underlying legal obligations to disclose material financial risks – One of the key functions of corporate law is to ensure that adequate information on the financial position of companies is provided to market stakeholders to inform and support their decision-making, particularly in relation to the allocation of capital (purchasing or selling shares). Companies are therefore subject to various disclosure obligations,89 including the preparation of an annual report, which includes the company’s financial statements prepared in accordance with accounting standards adopted by the AASB, and the directors’ report discussing business strategy and prospects (Corporations Act, s 292-295). These reporting obligations apply to all public companies (listed on the ASX) and large proprietary (private or unlisted) companies.90

Identifying and quantifying financially material risks to the business is central to company reporting. Where climate change or biodiversity loss pose material risks to a company, these risks must be disclosed in the annual report, both within the management commentary in the directors’ report and within the financial statements (see further, Table 5). For financial reporting purposes, information is considered material, if omitting, misstating or obscuring it could reasonably be expected to influence the decisions that the primary users (potential investors, creditors or lenders) of financial statements make on the basis of those financial statements.91

It is now widely recognised that climate change poses financial risks to companies across the economy and that information on the potential impacts of climate change on a company’s financial position, performance and prospects is decision-useful and material to a reasonable investor.92 While nature-related risks and their financial implications are not yet well understood across the market, there is growing recognition of their materiality for Australian companies.93 A recent legal opinion issued by leading Australian commercial law barristers, defines nature-related risks as the potential threats posed to an organisation that arise from its and wider society’s dependencies and impacts on nature.94 Nature-related dependencies are the aspects of ecosystem services that a company relies on to function, and nature-related impacts are changes in the state of nature, which may result in changes to the capacity of nature to provide social and economic functions, including ecosystem services.95 The opinion notes that Australia’s economy is broadly exposed to risks from nature degradation and, although risks will differ depending on a company’s sector and circumstances, nature-related dependencies and impacts are capable of posing a foreseeable financial risk to company interests.

Enforcement Pathways – Financial statements are signed off by company directors and auditors as providing a ‘true and fair view’ of the company’s financial position and performance (Corporations Act, ss295-97, 307-308). Directors’ reports are adopted by a resolution of directors, dated and signed, and constitute a representation made by directors (s195(1)(c)). Conduct (including disclosure) which is misleading or deceptive, or which is likely to mislead or deceive, is expressly prohibited (s1041H).96 Any representations made about future matters which lack a reasonable basis will be taken to be misleading (s796C). Where there has been a failure to disclose, or misleading or deceptive disclosure, ASIC has a range of powers and enforcement options available, and serious penalties and sanctions can apply (ss 674, 1311, 1317E.). Enforcement action can be brought against companies, company directors and auditors. Company shareholders can also seek a declaration that a breach has occurred and/or an injunction to prevent future breaches.97 Shareholders can also bring claims for compensation from the company for losses suffered because of misleading disclosure, either as individuals or as a class of shareholders under Australia’s securities class action regime (Corporations Act, Part IVA).

The ASX Listing Rules also include an obligation on companies to disclose information concerning it that a reasonable person would expect to have a material effect on the price or value of the entity’s securities (Rule 3.1). Information disclosed under this rule must be accurate, complete and not misleading (ASX Listing Rules, Guidance Note 8, 28). Listed entities must provide information to correct or prevent a ‘false market’ if requested to do so by the ASX (Rule 3.1B). A false market may arise where a listed entity has made a false or misleading announcement (Guidance Note 8, 6).

89 The continuous disclosure obligations set out in the ASX Listing Rules are also relevant.

90 Small proprietary companies may also be subject to disclosure obligations, for example when directed by ASIC or 5% of their members to do so (ss 292(2), 293, 294).

91 AASB, Amendments to Australian Accounting Standards – Definition of Material (December 2018); AASB Amendments to AASB 101 Presentation of Financial Statements (December 2019) [7].

92 See Luisa Unda and Anita Foerster, ‘Climate Risk Disclosure, Compliance and Regulatory Drivers: A Textual Tone Analysis’ (2022) 39 Company and Securities Law Journal 47, 51-57.

93 Australian Conservation Foundation, Pollination, Australian Ethical, The Nature-Based Economy: How Australia’s Prosperity Depends on Nature (September 2022).

94 Sebastian Hartford David and Zoe Bush, Nature-related risks and Directors’ Duties – Joint Memorandum of Opinion (24 October 2023).

95 Ibid.

96 Similar provisions are set out in the ASIC Act 2001 (Cth) (s12DA) and s 18 & 19 of the Australian Consumer Law.

97 See, eg, Abrahams v Commonwealth Bank of Australia, NSD864/2021 (Federal Court of Australia, commenced 26 August 2021).

New Climate Disclosure Standards – Until recently, there were no explicit legal requirements to provide climate risk disclosures in a particular format. Companies were advised by the AASB and AUASB to ensure that the financial implications of climate change were quantified where possible and disclosed in financial statements.98 They were also recommended by regulators to follow the recommendations of the TCFD, a voluntary framework for climate risk disclosure and management (see Part 3D),99 which has been heavily promoted via investor engagement and advocacy activities like shareholder resolutions (see Part 3E). While there has been wide uptake of the TCFD standard across the Australian market,100 the quality of reporting against this standard has been highly variable.101

Amendments to the Corporations Act were introduced in March 2024102 to clarify the underlying legal obligation to disclose climate-related risks and to provide for standardised disclosure in the form of a sustainability report (Schedule 4), which must meet climate risk reporting standards developed by the AASB.103 The AASB standards (under development) will be based on new international standards developed by the International Sustainability Standards Board (ISSB),104 which in turn reflect the TCFD framework. The new climate reporting regime is set out in Table 4. In addition to reporting on climate-related risks posed to the company, some of the required disclosures also cover the impacts of a company’s activities on climate change (e.g., scope 1, 2 and 3 emissions). GHG emissions can be both a potential source of transition risk for individual companies over different timeframes, and an adverse impact that contributes to broader systemic risks posed by climate change.

There are currently no similar reporting standards for nature-related risks. However, the Taskforce on Nature-related Financial Disclosures (TNFD) (discussed further in Part 3D) and the current work of the ISSB to develop an international nature-related risk reporting standard105 are likely to catalyse similar regulatory developments and shifting market expectations in Australia. Indeed, in Australia’s developing Sustainable Finance Strategy,106 Treasury have indicated an intent to develop broader sustainability reporting standards beyond climate. As such, it is foreseeable that the AASB will develop standards for nature-related risk reporting in the future.

Table 4: Australia’s new climate reporting regime107

Which companies are required to report?

All entities that are required to lodge financial reports under the Corporations Act (Chapter 2M), that meet minimum size thresholds, or which have emissions reporting obligations under the NGER scheme.

This includes listed and unlisted companies, financial institutions, and asset owners (e.g. superannuation entities). Generally small-medium enterprise and registered charities are not included. Reporting obligations for companies will be phased in according to company size and GHG emissions profile:

Group 1 (large companies and large GHG emitters) will report from 1 July 2025 – companies which lodge financial statements under the Corporations Act and which meet 2 of the 3 thresholds below:

• Consolidated revenue equal to or greater than $500mill

• Value of consolidated gross assets equal to or greater than $1bill

• 500 or more employees

+ companies that are registered under the National Greenhouse Energy & Reporting Act 2007 and that meet the publication threshold (25kt/per year or more of scope 1 & 2 emissions).

Group 2 (medium-large companies) will report from 1 July 2026 – companies which lodge financial statements under the Corporations Act and which meet 2 of the 3 thresholds below:

98 AASB and AUASB, Climate-related and Other Emerging Risks Disclosures: Assessing Financial Statement Materiality Using AASB/IASB Practice Statement 2 (April 2019).

99 See, eg, Australian Securities and Investments Commission (ASIC), Effective Disclosure in an Operating and Financial Review (Regulatory Guide 247, August 2019) [RG247.66]

100 KPMG, Status of Australian Sustainability Reporting Trends (June 2023 Update); Australian Council of Superannuation Investors, Promises, Pathways & Performance: Climate Change Disclosures in the ASX200 (Report, July 2022) 6.

101 TCFD, 2021 Status Report: Taskforce on Climate-Related Financial Disclosures (2021); Investor Group on Climate Change, CDP and Principles for Responsible Investment, Confusion to Clarity (Report, June 2021); Luisa Unda and Anita Foerster, ‘Climate Risk Disclosure, Compliance and Regulatory Drivers: A Textual Tone Analysis’ (2022) 39 Company and Securities Law Journal 47; Anita Foerster and Michael Spencer, ‘Corporate Net Zero Pledges: a triumph of private climate regulation or just more greenwash?’ 32(1) (2023) Griffith Law Review 110-142.

102 Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024 (Cth), Schedule 4.

103 AASB, Exposure Draft ED SR1 Australian Sustainability Reporting Standards – Disclosure of Climate-related Financial Information (Oct 2023)

104 IFRS S1 – General Requirements for Disclosure of Sustainability-related Financial Information; IFRS S2 Climate-related Disclosures.

105 The ISSB is currently consulting on the development of international standards for nature and biodiversity reporting as part of its package of international sustainability reporting standards. The EU’s Corporate Sustainability Reporting Directive already requires companies to report sustainability information in line with European Sustainability Reporting Standards (which have been developed to address climate change along with a wide range of other environmental and social issues including biodiversity and ecosystems). See further European Financial Reporting Advisory Group, ESRS E4 Biodiversity and ecosystems.

106 Australian Government, Treasury, Sustainable Finance Roadmap (June 2024) 1, 5 Box 1. See also, Australian Government, Treasury Sustainable Finance Strategy: Consultation Paper (Nov 2023).

107 This regime is not yet in force. It will enter into force once the Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024 passes parliament, and once the AASB reporting standard has been finalised.

• Consolidated revenue equal to or greater than $200mill

• Value of consolidated gross assets equal to or greater than $500mill

• 250 or more employees

+ other NGER reporters not captured in Group 1

Group 3 (medium companies) will report from 1 July 2027 – companies which lodge financial statements under the Corporations Act and which meet 2 of the 3 thresholds below:

• Consolidated revenue equal to or greater than $50mill

• Value of consolidated gross assets equal to or greater than $25mill

• 100 or more employees

How and where do companies report?

What must be reported?

Companies must provide an annual sustainability report each financial year as part of the annual financial reporting package (s292A). The contents of the sustainability report include (s296A):

Climate statement – to be prepared in accordance with the AASB sustainability standard (s296C)

Directors’ declaration – a resolution by directors (dated and signed) that the substantive provisions of the sustainability report are in accordance with the Act. For the first 3 years of the new regime, directors will only need to give an opinion on whether the entity has taken reasonable steps to ensure the substantive provisions of the sustainability report are in accordance with the Act (s1707C).

The climate statement must be prepared in accordance with the sustainability standards developed by the AASB (s296C, 296D). Consultation on the Australian standard is ongoing. However, it is likely that the final standard will require the following:

Governance – information on the governance processes, controls, and procedures a company uses to monitor, manage, and oversee climate-related risks and opportunities.

Strategy – information on the company’s climate risk management strategy, including:

• Climate-related risks and opportunities that could reasonably be expected to affect the company’s prospects (i.e. material financial risks).

• Current and anticipated effects of climate-related risks and opportunities on the business model and value chain, and on the company’s financial position, financial performance, and cash flows in the short, medium and long term.

• An assessment of the resilience of business strategy and business models, informed by climate scenario analysis (using at least 2 possible future scenarios, one of which must be consistent with the 1.5°C temperature goal set out in the Paris Agreement)

• Company responses to climate-related risks and opportunities, including climaterelated targets and climate-related transition plans, and associated implementation strategies and resource allocation.

Risk Management – information to understand a company’s processes to identify, assess, prioritise and monitor climate-related risks and opportunities.

Metrics and Targets – information to understand a company’s performance in relation to climate-related risk and opportunities including progress towards any climate targets it has set or has been required to set by law or regulation. Cross-industry metrics used to measure and monitor climate risk include:

• Amount and percentage of assets or business activities vulnerable to climate-related risks / opportunities.

• Amount of capital expenditure, financing or investment deployed towards climaterelated risks / opportunities.

• Remuneration – whether and how climate-related considerations are factored into executive remuneration.

• GHG emissions from all sources reported annually – scope 1, scope 2 and scope 3.

• Planned use of carbon credits to offset emissions to achieve net GHG emissions targets.

Assurance of climate risk disclosure?

Climate disclosures will be subject to similar assurance requirements to the financial statements. However, these are likely to be phased in over time, commencing with Group 1 entities.

The AUASB will develop auditing standards for sustainability reports, that will specify the extent and level of assurance required. Consultation on these standards is ongoing.108

Liability for misleading or deceptive disclosures?

A modified liability framework will apply during the first 3 years of the new regime for certain forward-looking statements related to climate change and made for the purpose of compliance with the Act. This includes statements about scope 3 emissions, scenario analysis and transition plans made in the first 3 years, or any other forward-looking statements made in the first 1 year.

During this period, ASIC will be able to take enforcement action for misleading or deceptive conduct in company reports or auditor reports. However, private litigants will not be able to bring civil actions (e.g., for compensation) for the first three years.

3A.2 Directors’ Duties and the management of climate and nature-related risks

Legal duties to take reasonable and proportionate steps to manage risks to company interests –

The Corporations Act sets out legal duties which govern company directors in the exercise of their powers and functions overseeing the management of the company. These duties require directors to act in the best interests of the company (s181) and with due care and diligence including by taking reasonable and proportionate steps to address foreseeable risks to company interests (s180(1)). Where climate change or biodiversity loss poses material risks to a company, company directors will therefore have legal obligations to take steps to manage these risks in the best interests of the company and to ensure that these risks and the company’s approach to risk management are appropriately disclosed to the market (Table 5).

Since the Paris Agreement was concluded in 2015, the standard of care expected of company directors in relation to climate change (i.e. the actions they are expected to take to address climate-related risks in the best interests of the company) has evolved considerably. There has been a discernible shift from expecting directors to merely identify and disclose relevant risks, to expecting directors to take steps to manage these risks. The standard of care is influenced by factors such as law and policy developments to address climate change, increasing investor and community expectations and scientific projections which evidence the timeframes over which physical climate risks may manifest.109 Overtime, these factors shift understanding of what would be material to the company, and of what risk management approaches would be in the best interests of the company over the long term.

In a recent legal opinion, leading commercial law barristers Hutley and Hartford-David caution that:

…it is no longer safe to assume that directors adequately discharge their duties simply by considering and disclosing climate-related trends and risks; in relevant sectors, directors of listed companies must also take reasonable steps to see that positive action is being taken: to identify and manage risks, to design and implement strategies, to select and use appropriate standards, to make accurate assessments and disclosures, and to deliver on their company’s public commitments and targets.110

Directors should take care to carefully align any public commitments on climate change (including net zero emissions targets) with the company’s operational strategy, as a failure to do so may expose directors for liability for misleading and deceptive conduct.111

Enforcement Pathways – The legal duties of directors are owed to the company itself. The corporate regulator – ASIC – can bring an enforcement action for breach of duty, with a range of civil and criminal penalties available (Corporations Act, Part 9.4, 9.4B). The company, or the company’s liquidator, can apply to the court for a compensation order for breach of duty (s1317J). Shareholders can also seek leave of the court to bring a derivative action against directors for breach of duty on behalf of the company (ss236-7).112

108 AUASB, Consultation Paper – Assurance over Climate and Other Sustainability Information (March 2024).

109 Noel Hutley and Sebastian Hartford-Davis, Climate change and directors’ duties (Supplementary Memorandum of Opinion, Centre for Policy Development (‘Hutley Legal Opinion (2019)’) (26 March 2019) 3-8.

110 Hutley and Hartford-Davis (Further Supplementary Memorandum of Opinion, 23 April 2021) (‘Hutley Legal Opinion 2021’) 2-3.

111 Ibid 11-15. ASIC has also alerted company directors to their potential liability exposure for greenwashing: Cathie Armour (ASIC Commissioner), ‘What is greenwashing? and what are its potential threats?’ (News article)

112 Alternatively, a class of shareholders may bring a representative class action under the securities class action regime: Corporations Act 2001 (Cth), Part IVA, Federal Court of Australia Act 1976 (Cth).

3A.3 Related litigation and enforcement activities

There are three distinct strands of litigation and enforcement activities that can influence the development of substantive expectations in relation to these corporate law disclosure obligations and directors’ duties. Strategic Litigation – climate and nature-related risk disclosure – Litigation seeking to enforce disclosure obligations as they apply to climate-related risks has helped to establish the materiality of climate change and clarify the underlying legal obligation to disclose climate-related risks when material. For example, in Guy Abrahams v Commonwealth Bank of Australia (CBA), 113 Abrahams, a shareholder of the CBA, alleged that the CBA had failed to disclose materials financial risks in their 2016 annual report posed by climate change as required by the Corporations Act. CBA responded by including climate risk disclosures in their 2017 annual report, and the case was withdrawn.114

More recent litigation is seeking to test whether it is misleading and deceptive for a company to make voluntary commitments to achieve net-zero emissions in line with the Paris Agreement yet continue to invest in fossil fuel expansion and other high-emitting activities (Box 1).

Box 1: Misleading Disclosure Cases

The ongoing case – Australasian Centre for Corporate Responsibility (ACCR) v Santos – centres on a series of statements that Santos, a major Australian oil and gas company, made in company documents and in investor briefings, that it provides clean energy natural gas and has a plan to achieve net zero emissions by 2040. The ACCR, a shareholder advocacy group, alleges that these claims are misleading and deceptive and lack a reasonable basis. They argue that it is misleading to label natural gas as clean energy considering its associated scope 1 and 3 GHG emissions, that Santos plans to significantly expand its natural gas operations and therefore its GHG emissions, and that the company’s net zero target relies on undisclosed assumptions about the effectiveness of CCU/CCS. As such, it is alleged that Santos is in breach of the Corporations Act and the Australian Consumer Law.115

Similar litigation has recently been commenced against other large Australian energy companies. In Greenpeace Australia v Woodside Energy, 116 Greenpeace alleges that Woodside has made misleading statements in relation to the GHG emissions reductions it claims to have achieved and in relation to its plan to attain net zero by 2050. In Australian Parents for Climate Action v Energy Australia117 it is alleged that Energy Australia has made misleading statements in relation to the use of carbon credits to offset GHG emissions associated with energy products which are labelled ‘Go Neutral’.118

Strategic Litigation – climate and nature-related risk management – Cases seeking to enforce directors’ duties as they relate to climate change are also emerging around the world and can influence the approach taken to interpreting directors’ duties and the standard of care expected in Australia (see e.g., Box 2).119 These cases address the steps that company directors should take to manage climaterelated risks in the best interest of the company.

Box 2: ClientEarth v Shell’s Board of Directors

Public interest environmental law group ClientEarth (which purchased shares in the company) filed a derivative action against the directors of the large energy company Shell (dual-listed in the UK and the Netherlands). The claim alleged that by failing to adopt and implement a robust and credible climate transition strategy in line with the Paris Agreement, the directors were in breach their duties to act with due care and diligence in the best interests of the company under UK company law.120 The claim focused on Shell’s climate targets and associated strategy, which, at the relevant time, included a net zero emissions plan with a 2050 target. ClientEarth brought evidence that the strategy excluded short to medium-term targets to reduce the companies’ scope 3 emissions that equate for 90% of its overall emissions;121 and that the net emissions of the Shell group are calculated to only fall by 5% by 2030.122 Further, the case alleged that Shell’s ongoing allocation of capital to new oil and gas projects, as well as high reliance (and lack of transparency) on CCS and offsets to meet climate targets, did not establish a reasonable basis for achieving the net-zero target.

113 VID879/2017 (Federal Court of Australia, commenced 8 August 2017).

114 See a case summary here

115 Environmental Defenders Office, World-first Federal Court case over Santos’ ‘clean energy’ and net zero claims (Website, 26 August 2021); Australasian Centre for Corporate Responsibility expands landmark Federal Court case against Santos (Media release, 25 August 2022).

116 NSD1520/2023 (Federal Court of Australia, commenced 13 December 2023).

117 NSD833/2023 (Federal Court of Australia, commenced 9 August 2023).

118 NSD833/2023 (Federal Court of Australia, commenced 9 August 2023).

119 This includes litigation targeting Shell’s approach to climate risk management in the Netherlands: Milieudefensie et. al v. Royal Dutch Shell PLC Rb. den Haag, 26 mei 2021, Prg. 2021 mnt HA ZA 19-379 (Neth.). In this case, the Hague District Court found that RDS’s action on climate change was inadequate and in breach of the standard of care under the Dutch Civil Code. The court ordered the company to reduce the CO2 emissions of the entire corporate structure to which RDS is the parent company, by net 45 per cent at the end of 2030 relative to 2019 levels. The company appealed the decision in April 2024.

120 Companies Act 2006 (UK), ss 172 and 174.

121 Here the case referenced the assessment conducted by Climate Action 100+, an investor engagement initiative supported by 700 large scale institutional investors, which benchmarks targeted companies on their net-zero targets and strategy. See, Climate Action 100+, Companies (website) (CROSS REF BELOW).

122 Shu Ling Liauw et al, Global Climate Insights, Update: Shell emissions forecast (Sept 2022).

This case was not successful.123 In deciding that the derivative action should not proceed, the UK High Court noted that Shell did have a plan to manage climate-related risks and it is for the directors (and not the courts) to consider how best to promote the success of a company.124 This highlights that the duty of care and diligence is focused very much on material financial risks to the company (not the risks and impacts of the company’s activities on the climate) and that company directors are provided considerable discretion to respond to such risks. Even though financial materiality of climate change is well established, there are still gaps between what is material to a company (and how a company might manage those risks) and what is needed to meet Paris Agreement goals and to address the more systemic risks posed by climate change. The decision in this case suggests that it is reasonably open for directors to decide to continue to pursue climate-damaging activities, such as new oil and gas developments, in the short to medium term as part of their business model if they are profitable and the financial risks associated with these activities can be appropriately managed (e.g., through sufficient diversification of business activities, and investment of resources and capital in developing alternatives over time), even though this may undermine the timely phase out of fossil fuels required to achieve Paris Agreement goals.125

The court also highlighted that ClientEarth was a minority shareholder, holding only 27 shares in Shell, and noted that the majority of the members appeared to support the directors’ strategic approach to climate change risk (88.4% of the votes cast by members at the 2021 AGM and 80% at the 2022 AGM).126 As such, ClientEarth’s interests did not align with the best interests of the body of shareholders as a whole, which directors are required to consider when discharging their legal duties.127 This finding highlights how corporate law tends to prioritise the short-term, profit-focused interests of current shareholders above the interests of longer term or even future shareholders in interpreting the best interests of the company.

Regulatory scrutiny and enforcement – Greenwashing – ASIC has recently increased its regulatory oversight of company disclosures in relation to sustainability and issued an information statement on how to avoid greenwashing when promoting sustainability-related products and services.128 This applies to companies listed on the ASX, which offer securities (shares) as a financial product. The information statement highlights that …particular risks of breaching the misleading statement prohibitions arise in relation to representations made about future matters that are not supported with reasonable grounds. For example, if you state that you will achieve a certain carbon emissions target (such as net zero carbon emissions) by a particular date, this may amount to a representation about a future matter. Such a representation may be deemed to be misleading if you do not have reasonable grounds for making the representation.129 Companies are warned to ensure clarity and to avoid using vague terminology in all communications. In relation to sustainability targets, companies are recommended to clearly explain what the target is, how and when you expect to meet the target, how you will measure your progress or milestones and any assumptions you have relied on when setting that target of when measuring progress.130

In recent years, ASIC and the ACCC have taken enforcement action in relation to greenwashing, and Ad Standards have investigated complaints brought under the Australian Association of National Advertisers Environmental Claims Code (Box 3). The ASX have also received requests to investigate potential breaches of the continuous disclosure obligation set out in the ASX Listing Rules.131 While not all these actions have been successful and the fines issued for infringements can be minor, the increased regulatory scrutiny is nonetheless a significant influence on company disclosure practices and has been linked to green hushing (removing or watering down public disclosures of climate and other sustainability targets for fear of regulatory scrutiny). ASIC recently warned that non-disclosure of material sustainability information can also be seen as a form of greenwashing or misleading disclosure.132

123 ClientEarth v Shell’s Board of Directors [2023] EWHC1137 (Ch); ClientEarth v Shell’s Board of Directors [2023] 1897 (Ch)

124 ClientEarth v Shell’s Board of Directors [2023] 1897 (Ch) [48]. The court noted that ClientEarth’s argument ‘ignores the fact that the management of a business of the size and complexity of that of Shell will require the Directors to take into account a range of competing considerations, the proper balancing of which is a classic management decision with which the court is ill-equipped to interfere.’

125 IEA, Net Zero Roadmap A Global Pathway to Keep the 1.5 °C Goal in Reach 2023 Update

126 ClientEarth v Shell’s Board of Directors [2023] 1897 (Ch) [68].

127 Ibid [65]; [69].

128 ASIC, How to avoid greenwashing when offering or promoting sustainability-related products. This information statement is intended to complement other ASIC regulatory guidance including Regulatory Guide 65 – Section 1013DA disclosure guidelines, Regulatory Guide 168 Disclosure: Product Disclosure Statements (and other disclosure obligations). See also: Armour (n 111).

129 Ibid.

130 Ibid.

131 EDO, Complaint re Santos

132 Jonathan Barret, ‘Companies greenhushing to avoid scrutiny of climate goals, ASIC says’ (The Guardian, 5 June 2023).

Box 3: Greenwashing Claims against companies (excluding financial institutions) since 2022

In 2022, ASIC issued infringement notices and fines against Tlou Energy Limited regarding claims made by the company that their electricity production was clean and carbon neutral and that their gas-topower projects would be low emissions.133 ASIC also commenced investigation of statements made by international coal company Glencore in relation to its net zero 2050 target.134 Ad Standards investigated a number of companies including Glencore, Ampol, Shell and Santos to determine if their statements were in breach of the Environmental Claims Code.135 No findings of breach have yet been made by Ad Standards.

In 2023, ASIC issued infringement notices and fines to Black Mountain Energy in relation to claims made that the company’s natural gas projects would be net-zero carbon emissions.136 The ACCC also commenced investigations into alleged misleading and deceptive conduct (under the Corporations Act and Australian Consumer Law) by the Australian Petroleum Production and Exploration Association (in relation to promotion of fossil gas as essential to the net zero transition),137 Etihad Airways (in relation to claims made about the climate impact of Etihad’s flights),138 Toyota (in relation to environmental representations made about their vehicles and business),139 NeuRizer (Leigh Creek Energy) (in relation to carbon neutral claims made about fertilizer manufacture),140 and Tamboran (in relation to net zero representations).141

Although most greenwashing complaints to date have focused on climate change and net zero goals, there are indications that similar complaints will emerge in Australia in relation to nature-related issues. For example, in 2023 ASIC received a complaint from the Victorian Forest Alliance in relation to alleged misleading and deceptive representations made by VicForests in relation to the sustainability of its timber harvesting activities.142

Table 5: Overview of Corporate Law obligations as applied to climate & nature-related risks

Disclosure Obligations

Financial Statements – The annual report must include the financial statements and any notes to the statements (s295).

Company directors and auditors sign off on the financial statements to confirm they accord with prescribed accounting standards and present a ‘true and fair view’ of the company’s financial position and performance (ss 295-97, 307, 308).

Information is considered to be material, if omitting, misstating or obscuring it could reasonably be expected to influence the decisions that the primary users (potential investors, creditors or lenders) of financial statements make on the basis of those financial statements.

Directors Report – The Annual Report must include a Directors’ Report including a review of the company’s operations and results, details of significant changes in the company’s state of affairs, and details of any matter or circumstance that has arisen since the end of the year that has or may significantly affect the company’s operations, the results of those operations, and the company’s state of affairs in future financial years (s299(1)).

Public listed companies must also disclose information that would enable shareholders to make an informed assessment of the company’s operations, financial position, and the business strategies, and prospects for future financial years in the form of an Operating and Financial Review (s299A(1)).

133 ASIC, Tlou Infringement Notices

134 Lock the Gate, Glencore Complaint

Climate Change – Guidance prepared by the AASB and AUASB (Climate and other emerging risks disclosures) in 2019 notes that climate-related and other emerging risks may pose financial implications through asset impairment, changes in the useful life of assets and their fair valuation, increased costs or reduced demand for products and services, potential liabilities, and changes in expected credit losses. As such, climate-related risks could be material to a company and may need to be disclosed in financial statements and any notes to those statements. Nature – No similar guidance is available. The recent finalisation of the TNFD is expected to catalyse similar regulatory developments in relation to nature-related risks.

Climate Change – ASIC Regulatory Guide 247 provides that ‘it is likely to be misleading to discuss prospects for future financial years without referring to the material business risks that could adversely affect the achievement of the financial prospects described for those years’ and that the Operating and Financial Review should ‘include a discussion of environmental, social and governance risks that could affect the entity’s’ financial performance or outcomes disclosed.’ It further recognises that climate change is a systemic risk that could have a material impact on the future financial position, performance, and prospects of listed companies.

Nature – No similar guidance is available. The recent finalisation of the TNFD is expected to catalyse similar regulatory developments in relation to nature-related risks.

135 Ad Standards claim no. 0209-22 (determined 14 September 2022); Ad Standards claim no. 0280-22 (determined 25 January 2023).

136 ASIC, Infringements Black Mountain Energy

137 EDO, Request to ACCC re Australian Petroleum Production and Exploration Association

138 EDO, Request to ACCC re Etihad

139 EDO, Request to ACCC re Toyota

140 EDO, Request to ACCC re NeuRizer (Leigh Creek Energy)

141 Lock the Gate and Get Up, Request to ACCC re Tamboran

142 EDO, Request to ACCC re VicForests

The Director’s Report must be adopted by a resolution of directors, dated and signed, and constitutes a representation made by directors (s295(1)(c)).

Sustainability Statements – Legislation is currently before the parliament to amend the Corporations Act to introduce a climate reporting regime. This will enter into force once the Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024 passes parliament, and once the AASB reporting standard is finalised.

Companies must provide an annual sustainability report each financial year as part of the annual financial reporting package (s292A) including relevant sustainability statements and a directors’ declaration.

Climate Change – Companies must prepare a Climate Statement, in accordance with the AASB sustainability standard (s296C)

Nature – No similar obligation applies, however are expected in line with international developments.

Directors’ Duties

Duty of due care and diligence (s180(1)) –Directors must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable director in their position would exercise. This includes informing themselves of foreseeable risks to company interests and adopting proportionate measures to manage such risks.143

In discharging this duty, directors are granted some discretion to exercise their judgment in making business decisions which often involve complex risk calculations. The business judgment rule provides a defence for a director who acts, or decides not to act, based on an informed, rational assessment of the company’s best interests (s180(2)).

Climate Change – Company directors should inform themselves of foreseeable risks posed to company interests by climate change and take proportionate measures to manage these risks.144

While the measures to be taken will depend very much on the context of a particular company and its risk exposure, directors are clearly expected to do more than just consider and disclose climate-related risks. They also need to take reasonable steps to manage these risks in the best interests of the company and disclose their approach to climate risk management.

This may include designing and implementing risk management strategies, using appropriate standards to make accurate assessment and disclosures and delivering on the company’s public commitments and targets.145 However, directors maintain considerable discretion to determine what steps should be taken to manage climaterelated risks in the best interest of the company.

Nature – Similar expectations will apply where a company faces material nature-related risks. A recent legal opinion from Hartford-Davis and Bush notes that recent international developments, including the Global Biodiversity Framework and TNFD are likely to catalyse local regulatory developments and shifting market expectations regarding corporate disclosure and management of nature-related risks.146

Duty to act in good faith, in the best interests of the company and for a proper purpose (s181) –The ‘best interests of the company’ are generally interpreted to mean the ‘best interests of the shareholders as a general body.’147

Climate Change / Nature – This duty does not preclude a director from considering the legitimate interests of nonshareholder stakeholders (including environmental and social considerations such as climate change and nature), if this is undertaken in the context of the company’s long-term interests, including with a view to avoiding reputational harm.148

Indeed, directors are encouraged to consider a wide range of stakeholder interests and take a long-term view of the company’s best interests in fulfilling this duty.149 However, directors maintain considerable discretion to determine what is in the best interests of the company.

143 For a review of the relevant case law, see Noel Hutley and Sebastian Hartford-Davis, Climate Change and Directors’ Duties: Memorandum of Opinion (‘Hutley Legal Opinion (2016)’), (7 October 2016) 6-16; Sarah Baker, Director’s Liability and Climate Risk: Australia Country Paper (Commonwealth Climate and Law Initiative Report, April 2018)

144 Hutley Legal Opinion (2016) (n 143).

145 Hutley Legal Opinion (2021) (n 110) 2-3.

146 Hartford-Davis and Bush n (94).

147 Relevant case law includes: Ngurli Ltd v McCann (1953) 90 CLR 425, 438 citing Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286, 291; Richard Brady Franks Ltd v Price (1937) 58 CLR 112, 135; Pilmer v Duke Group Ltd (in liq) (2001) 207 CLR 165, 178-179.

148 Bret Walker and Gerald Ng, Australian Institute of Company Directors – the Content of Directors’ “Best Interests” Duty: Memorandum of Advice (‘Walker and Ng Legal Opinion (2022)’), (24 February 2022); Bell Group Ltd (in liq) v Westpac Banking Corporation [2008] WASC 239, 534 (n.b. this decision was ultimately overturned on separate grounds); Corporations and Markets Advisory Committee, The Social Responsibility of Corporations (Report, December 2006); Parliamentary Joint Committee on Corporations and Financial Services, Corporate Responsibility: Managing Risk and Creating Value (Report, June 2006).

149 Walker and Ng Legal Opinion (2022) (n 148).

Duty of disclosure – As noted above, company directors are required to sign off on financial statements and directors reports as complying with accounting standards and amounting to a ‘true and fair representation’ of the affairs of the company. They will also be required to sign off on sustainability reports under the new climate disclosure regime.

Directors can be directly liable (or liable as an accessory) for misleading disclosure in annual reports. Misleading disclosures can also be a ‘stepping stone’ to establishing liability for a breach of the duty of care and diligence s180(1),150 including in situations where directors have caused, permitted, or failed to take reasonable steps to prevent the company making misleading statements (or omissions) to the market.151

3A.4 Key Takeaways – Corporate Law Obligations

Climate Change – Directors are recommended to take care to carefully align any public commitments on climate change (including net zero emissions targets) with the company’s operational strategy and capital allocation plans, as a failure to do so may expose directors to personal liability for misleading and deceptive conduct.152 Nature – As regulatory and market expectations evolve; directors will face similar expectations in relation to nature-related risks.153

Corporate law obligations focus on financial risks posed by climate change and biodiversity loss to the company and incentivise companies to take steps to address these risks. They do not focus directly on adverse impacts caused by a company which can contribute to broader systemic risks posed by climate change and biodiversity loss. However, where a company’s activities contribute to these adverse impacts (e.g., GHG emissions, habitat destruction), this can be a source of transition risk at the company scale. As climate change and biodiversity loss worsen, as law and policy responses develop, and as markets shift in response, these risks are likely to intensify for companies. While there is now a well-developed understanding of climate-related risks, it is still unclear how understanding of nature-related risks and their materiality will develop, particularly at the company scale.

Companies and their directors are granted considerable discretion to determine the materiality of climate and nature-related risks to the company and in relation to the approach they take to managing these risks. However, this discretion is being significantly constrained with the development of new mandatory disclosure standards. Further, the standard of care expected of company directors in terms of risk management is also shifting because of law and policy developments, market expectations, advances in scientific understanding of impacts and associated strategic litigation. Again, these developments are more advanced for climate-related than for nature-related risks.

As a result of the focus on financial risks to the company and the discretion afforded to companies and their directors, corporate law instruments provide relatively weak incentives for companies to manage adverse impacts (and limit their contribution to systemic risks) in line with the net zero and nature positive goals.

3B Legal obligations in environmental and climate change law

Australian companies have direct legal obligations, or are significantly influenced by, several environmental and climate change laws which have been introduced by the Australian Government to reduce adverse climate or biodiversity impacts associated with company activities in line with Australia’s obligations under the Paris Agreement and the CBD. These laws differ in regulatory approach and strength of obligation, and generally apply to companies pursuing high impact activities.

For climate change, they include requirements to report GHG emissions against agreed standards under the NGER regime, and recently introduced obligations for high emitters to reduce GHG emissions in line with Australia’s climate targets (embedded in the Safeguard Mechanism’s emissions trading scheme).

For nature, the principal law is an environmental impact assessment and approval regime which applies to major industrial or development projects where there are likely significant impacts on protected environmental values, including biodiversity. This can result in the imposition of legally binding conditions to mitigate adverse impacts, or indeed, in rare cases, refusal of proposed projects.

150 Ibid 15.

151 Australian Securities and Investments Commission v Hellicar [2012] HCA 17.

152 Hutley Legal Opinion (2021) (n 110) 11-15.

153 Hartford-Davis and Bush n (94) 2-3 [3(e)-(f)].

The laws discussed here have been recently reformed or are in the process of reform. Like corporate law obligations discussed in Part 3A, the obligations within them are developed and enforced via litigation. Ongoing reform and litigation are relevant for understanding evolving climate and nature-related transition risks for Australian companies.

Table 6: Regulatory instruments and key actors – Legal obligations in environmental and climate change law

Regulatory Instruments

Climate Change

Australia’s 2022 NDC under the Paris Agreement Climate Change Act 2022 (Cth) (CCA)

National Greenhouse and Energy Reporting Act 2007 (Cth) (NGER) – GHG emissions reporting obligations and Safeguard Mechanism

Australian Government Net Zero Plan and associated sectoral plans (in development)

Nature

Environment Protection and Biodiversity Conservation Act 1999 (Cth) (EPBC Act)

Including planned reforms outlined in Australia’s Nature Positive Plan (2022)

Key Actors

Australian Government Minister for Climate Change and Energy (Climate Change Minister) – responsible for Australia’s NDC under the Paris Agreement. Various responsibilities under the CCA & NGER Safeguard Mechanism. Leads development of Net Zero Plan and Electricity and Energy Sector Plan

Climate Change Authority – independent statutory authority established by the CCA to advise the minister on climate targets and review and make recommendations on the operation of the NGER (& ACCU scheme discussed in Part 3C.1)

Australian Government Department of Climate Change, Energy, the Environment and Water (DCCEEW) – leads Australia’s participation in UNFCCC negotiations and manages national emissions inventory and projections. Environmental assessment role under EPBC Act.

Clean Energy Regulator (CER) – administers the NGER including the Safeguard Mechanism

Australian Government Minister for Environment and Water (Environment Minister) – approves projects under the EPBC Act, and notifies climate change minister of associated scope 1 emissions (relevant to Safeguard Mechanism emissions baselines)

Net Zero Economy Agency (to become Net Zero Economy Authority) – informs the development of Net Zero sectoral plans

3B.1 Climate Change Laws and Associated Instruments

3B.1.1 Australia’s Nationally Determined Contribution (NDC)

Effective from the 16 June 2022, the NDC communicates Australia’s intended contributions to climate change mitigation and adaptation under the Paris Agreement, including emissions reduction targets.154 It does not place legal obligations on companies. However, it indicates the regulatory environment that Australian companies operate in, and how this is expected to develop over time. Relevant features include:

Economy-wide targets – The emissions reduction targets outlined in the 2022 NDC are ‘economy-wide emissions reduction commitments, covering all sectors.’ Steps are now being taken to set out aligned emissions reduction pathways for each sector of the economy (see 3B1.2).

Increasing ambition – Comparison of Australia’s 2022 NDC to previous NDCs indicates a regulatory environment with likely increasing obligations and incentives for companies to reduce GHG emissions.

Table 7: Australia’s NDCs

2016

2020 26-28% below 2005 levels by 2030 Yes, but timeframe for achieving net zero was ‘as soon as possible’

2021 26-28% below 2005 levels by 2030 Net zero goal adopted with 2050 timeframe attached.

2022 43% below 2005 levels by 2030 Yes (2050 timeframe maintained).

Australia’s next NDC under the Paris Agreement is due in 2025 and must represent a more ambitious contribution than the 2022 NDC.155 Its content and targets will now be regulated by the CCA (see further below).

Limited discussion of policy approaches – The 2022 NDC announced investment in renewable energy to accelerate decarbonisation of Australia’s electricity grid, as well as the introduction of declining emissions baselines for high emitters under the Safeguard Mechanism reforms (Part 3B.1.3). While it places greater emphasis on direct emissions reduction than previous NDCs, it indicates that high-emitting activities may continue in conjunction with CO2 removal.156 There is also express reference to accelerating the deployment of ‘low emissions technologies’ which may include controversial carbon abatement technologies like CCU/ CCS.

3B.1.2 Climate Change Act 2022 (Cth) (CCA)

Introduced in September 2022, the objectives of the CCA include to advance Australia’s response to climate change by setting out Australia’s GHG emissions reduction targets to contribute to the Paris Agreement’s temperature goal (s 3). Australia’s alignment with the Paris Agreement net zero goal is enshrined in s 10(1) of the CCA which outlines an economy-wide GHG emissions reduction target of 43% reduction on 2005 emissions by 2030, and net zero by 2050.

The CCA does not create legal obligations for companies, but rather is indicative of the regulatory environment in which they operate. Relevant features include:

Clear, evidence-based process for updating climate targets and improved transparency around implementation – In setting new GHG emissions targets to be included in Australia’s NDC, the Climate Change Minister must consider the advice of the independent, expert-based Climate Change Authority (s15). The authority will provide advice on Australia’s 2035 target in October 2024. The Minister must also prepare an annual climate change statement to be tabled in parliament detailing progress towards Australia’s climate targets and the effectiveness of federal government policies in contributing to those targets (including in sectors covered by the Safeguard Mechanism) (s12). In preparing this statement the minister must have regard to the advice of the Climate Change Authority (s14), which must include advice about whether emissions covered by the Safeguard Mechanism are declining consistently with established aggregate thresholds (s14(1A)).

Increased governmental accountability for achieving targets – Like other framework climate legislation, the CCA imposes potentially enforceable obligations on government to set targets and develop policies to achieve those targets.157 For example, in May 2024, the UK High Court ruled that the UK government had breached its duty under the Climate Change Act 2008 (UK) to adopt policies and proposals which would enable their GHG emissions reduction targets to be met.158 The court ordered the UK government to remake the Net Zero Plan in accordance with the statutory requirements.

Limited impact on decisions made under other relevant legislation including the EPBC Act – The GHG emissions targets set by the CCA are expressly included as a consideration for some, but not all, relevant decisions made under other federal legislation. For example, legislation that regulates the Export Finance Insurance Corporation (EFIC) and the Northern Australia Infrastructure Facility (NAIF) incorporates the CCA’s emissions reduction targets.159 This may affect the viability of projects funded by EFIC and NAIF, especially where these involve significant GHG emissions, though there are concerns that the CCA may be insufficient to halt funding of fossil fuel projects.160 However, the CCA does not expressly provide for the consideration of its emissions reduction targets in federal environmental assessments of major projects under the EPBC Act (Part 3B.2).161

Development of Net Zero Plan and sectoral plans: The Commonwealth government will develop a Net Zero Plan setting out government priorities, policies and measures to reduce emissions and support ongoing and new investment in low emissions and renewable activities in line with the CCA targets. This plan will be based on advice provided by the Climate Change Authority in relation to sectoral pathways (to be provided before 1 August 2024) and economy-wide emissions reduction targets for 2035 (to be provided in October 2024).162 Sector plans will also be developed for the electricity and energy, agriculture and land,

155 Paris Agreement, art 4.3.

156 See, eg, several references to ‘removals’ in Table 1 of the 2022 NDC

157 See further Foerster et al, ‘Paris at the sub-national scale?: An exploration of the role and potential of framework climate change laws’ (2022) 45(3) Melbourne Law Review 1045.

158 Friends of the Earth & Ors v Secretary of State for Energy Security and Net Zero [2024] EWHC 995 (Admin) (03 May 2024).

159 CCA, Revised explanatory memorandum 10 [24].

160 Australia Institute, Submission to Australian Senate, Environment and Communications Legislation Committee Inquiry in relation to Climate Change Bill 2022 and the Climate Change (Consequential Amendments) Bill 2022, (August 2022) 8.

161 This is reinforced by the explanatory memorandum to the CCA, and was confirmed in Department of Climate Change, Energy, the Environment and Water submissions to a senate enquiry: CCA Revised Explanatory Memorandum (n 159) [24]; Senate Environment and Communications Legislation Committee, Parliament of Australia, Climate Change Bill 2022 and the Climate Change (Consequential Amendments) Bill 2022 (Report, August 2022) [4.24].

162 DCCEEW website

transport and infrastructure, resources, industry, and built environment sectors. The Net Zero Economy Authority (which will later be established subject to the passage of legislation in 2024) will play a role plan development.163

3B.1.3 National Greenhouse and Energy Reporting Act 2007 (Cth) (NGER) and the Safeguard Mechanism

The NGER provides for a national reporting framework that requires companies to provide information on their GHG emissions, energy consumption and production. Reporting thresholds apply at the scale of a facility and a corporate group – for example, facilities that emit over 25,000 tonnes CO2-e per year or corporate groups that emit over 50,000 tonnes CO2-e per year must report scope 1 and 2 emissions.164 This information is used to inform government policy and the Australian public, and to meet Australia’s obligations to keep national GHG inventories under the UNFCCC.

In addition, the NGER contributes to the achievement of Australia’s GHG emissions reduction targets under its NDC and the CCA by establishing the Safeguard Mechanism (NGER Act, s3(2)). The Safeguard Mechanism aims to reduce GHG emissions from Australia’s largest industrial facilities by applying declining legislated targets, known as baselines, on their net GHG emissions. It applies to facilities that emit more than 100,000 tonnes of CO2-e in scope 1 emissions per year (ss 9, 22XI) (large facilities). There are currently 219 large facilities across the mining, oil and gas production, manufacturing, transport and waste sectors.165 Relevant features include:

Application at the facility, not company scale – The application of the Safeguard Mechanism at the facility scale means that if a company has multiple large facilities, it will have emissions reduction obligations for each large facility. Further, if a company has multiple facilities with emissions that fall below the large facility threshold, these will not be aggregated to impose emissions reduction obligations on the company.

Declining baselines for large facilities: When first introduced in 2016, the Safeguard Mechanism imposed a cap on facilities that emitted more than 100,000 tonnes of CO2-e in a financial year. While this placed a limit on emissions growth above a baseline, it was not designed to reduce emissions below this baseline.166 In 2023, the Safeguard Mechanism was reformed to introduce declining baselines for the same group of facilities.167

Aggregate declines also required: In addition to declining baselines for large facilities, the 2023 reforms require total net emissions of the collective large facilities covered by the mechanism to reduce over time, in line with Australia’s emissions reduction target under the 2022 NDC.168 The specifics of this decline are enshrined in the legislation as follows:

Table 8: Safeguard Mechanism – declining baselines

Time

1 July 2020 – 30 June 2030

(s 3(2)(b)).

Financial year 2029-30 must not exceed a total of 100 million tonnes CO2-e (s 3(2)(c)(i)).

Any financial year beginning after 30 June 2049 must be zero (in line with the net zero by 2050 goal) (s3(2)(c)(ii)).

Each year post 30 June 2024 5-year rolling average safeguard emissions for each financial year post 30 June 2024 must be lower than the previous 5-year rolling average safeguard emissions for that financial year (s3(2)(d)).

The Climate Change Minister receives annual reports from the Climate Change Authority as to whether the aggregate emissions emitted by large facilities are declining consistently with the aggregate decline rate set in the legislation (CCA, s 14(2)).

Declining baselines for new entrants: New large facilities, as well as existing large facilities if they begin to produce new products, will face more stringent baselines which will be set according to best practice emissions intensity for the commodity produced by the facility (NGER (Safeguard Mechanism) Rule 2015, r 29). This will vary from sector to sector, but the government has highlighted that best practice in relation to

163 Net Zero Economy Authority Website

164 CER, Safeguard Mechanism Obligations

165 CER, Safeguard Mechanism

166 Gerard M Bates, Environmental Law in Australia (LexisNexis Butterworths, 10th ed, 2019) 694-695; Explanatory Memorandum, Safeguard Mechanism (Crediting) Amendment Bill 2023, 4.

167 Safeguard Mechanism (Crediting) Amendment Act 2023 (Cth) s 1 which repeals and replaces s 3(2) of the NGER Act.

16i8 Ibid.

new gas fields supplying existing liquefied natural gas facilities will be net zero scope 1 emissions from the outset, ‘given the existence of low-CO2 fields and opportunities for carbon capture and storage.’169

Ministerial flexibility to adjust baselines: The Climate Change Minister can adjust the baselines of existing large facilities if a new large facility is approved. This could result in increased obligations placed on existing large facilities. The process set out in the CCA and NGER requires the Climate Change Minister to consider the impact of scope 1 emissions from large facilities on the trajectory of the emissions reduction target under the CCA (CCA, s 15A). Where the Environment Minister grants approval under the EPBC Act for a new or expanded facility that will emit scope 1 emissions of more than 100,000 tonnes of CO2-e, they will be required to provide an estimate of these emissions (s15 A). The Climate Change Authority must advise the Climate Change Minister as to the impact of the resultant emissions (s14(1A)). The Climate Change Minister is then required to undertake public consultation to determine whether the legislative rules under the Safeguard Mechanism require amendment (NGER s 22XS(1C)(c)). Following this, the Climate Change Minister is empowered to amend these rules which could involve requiring steeper emissions reductions from large facilities. Therefore, while the Climate Change Minister does not have authority to refuse the approval of new high-emitting activities due to the attendant scope 1 emissions, they do have authority, after consultation, to take measures which would limit the scope 1 emissions permitted from these facilities. This may, in turn, influence a reduction in these activities by Australian companies, promoting alignment with the net zero goal. This aspect of the Safeguard Mechanism reforms is significant, as the introduction of a ‘GHG trigger’ requiring the environment minister to consider the GHG emissions of projects under the EPBC Act and refuse these projects if these emissions would have an unacceptable impact, has long been controversial and consequently never enacted (see further Part 3B.2).

Sectoral approach for grid-connected electricity generators: The 2023 reforms have maintained the sectoral approach of the 2016 mechanism which grouped and applied a single baseline to grid-connected electricity generators.170 Under the 2016 mechanism, once the collective baseline was exceeded, each electricity generator was to be assessed individually. However, the collective baseline figure was set so high – 198 million tonnes CO2-e – that it was not likely to be exceeded until 2030,171 and the individual assessment process has not yet occurred.172 However, emissions at power stations that do not relate to electricity generation, for example power stations used to operate coal mines, will be covered separately by the 2023 Safeguard Mechanism if they exceed the 100,000 tonne of CO2-e per year threshold. This is intended to prevent a practice of coal mines defining themselves as part of a grid-connected electricity generator to qualify for sectoral assessment and avoid individual compliance obligations.173

Application to scope 1 emissions (and exclusion of scope 2 and 3 emissions): The Safeguard Mechanism only applies to scope 1 emissions, excluding scope 2 and scope 3 emissions.174 This is consistent with the UNFCCC’s emission-based accounting system under which states report GHG emission from fuels burned or removed by sinks within their territory.175

Flexibility for large facilities that operate in ‘trade exposed industries’: Trade-exposed industries are afforded ‘tailored treatment’ under the reforms.176 The NGER does not define ‘trade exposed industries,’ but definitions for two types of facility are set out in the Government’s position paper.177 ‘Trade-exposed facilities’ are eligible to apply for competitive grants through the $600 million Safeguard Transformation Stream within the Powering the Regions Fund. This funding is to ‘support on-site decarbonisation activities across the full spectrum of technological maturity on a technology neutral basis’.178 ‘Trade-exposed baseline adjusted facilities’ are eligible to apply for a lower baseline decline rate.179 Approximately 80 per cent of facilities covered by the safeguard mechanism fall into the ‘trade-exposed facilities’ category,180 which includes facilities that provide the products or services listed in Schedule 2 to the 2023 of the Safeguard Mechanism Rules. This extensive list includes some of Australia’s highest emitting industries like coal, oil and gas.

169 Chris Bowen, Minister for Climate Change and Energy, ‘Safeguard Mechanism one step closer to Parliamentary passage’ (Media Release, 27 March 2023). The Greens Party have claimed that this requirement will ‘derail the business case’ of the Beetaloo Basin gas field in the Northern Territory.

170 Australian Government, Department of Climate Change, Energy, the Environment and Water, Safeguard Mechanism Reforms (Position Paper, January 2023) (‘SM Position Paper 2023’) 15, footnote 8.

171 Sophie Power, ‘Australia’s climate safeguard mechanism: a quick guide’ (Research Paper, Parliamentary Library, Parliament of Australia, 3 December 2018) 4.

172 According to the Australian Government Clean Energy Regulator, National Greenhouse and Energy Reporting data for the 2021-22 reporting year (reported in February 2023), a total of 310 million tonnes CO2-e emissions was recorded, and electricity generation comprised 46.2 per cent of this total, therefore closer to 143 million tonnes of CO2-e emissions.

173 SM Position Paper 2023 (n 170) 53.

174 The NGER Act s 22XI defines ‘covered emissions’ as scope 1 emissions of GHGs. See further definition of ‘net safeguard emissions’ NGER Act s 7.

175 Piggot et al (n 26); Steininger et al (n 26).

176 SM Position Paper 2023 (n 170) 41.

177 Ibid 41-49. ‘Trade exposed facilities’ are determined at an activity level. A trade exposed activity list is set out in Safeguard Mechanism Rule. ‘Trade exposed adjusted baseline facilities’ are those assessed as having an elevated risk of carbon leakage.

178 Ibid 43.

179 Ibid 44.

180 Ibid 43.

Availability of offsets and tradable credits/flexible compliance options: The 2023 reforms maintain the availability of Australian Carbon Credit Units (‘ACCUs’) (see further Part 3C.1) to meet obligations under the Safeguard Mechanism and also expand the list of compliance options available to facilities.181 Like the 2016 mechanism, there is no restriction on the amount of ACCUs that can be surrendered to meet a baseline. While Safeguard facilities can purchase ACCUs to meet their emissions reduction requirements, from 1 January 2023, they can no longer generate ACCUs themselves by reducing scope 1 emissions.182 ACCUS cannot be generated by safeguard facilities for meeting their emissions reduction baselines. However, facilities that reduce their emissions beyond their baselines generate Safeguard Mechanism Credits (SMCs) which can be sold to other safeguard facilities or kept and then surrendered to meet future emissions reduction obligations in line with a facility’s declining baseline (but only until 2030).

The only limited constraint on use of ACCUs is a transparency measure. Where a facility surrenders ACCUs equal to more than 30 per cent of its baseline, they must submit a statement to the regulator.183 This statement will be published and must explain why more carbon abatement was not undertaken at a facility during a period; explain whether limitations in available technologies affected the level of carbon abatement undertaken at the facility; explain whether there are barriers, including regulatory barriers, to undertaking carbon abatement at the facility; and include information about future opportunities for undertaking carbon abatement at the facility.184

Currently, safeguard facilities are not allowed to use international units to meet their compliance obligations, however the government has announced it will consider allowing international units to be purchased and traded under the Safeguard Mechanism in the future.185

3B.2 Nature and Biodiversity Laws

3B.2.1 Environment Protection and Biodiversity Conservation Act 1999 (Cth) (EPBC Act)

The EPBC Act establishes a system of environmental impact assessment for projects at the federal level, that works in conjunction with similar state-level laws to regulate impacts on nature and biodiversity. The EPBC Act requires actions that will have a significant impact on ‘matters of national environmental significance’ (MNES) to seek the approval of the Environment Minister prior to commencement. It is an offence to undertake the activity without approval. MNES listed under the EPBC Act (colloquially referred to as ‘triggers’) include:

• world heritage properties (s12);

• national heritage places (s15B);

• wetlands of international importance (s16);

• nationally threatened species and ecological communities listed under the EPBC Act (s18);

• migratory species listed under the EPBC Act (s20);

• Commonwealth marine areas (s23);

• the Great Barrier Reef Marine Park (s24B);

• a water resource in relation to coal seam gas and large coal mining developments (s24D); and

• nuclear actions including uranium mining (ss21, 22).

If a project is assessed as not having a significant impact on MNES, it will not be a ‘controlled action’ and therefore can proceed without ministerial approval (ss67-67A). Projects that will have an unacceptable impact on one or more MNES can be rejected by the Environment Minister (s74B), although this is very rare in practice.186 Projects that will have significant impacts on MNES, that have not been determined as unacceptable impacts, can be approved by the minister. In deciding whether or not to approve a proposal, the Minister must strike a balance between a wide range of environmental, social and economic considerations (s136). The minister has discretion to attach conditions to the approval to protect, repair or mitigate damage to the MNES impacted by the project (s133, 134). In practice, most proposals are approved with conditions,187 and these conditions often include a requirement to offset unavoidable impacts (discussed further below). Relevant features of the EPBC Act that can influence company approaches to nature and climate-related risks and impacts include:

Environmental offsets: Although not explicitly provided in the EPBC Act, offsets are commonly included in approval conditions. In 2012, the federal government developed an Environmental Offsets Policy to guide this process. This requires all reasonable measures to be taken to avoid and mitigate impacts on MNES

181 Ibid 2-3, 29-40.

182 See further, definition of ‘excluded offset project’ discussed in relation to the ACCU Scheme in Part 3C.1 below.

183 National Greenhouse and Energy Reporting (Safeguard Mechanism) Amendment (Reforms) Rules 2023 s 72C(4).

184 Ibid s 72C(5)(b)-(d).

185 SM Position Paper 2023 (n 170) 3.

186 See the EPBC Act Portal for a list of all projects considered and their outcome.

187 Ibid.

prior to offsetting residual adverse impacts. It sets out guiding principles including that offsets must be additional, for a tenure of at least the same duration as the impact on the protected matter arising from the action and be proportionate to losses.188

A 2020 statutory review of the EPBC Act conducted by Graeme Samuel AC (the Samuel review) found that the offsets policy was not being applied in accordance with its ‘avoid, mitigate, offset’ hierarchy, and that in practice, developers negotiated offsets at the outset of a project prior to exhausting options to avoid or mitigate impacts.189

Accordingly, it recommended the introduction of legally enforceable National Environmental Standards that would, among other things, minimise harm to MNES by requiring proponents to employ ‘all reasonable measures to avoid and then to mitigate significant impacts, and then lastly apply appropriate offsets’ (Proposed draft standard 1(c)). The proposed standards would require offsets to be:

• achievable – an offset is achievable where demonstrated scientific knowledge exists on how to restore the habitat with a high confidence of success, and its long-term protection is assured (for example through conservation covenants or conservation agreements); and

• ecologically feasible – An offset is ecologically feasible where it can be demonstrated that the species or community can be reliably restored in a timeframe proportionate to effectively address the impact of the action and enough space exists to undertake restoration (not ecologically or tenure constrained).190

Regulation of climate change impacts is incidental and limited – Climate change impacts are not an MNES under the EPBC Act. Because the EPBC Act does not explicitly address climate change, the Environment Minister has considerable discretion to approve high-emitting projects.191 Amendments to the EPBC Act to include an explicit climate change trigger (that would require assessment of projects with significant impacts on climate change) have long been advocated, but never implemented. This issue was most recently revisited by the Samuel Review.192 The review did not support the introduction of a climate change trigger,193 instead arguing that new legally binding National Environmental Standards should require project proponents to disclose the ‘full emissions’ of proposed developments and to ‘explicitly consider’ the effectiveness of actions that could be taken to avoid, mitigate, or offset impacts of proposed developments on MNES under climate change scenarios.194

Further reform – Overall, the Samuel review found that the EPBC Act was failing to achieve its purpose and that Australia’s environment was in an ‘overall state of decline’ and ‘under increasing threat’.195 The review noted that the EPBC Act’s process of project-by-project assessment focusses on environmental impacts in isolation and therefore fails to address cumulative impacts and threats to the environment,196 a key indicator that the legislation is not well aligned to the nature-positive goal (Part 2B). In response, the Commonwealth government released Australia’s Nature Positive Plan in December 2022, outlining a reform agenda in three tranches:

• Tranche 1 – Establishment of the Nature Repair Market to channel private capital to nature protection and restoration – legislation introduced in late 2023 (Part 3C.2)

• Tranche 2 – Establishment of Environment Protection Australia (a new federal environmental regulator) and Environmental Information Australia (a new environmental data agency) – legislation introduced in May 2024, including an overarching definition of nature-positive (s6(1)) (see Part 2B above).197 One of the statutory roles of the head of Environmental Information Australia is to set a baseline for the measurement of nature positive outcomes (s13(2)) and to develop and implement a monitoring, evaluation and reporting framework that provides a basis for assessing and publicly reporting on whether and to what extent nature positive is being achieved in Australia (s13(1)).

• Tranche 3 – Introduction of legally enforceable National Environmental Standards to guide assessment and approvals and other decision-making under the Act – yet to be developed.

188 These environmental offsets are not eligible to generate Australian Carbon Credit Units pursuant to r 20A CFI Rules (see further Part 3C.1 below).

189 Australian Government Department of Agriculture, Water and the Environment, Graeme Samuel, Independent Review of the EPBC Act (October 2020) (‘Samuel Review’).

190 Ibid 205.

191 Jacqueline Peel, Legal Opinion – gaps in the Environment Protection and Biodiversity Conservation Act and other federal laws for protection of the climate (Report for the Climate Council, 2023) 9-14.

192 Ibid 4-5.

193 Ibid 5, 47-48, recommendation 2.

194 Ibid.

195 Ibid, executive summary.

196 Ibid [8.1].

197 Nature Positive (Environment Information Australia) Bill 2024.

There are widespread concerns with the compartmentalisation and ordering of these reforms, which postpone what is arguably the most important substantive component (National Environmental Standards), with the associated risk that these may not be fully implemented.198 Although Tranche 2 of the reforms has now introduced a statutory definition of nature positive and an institutional process for measuring and reporting on nature positive outcomes, without strong underpinning environmental standards, it is unclear whether this new framework will contribute to better outcomes for nature.

3B.3 Key Takeaways – Environmental & Climate Law Obligations

The laws outlined above provide limited constraints on company activities that lead to adverse impacts on climate change and biodiversity and relatively weak incentives for companies to align their risk and impact management with net zero and nature positive goals, although these incentives are stronger in relation to climate change impacts.

The principal climate change instruments only apply to a subset of Australian companies – the highest industrial emitters at the facility scale – and include substantial flexibility measures which have the potential to undermine their effectiveness. The principle environmental instruments used to address biodiversity loss grant considerable discretion to governmental decision-makers to approve harmful projects, relying on offsets and other conditions to minimise harm, and have been shown to be ineffective. While climate change regulation at the national level is now more explicitly aligned to the net zero goals of the Paris Agreement, Australia’s biodiversity laws do not yet align well with nature positive goals and much depends on the roll-out of ongoing reforms. There is also limited attention to the intersection of climate and nature-related impacts.

3C Environmental Market Schemes for Carbon and Biodiversity

Carbon and biodiversity markets are intended to provide flexible and efficient pathways for companies to mitigate adverse impacts (including where they have direct legal obligations to do so) and to align to net zero and nature positive goals through the purchase of carbon and biodiversity credits.

This Part discusses Australia’s carbon market and its interactions with the Safeguard Mechanism under the NGER (Part 3B.1.3). The prominence of this scheme within Australia’s climate policy mix highlights the Australian Government’s strong and longstanding endorsement of carbon abatement measures to achieve net zero. Australia’s fledgling national biodiversity market is also introduced, noting its potential future interaction with the environmental assessment and approval regime under the EPBC Act (Part 3B.2.1).

Table 9: Regulatory instruments and key actors – Environmental Market Schemes

Regulatory Instruments Key Actors

Climate Change

Australian Carbon Credit Units Scheme also known as the Emissions Reduction Fund (ACCU Scheme) as established by the Carbon Credits (Carbon Farming Initiative) Act 2011 (Cth) (CFI Act)

Nature

Nature Repair Market as established by the Nature Repair Act 2023 (Cth) (NR Act)

Australian Government Minister for Environment and Water (Environment Minister) – responsible for biodiversity markets under the Nature Repair Act.

Australian Government Minister for Climate Change and Energy (Climate Change Minister) – responsible for carbon markets under the NGER (Safeguard Mechanism) and ACCU scheme.

Australian Government Department of Climate Change, Energy, the Environment and Water (DCCEEW) – responsible for both carbon and biodiversity markets.

Clean Energy Regulator (CER) – administers carbon and biodiversity markets. Emissions Reduction Assurance Committee (ERAC) – responsible for ACCU Carbon market Methodology Determinations and Offset Integrity Standards. ERAC is being reconstituted as the Carbon Abatement Integrity Committee.

ASX – the ASX recently won the tender to develop the Australian Carbon Exchange (the market place for trading ACCUs).

ACCC and ASIC – have a role in regulating compliance with environmental markets (see discussion of greenwashing in Part 3A.3 above).

Registered greenhouse and energy auditors – audit both biodiversity and carbon projects under market schemes.

Nature Repair Committee – (under establishment) – advise the Environment Minister on Nature Market Methodology Determinations and assessment instrument.

3C.1 Climate Change – carbon markets

Australian Carbon Credit Units Scheme – ACCU Scheme

The ACCU Scheme is a carbon crediting scheme, established in 2011 by the Carbon Credits (Carbon Farming Initiative) Act 2011 (Cth) (CFI Act). The CFI Act was introduced to assist Australia to meet its international obligations under the UNFCCC via avoiding emissions and removing GHG from the atmosphere. It aims to incentivise offset projects and increase carbon abatement in a manner that is consistent with the protection of Australia’s natural environment, and which improves climate change resilience (CFI Act, s 3).

Under the scheme, companies and individuals can apply to have emissions reduction or removal projects approved. ACCUs are earned for every tonne of CO2-e that an eligible project avoids emitting or removes from the atmosphere. For a project to be eligible it must follow an approved methodology and meet a list of criteria set out in the CFI Act and underlying Carbon Credits (Carbon Farming Initiative) Rule 2015 (CFI Rule).

There are several features of the scheme which influence the way it can be used by companies towards net zero (and potentially nature positive) goals:

Excluded offset projects and interlinkages with the Safeguard Mechanism – A project must not be an ‘excluded offset project’ (s 56 CFI Act, r 20AA CFI Rule). An emissions reduction activity that was already mandatory – for example, a safeguard facility reducing its emissions in accordance with its declining baseline (Part 3B.1.3) – would be excluded from the scheme. Facilities required to reduce their scope 1 emissions under the Safeguard Mechanism can no longer generate ACCUs in respect of these reductions but will instead generate Safeguard Mechanism Credits ‘SMCs’ if they overperform on their emissions reduction requirements. Safeguard Mechanism facilities can still register projects and earn ACCUs for reductions in scope 2 emissions (e.g., projects that reduce electricity use) or emissions removal projects in the land sector,199 which they can sell or use to meet their safeguard mechanism obligations.200

Other factors that exclude a project under the ACCU scheme are set out under the CFI Rule and have important implications for the extent to which the ACCU scheme supports or undermines biodiversity goals. For example, the CFI Rule excludes projects that involve plantings that would remove and store carbon from the atmosphere but are weed species; clearing native forest or draining wetlands to establish new vegetation; and protecting native forests where clearing consents or harvest approvals have been granted (r 20AA(1)(b), (d), (f)). Further investigation is required to understand the strength of these protections in practice.

In approving regulations that set out what is an excluded project, the Minister for Climate Change must consider whether there is a material risk that that kind of project will have a material adverse impact on one or more of (s 56(2)(a)-(e) CFI Act): the availability of water; the conservation of biodiversity; employment; the local community and land access for agricultural production. Therefore, the Minister balances competing environmental, social and economic considerations in approving these rules.

Approved methodologies: Projects will only be eligible if they follow a methodology pursuant to a Carbon Credits (Carbon Farming Initiative) Methodology Determination (Carbon Market Methodology Determination), which are approved by the Climate Change Minister of the advice of ERAC. Carbon Market Methodology Determinations must comply with the Offset Integrity Standards (CFI Act ss 106(4AA), 106(4B)). Carbon Market Methodology Determinations that are current, in development, under review and retired are set out in Table 10. Although there are methods applicable to all sectors, most current methods involve GHG removals and apply to agriculture and vegetation management. Several energy efficiency methods (avoided emissions) are also available for waste management and commercial buildings and manufacturing, although the availability of these methods in the waste sector particularly has been limited following recent reforms. The reforms to the Safeguard Mechanism outlined in Part 3B.1.3 may increase the popularity of energy efficiency methods under the ACCU Scheme because facilities covered by the safeguard mechanism and deploying these methods may reduce their scope 2 emissions using these methods and generate ACCUs to meet their scope 1 emissions reduction obligations. These large facilities will also be able to purchase ACCUs generated through energy efficiency methods from facilities not covered by the safeguard mechanism in order to meet their obligations.

Offset Integrity Standards – Carbon Market Methodology Determinations (and variations to these) must comply with the following standards (CFI Act s 133(1)):

• Additionality: eligible projects must result in carbon abatement that is unlikely to occur in the ordinary course of events.

• Measurable and verifiable: eligible projects must involve carbon removal, reduction or emission that is measurable and capable of being verified.

• Eligible carbon abatement: eligible projects must involve ‘eligible carbon abatement’ defined as abatement that results from the project and can be used to meet Australia’s international climate targets.

• Evidence-based: methods must be supported by clear and convincing evidence.

• Project emissions must be direct and material: the net abatement amount for a project must be calculated by deducting the CO2-e of material amounts of GHGs that are emitted as a direct consequence of carrying out the project.

• Conservative: eligible projects that involve estimates, projections or assumptions must make conservative estimates, projections or assumptions.

ERAC has issued guidance for interpreting the Offset Integrity Standards,201 as well as principles it uses to assess models for estimating abatement from projects which include that:202

• Models must be based on credible data.

• Models must be consistent with Australia’s international accounting requirements for reporting against international emissions reduction commitments and must be able to be counted towards Paris Agreement commitments.

• Abatement estimation from models should be as accurate as possible.

• Models must properly represent the emissions and sequestration processes being considered. This means that models must be appropriate for the processes they are applied to (not a one-size fits all approach).

• Models must be reviewed regularly and subject to continuous improvement as scientific evidence and data availability improve over time.

• Models must be verifiable (supported by a compliance approach that is evidence based).

• Models used in the preparation of Australia’s national GHG inventory reports to the United National Framework Convention on Climate Change meet the above principles.

Ongoing ACCU reform: There has been considerable critique of the integrity of the ACCU scheme, and particularly the application of widely used methods such as human-induced regeneration (HIR) and avoided deforestation which have been heavily criticised for their failure to achieve real, additional and permanent abatement.203 The integrity of these methods has implications for the overall capacity of the scheme to reduce GHG emissions, and also whether or not it supports or undermines biodiversity outcomes. Indeed, the most popular methods under the ACCU Scheme since its commencement have been vegetation, waste and savanna fire management methods.204 According to the CER ACCU project register (last updated 30 May 2024),205 the HIR method alone currently comprises approximately 24% of all projects registered, highlighting the importance of ensuring it represents real, additional and permanent GHG emissions removals. An independent review of the ACCU scheme was conducted in 2022.206 While the review generally endorsed the integrity of the scheme, it made 16 recommendations for improvement which were accepted by the Government and are being progressively implemented.207 Recommendations 8 and 9 are particularly relevant for this analysis:

• Recommendation 8: Project administration for the human-induced regeneration (HIR) method should ensure that all HIR projects conform to its current intent: that it is reasonable to expect that the project area will become native forest, attain forest cover, and permanently store carbon as a direct result of project management actions. The CER has begun to implement the recommendation for existing HIR projects.208

201 ERAC Guidelines

202

203

205 ACCU project register

206 Chubb et al review of ACCU Scheme

• Recommendation 9: No new project registrations should be allowed under the avoided deforestation method. This recommendation has also been implemented and applies from 16 February 2023. Avoided deforestation projects that were approved prior to this will continue to be issued credits until the end of their crediting period (15 years from the date of registration).

Historically, the Australian Federal Government has been the primary purchaser of ACCUs.209 Since 2021, there has been a growth in the purchase of ACCUs by intermediaries who are trading ACCUs in the secondary market.210 As the ACCU Scheme reforms are still in progress and the Safeguard Mechanism reforms are only just in force, the impact of these developments on market participation are unknown.

Development of Australian Carbon Exchange – The CER is working with the ASX to develop an Australian Carbon Exchange for buying and selling ACCUs. This is expected to be launched between late 2024 and 2025.

Table 10: Carbon Market Methodology Determinations (by sector) – current, in development, under review, retired (May 2024)

Sector Methodology

Agriculture Current

Estimating sequestration of carbon in soil using default values method

Estimation of soil organic carbon sequestration using measurement and models method

Fertiliser use efficiency in irrigated cotton method

Reducing GHG emissions in beef cattle through feeding nitrate containing supplements method

In development

Integrated Farm and Land Management method

Under Review

Animal Effluent Management method (crediting period)

Beef herd management method (subject to periodic review)

Electricity Generation* Current

Commercial buildings and manufacturing*

Carbon capture and storage method

Current Aggregated small energy users method

Commercial building energy efficiency method

High efficiency commercial appliances method

Industrial and commercial emissions reduction method

Industrial equipment upgrades method

Refrigeration and ventilation fans method

Facilities Current

Facilities method – ACCUs are generated by reducing the amount of GHGs released from sites that are required to report their scope 1 and 2 GHG emissions under the NGER but not covered by the Safeguard Mechanism. ACCUs can be generated under this method by, for example, upgrading, modifying or replacing site equipment.

Retired Methodologies**

Destruction of methane generated from manure in piggeries

Destruction of methane from piggeries using engineered biodigesters

Destruction of methane generated from dairy manure in covered anaerobic ponds

Measurement of soil carbon sequestration in agricultural systems

Reducing greenhouse gas emissions in milking cows through feeding dietary additives method

Sequestering carbon in soils in grazing systems

Commercial and public lighting method

Industrial electricity and fuel efficiency method 2015

Sector Methodology

Mining, oil and gas*

Current

Coal mine waste gas method

Oil and gas fugitives method

Transport* Current Aviation method

Land and sea transport method

Vegetation Management

Current Avoided clearing of native regrowth method

Designated Verified Carbon Standard projects method

Measurement based methods for new farm forestry plantations method

Plantation forestry method

Reforestation and afforestation 2.0 method

Reforestation by Environmental or Mallee

Plantings – FullCAM method

Savanna fire management – 2018 emissions avoidance method

Savanna fire management – 2018 sequestration and emissions avoidance method

Tidal restoration of blue carbon ecosystems method

In development

Savanna fire management methods

Waste and Waste Water*

Current

Alternative waste treatment method

Source separated organic waste method

Domestic, commercial and industrial wastewater method

Under Review

Wastewater treatment method (crediting period review)

Landfill gas method

Landfill gas (generation) method

Retired Methodologies**

Avoided Deforestation

Avoided Deforestation 1.1 method

Human-induced regeneration of a permanent even-aged native forest 1.0

Human-induced regeneration of a permanent even-aged native forest 1.1 method

Native forest from managed regrowth method

Plantation forestry (2017)

Quantifying carbon sequestration by permanent environmental plantings of native species using the CFI reforestation modelling tool

Quantifying carbon sequestration by permanent mallee plantings using the reforestation modelling tool

Reduction of greenhouse gas emissions through early dry season savanna burning (1.0 and 1.1)

Avoided emissions from diverting legacy waste from landfill for process engineered fuel manufacture

Avoided emissions from diverting legacy waste through a composting alternative waste technology

Capture and combustion of methane in landfill gas from legacy waste

Capture and combustion of methane in landfill gas from legacy waste: upgrade projects

Diverting waste to an alternative waste treatment facility

Enclosed mechanical processing and composting alternative waste treatment

* Following reforms to the Safeguard Mechanism, safeguard mechanism facilities will no longer be able to generate ACCUs for reduction of scope 1 emissions via these methods. However, safeguard mechanism facilities may still choose to deploy these methods to generate SMCs (if they outperform their emissions reduction obligations) to bank to meet future obligations, or to trade to other safeguard mechanism facilities (Part 3B.1.3)

** No new projects can be registered under closed methods. However, Existing projects can continue to operate under these methods as long as they have started their crediting period.

3C.2 Nature – biodiversity markets

Nature Repair Market established by the Nature Repair Act 2023 (Cth) (NR Act)

The NR Act was introduced in December 2023 to establish a national, voluntary biodiversity market, which is expected to come into operation in December 2024.211 The objectives of the legislation (s3) reflect Australia’s commitments under the CBD and Global Biodiversity Framework and include: to promote the enhancement and protection of biodiversity in Australia (s3(a)), including meeting the goal of no new extinctions (s3(b)(a)) and promoting the engagement of market participants, including private enterprise (s3(c)).

211 Before this can occur, the following elements of the scheme must be established: Nature Repair Committee (s194 NR Act); legislative rules (s237); Nature Market Methodology Determinations (s45); biodiversity assessment instrument (s58).

The NR Act allows eligible persons (individuals and companies) to apply to register a biodiversity project with the CER (ss7, 11(1)). ‘Biodiversity project’ is defined as ‘a project, carried out in a particular area, that is designed to enhance or protect biodiversity in native species (whether the effect on biodiversity occurs within or outside the area)’ (s7). The expression of ‘enhance’ and ‘protect’ requirements in this definition as alternatives rather than both being mandatory appears to be misaligned with the nature positive goal which focusses on net gains for nature as opposed to the aim of merely stabilising nature decline (Part 2B).

An application to register a project must satisfy the requirements of the NR Act Rules and the applicable Nature Market Methodology Determination (both of which are yet to be established). Nature Market Methodology Determinations will be approved by the Environment Minister on recommendation of the Nature Repair Committee (NR Act ss 45, 47(1)(a)(ii), 47(3), 54). Regulations will also be developed to outline the circumstances under which biodiversity certificates must be relinquished where there has been a significant reversal of a biodiversity outcome in relation to the biodiversity project (s 147A).

A biodiversity project will generate a tradeable biodiversity certificate, constituting personal property and representing a biodiversity outcome owned and traded separately from the underlying land and a register of biodiversity certificates will be operated by the CER. The intent is that biodiversity certificates will be purchased by private and philanthropic investors but would also be able to be purchased by the Commonwealth and other governments.212 Rules to govern the Commonwealth’s purchase of biodiversity certificates will be developed under the Act (s 85).

There are several features of the Nature Repair market which will influence the way it can be used by companies towards nature positive (and net zero) goals:

Methodologies must comply with the Biodiversity Integrity Standards (s57) – including:

• Biodiversity projects must be designed to prevent the project from having significant adverse impacts on native species protected under the EPBC Act or state and territory environmental legislation.

• Nature Market Methodology Determinations and biodiversity projects must be designed to enhance or protect biodiversity in native species. However, ‘enhancement or protection of biodiversity in native species in Australia’ is not defined in the Act. Nature Market Methodology Determinations must also meet other standards prescribed by the rules which are under development (s57(1)(j)). Nature Market Methodology Determinations must also be made in accordance with a Biodiversity Assessment Instrument (forthcoming) (s58).

• Like the Offsets Integrity Standards under the ACCU Scheme, biodiversity projects must meet core integrity standards in relation to additionality (s57(1)(a)), measurable, verifiable and evidencebased methods (s57(1)(d)(ii), (e)(i)), with conservative estimations (s57(1)(g)). There are some notable differences between the integrity standards of the ACCU and Nature Repair market including in relation to consistency with Indigenous knowledge and values (Table 11).

Table 11: Comparison of ACCU and Nature Repair Market Integrity Standards

Additionality

Measurable

Eligibility Concept of ‘eligible carbon abatement’ is expressly defined.

No definition of concept of ‘enhancement or protection of biodiversity in native species in Australia’ which is central to project eligibility.

Evidence based yes yes

Outcomes must be direct and material yes

No requirement that outcome be as a direct result of the biodiversity project. Materiality only considered in relation to whether the project will have an adverse, not positive impact (s33(2)).

Consistency with Indigenous knowledge and values no yes

Conditions in Nature Market Methodology Determinations must be consistent with relevant Indigenous knowledge and values relating to biodiversity and cultural heritage so far as is reasonably practicable (s 57(1)(e)(ii)).

212 Nature Repair Market Bill 2023, Revised explanatory memorandum, 7.

Level of certainty and confidence no yes

Conditions set out in or imposed by a Nature Market Methodology

Determination must require a clear indication of the level of certainty and confidence regarding the achievement of the enhancement or protection of biodiversity of native species (s 57(1)(e)(v),(vi)).

A level certainty of any estimate or projections relied upon must also be indicated (s 57(1)(f)(ii)).

Conservative yes yes

Use of biodiversity projects for offsets – Biodiversity certificates will not be able to be used for an environmental offsetting purpose (NR Act s 76A). The NR Act as originally proposed would have allowed biodiversity project proponents to elect whether the biodiversity certificates from their project could be used for offsetting in future.213 However, an amendment moved by Greens Senator Hanson-Young removed this discretion from the final wording of the legislation as enacted.214 This amendment was made and included in response to opposition to the use of biodiversity offsets and concerns about the integrity of biodiversity offset schemes generally,215 and to encourage the involvement of market participants who do not want their biodiversity certificate to be used as offsets.216

Therefore, as currently designed, the Nature Repair Market will operate separately from existing biodiversity offset schemes, such as the EPBC Act (Part 3B.2.1), which employs offsets as a compliance mechanism where there are unavoidable environmental impacts. It will also operate separately from Australia’s only other market-based biodiversity scheme in NSW, which has been controversial because of integrity concerns, and low confidence in market oversight and governance.217 Under the NSW Scheme (established under the Biodiversity Conservation Act 2016 (NSW)), approved development projects generate ‘biodiversity credit obligations’ when these projects result in unavoidable environmental impacts. To meet their biodiversity credit obligations, development project proponents can:

• retire biodiversity credits that they have previously generated or purchased on the market;

• pay into the Biodiversity Conservation Fund and transfer the biodiversity credit obligation to the Biodiversity Conservation Trust (a statutory body);

• fund a biodiversity conservation action; or

• commit to deliver mine site rehabilitation.218

Interactions with ACCU Scheme – ACCUs and biodiversity certificates will be able to be ‘stacked’ (generated from the same project area). Multiple biodiversity projects may be undertaken in the same area if they are associated with new activities and delivering additional biodiversity outcomes. However, to avoid double counting, the same activities on the same land cannot generate multiple biodiversity credits, or be eligible for both biodiversity credits and ACCUs.219 Unlike some non-government biodiversity credit schemes, which issue multiple credits for different biodiversity outcomes that can be tracked separately for a single project;220 each eligible biodiversity project under the NR Act will be issued a single biodiversity certificate.221 In contrast, under the ACCU scheme, credits are issued for every tonne of CO2-e avoided or removed. Some non-government schemes also expressly allow for the biodiversity co-benefits of carbon credits to be certified,222 but this is not currently provided for under the ACCU Scheme.

These differences may have implications for the effectiveness of Australia’s carbon and biodiversity markets. For example, ACCUs accompanied by a biodiversity certificate are likely to attract higher premiums than ACCUs or biodiversity certificates in isolation. Further, there may be insufficient biodiversity certificates to meet demand unless all ACCUs generated by a project are traded in a single tranche together with a biodiversity certificate.223 Further, as discussed, in Part 2B, the nature positive goal seeks to achieve carbon neutrality and restore nature. This goal may be better served by incentivising companies to pursue projects with co-benefits in relation to climate change and nature, including by allowing the same projects to be eligible for the ACCU Scheme and the NR Market.

213 Ibid 89.

214 Nature Repair Market Bill 2023, Schedule of the amendments made by the Senate (5 December 2023).

215 Lisa Cox, ‘Stop the rapid loss of nature’: Labor warned to clamp down on biodiversity offsets in environment law overhaul’ (The Guardian, 13 December 2023)

216 Revised explanatory memorandum (n 212) 89-90.

217 NSW Auditor-General, Effectiveness of the Biodiversity Offsets Scheme (30 August 2022); Independent Pricing and Regulatory Tribunal, Biodiversity Market Monitoring Annual Report 2022–23 (December 2023). See also the NSW Government’s response to integrity concerns about the scheme.

218 NSW Government, Department of Environment and Heritage ‘How the Biodiversity Offsets Scheme works’ ( web page).

219 NR Market Bill, revised explanatory memorandum [4.13].

220 Pollination, State of Voluntary Biodiversity Credit Markets: A Global Review of Biodiversity Credit Schemes (Report, October 2023).

221 Revised explanatory memorandum (n 212) 220.

222 See, eg, CCB Standards and the Social Carbon Standard

223 Allens, How will the Nature Repair Market help your business invest in the environment?

3.C.3 Key Takeaways – Carbon and Biodiversity Markets

Australian carbon markets, while still emerging, are more developed than biodiversity markets. The ACCU scheme is now somewhat aligned to the net zero goal via its interaction with the Safeguard Mechanism (which establishes net zero aligned scope 1 emissions reduction obligations for certain companies). The fact that biodiversity projects under the Nature Repair Market are not able to be used as offsets ostensibly supports the nature positive goal, however it is unclear whether there will be a sufficient market for biodiversity credits as a result. Although there is some interaction between the two schemes, they have not been designed in a way which would easily allow companies to achieve climate and biodiversity goals concurrently, and which would ensure that climate change outcomes are not achieved at the expense of biodiversity outcomes.

There have been serious integrity concerns raised about the ACCU scheme and some reforms have been introduced to address these. However, these concerns take on further importance now that ACCUs are no longer expected to be purchased by the Australian Government or by private entities for use towards voluntary climate commitments, but indeed can be used as offsets to meet compliance obligations under the NGER Safeguard Mechanism.

Experience with biodiversity markets at a state level, and with the use of biodiversity offsets as a compliance mechanism within environmental assessment and approval regimes like the EPBC Act, suggest similar potential integrity issues may arise for Australia’s new Nature Repair Market. These issues become more concerning if biodiversity credits can be used as a compliance mechanism to offset biodiversity loss.

3D Voluntary Industry Standards

Voluntary industry standards can be an important influence on company approaches to climate change and biodiversity, driving behavioural change, for example, through peer pressure and reputational concerns. The regulatory impact of voluntary standards can be amplified when they are referenced or used as a basis for other regulatory instruments and activities, such as formal regulatory guidance issued by government regulators, strategic litigation and investor engagement and advocacy. Industry standards addressing climate change (and biodiversity) have proliferated globally, including at a sectoral scale.224 This Part discusses a small selection of the most prominent international cross-sectoral standards for risk disclosure and management, for target-setting, and for the use of carbon and biodiversity credits towards corporate net zero and nature positive goals.

For climate change, industry standards for climate risk disclosure and management have played an important role in developing substantive best practice expectations for companies in relation to their underlying corporate law obligations (Part 3A). Voluntary standards like the Taskforce on Climate-related Financial Disclosures (TCFD) have been endorsed by regulators, referenced in various investor engagement and advocacy activities (Part 3E) and indeed, now form the basis for international sustainability reporting standards and Australia’s new mandatory climate risk reporting regime. Similar developments are emerging in relation to nature-related risks.

Standards for corporate target setting, such as the Science-based Target Setting Initiative (SBTi), interact closely with risk disclosure standards. They provide substantive guidance to companies on how to align their operations and activities (and value chains) with global net zero and nature positive goals. They also enhance transparency around company performance and progress. Voluntary standards are also emerging to govern offset integrity on both the supply and demand side of voluntary carbon and biodiversity markets. The Voluntary Carbon Markets Integrity Initiative (VCMI) provides an example of a demand-side initiative with the potential to influence corporate use of offsets towards net zero goals.

Table 12: Voluntary Industry Standards on Climate and Nature – Initiatives and Activities

Initiatives and Activities

Taskforce on Climate-Related Financial Disclosures (TCFD) – an international, industry-led framework for risk disclosure and management established following the adoption of the Paris Agreement. The TCFD was instrumental in articulating different categories of climate-related financial risks and highlighting financial implications for operating companies and associated finance sector entities.

Taskforce on Nature-related Financial Disclosures – the nature-related equivalent to the TCFD formed in 2020. The TNFD has articulated different categories of nature-related risks, consistent with the TCFD delineation of physical and transition risks.

Science Based Target Setting Initiative (SBTi) – a multi-stakeholder initiative to define and promote best practice in emissions reduction and net zero targets in line with climate science, including through developing standards, tools and guidance for companies to set science-based targets, and validating these targets.

Science Based Target Network (SBTN) – a multi-stakeholder initiative that is developing science-based targets for nature for companies and for cities, aligned to the SBTi.

Voluntary Carbon Markets Integrity Initiative (VCMI) – independent non-profit organisation that develops voluntary standards to enable high-integrity voluntary carbon markets.

3D.1 Taskforce on Climate-related Disclosures and Taskforce on Nature-related Disclosures

In 2017, the TCFD set out a four-part framework225 for climate risk disclosure and management covering governance (the organisation’s governance around climate risks and opportunities); strategy (the actual and potential impacts of climate-related risks on the organisation’s businesses, strategy and financial planning); risk management (the processes used by the organisation to identify, assess and manage climate-related risks) and metrics and targets (used to assess and manage climate-related risks and opportunities). Over time, increasingly detailed guidance has been produced.226 Entities are encouraged to: report on the direction and ranges of potential financial implications of climate change to their business under different climate-related scenarios (including scenarios aligned to Paris Agreement goals); set quantified targets to manage climate risks (e.g., GHG emissions reduction targets including for scope 3 emissions); set out comprehensive business transition strategies to meet targets; and report regularly on progress using common indicators and metrics to allow for progress tracking and comparison.

Many Australian companies have voluntarily committed to the TCFD: for example, in 2023, of the 97% of ASX1000 companies that reported on sustainability, 78% were TCFD aligned.227 This high uptake have been driven by investor-led engagement and advocacy activities (Part 3E), many of which have focused on improving climate risk disclosure. Corporate regulators have also endorsed the TCFD, referencing the framework in various updates to regulatory guidance on financial reporting.228

Yet despite purported TCFD alignment and a surge in the quantity of climate risk disclosure provided by Australian companies, several empirical studies highlighted that reporting practices were highly variable and often poor-quality, with only partial implementation of the TCFD framework.229 For example, few companies disclose robust transition plans using relevant targets and metrics to allow for progress reporting and comparison across entities.230 Accordingly, investors and civil society stakeholders have raised concerns about the quality and decision-usefulness of climate reporting.231

The TNFD framework was finalised in 2023 and has closely followed the TCFD model.232 It sets out a four-part framework for nature-related risk disclosure and management covering governance, strategy, risk management and metrics and targets. However, the TNFD is notably broader than the TCFD in its framing of relevant risks:

• While the TCFD focuses on physical and transition risks, the TNFD sets out three categories of naturerelated risks – physical, transition and systemic. Systemic risks arise from the breakdown of the whole system and involve cascading interactions of physical and transition risks.

225 TCFD Report (2017). See also, TCFD, Technical Supplement: The Use of Scenario Analysis in Disclosure of Climate-Related Risks and Opportunities (TCFD, 2017).

226 TCFD, Guidance on Metrics, Targets and Transition Plans (2021).

227 KPMG (n 100).

228 See, eg, Australian Securities and Investments Commission (ASIC), Effective Disclosure in an Operating and Financial Review (Regulatory Guide 247, August 2019) [RG247.66]; APRA, Prudential Practice Guide CPG 229 Climate Change Financial Risks (November 2021), 5, 18, 19.

229 AASB and AUASB, Climate-related and Other Emerging Risks Disclosures: Assessing Financial Statement Materiality Using AASB/IASB Practice Statement 2 (April 2019); Unda and Foerster (n 101).

230 TCFD, 2021 Status Report (n 101). For an Australian perspective, see: Foerster and Spencer (n 101).

231 Investor Group on Climate Change, CDP and Principles for Responsible Investment (n 101) 4.

232 TNFD, Recommendations (2023)

• The TCFD focuses on climate-related risks to entities. In contrast, the TNFD more explicitly acknowledges that nature-related risks are bidirectional. The TNFD addresses nature-related issues, defined as dependencies, impacts, risks and opportunities (DIRO) and notes that entities should consider these issues in the context of their full value chains, including upstream, downstream, and financed activities and assets, as well as direct operations. It clearly highlights that company dependencies and impacts on nature are relevant to understanding the entity’s risk exposure. Accordingly, it recommends assessing and responding to the organisation’s impacts on nature as part of risk management. However, companies are also urged to consider systemic risks of biodiversity loss and ecosystem collapse, and the TNFD notes the potential mismatch between biodiversity impacts which lead to systemic risks and understandings of financial materiality at the entity scale.

The TNFD is voluntary in Australia. It is at an early stage of implementation – 13 companies with Australian headquarters have adopted the TNFD as of May 2024.233

3D.2 Science-based Target Setting Initiative and Science-Based Target Network

The SBTi provides an accreditation platform to certify corporate climate targets are aligned with the Paris Agreement. To be accredited under the SBTi Net-Zero Standard (which is aligned to the 1.5°C temperature goal), companies must commit to reducing scope 1, scope 2, and where relevant scope 3 (value chain) emissions to zero or to a residual level that is consistent with Paris-aligned pathways and set near term (5-10 years) and long term (2050 or earlier) targets to achieve this.234 SBTi preferences absolute emissions reduction targets (percentage reduction against a baseline year) over emissions intensity targets (expressed per unit of production or value), as intensity targets can mask emissions increases for fast-growing companies.235 Until recently, SBTi has allowed only a small proportion (10%) of residual emissions to be offset or otherwise neutralised via negative emissions technologies such as CCS. However recent revisions have opened up the possibility for greater use of offsets towards net zero commitments, particularly in relation to scope 3 emissions.236

The pace and magnitude of emissions reductions expected differs between industries and sectors in recognition of their various contributions to global emissions as well as their mitigation potential. For example, companies in high-emitting sectors (e.g. power generation, energy, forestry, agriculture) should use a sectoral target setting approach, but others should use an absolute approach (equating to a requirement to reduce emissions by 4.2% annually).237

Signatory companies commit to report company-wide emissions and disclose progress annually against targets. Early reports provide evidence of growing uptake and impact. Yet, participation remains uneven, with the highest-emitting sectors and markets beyond the United States and Europe under-represented.238

Like the SBTi, the SBTN is developing targets and methods for companies to align with global nature positive goals (Part 2B above). Its first release in 2023 sets out technical guidance to assist companies to assess their impacts on nature across their value chain and prioritise areas where action has the biggest overall impact.239 Target-setting methods are being developed to address the key drivers of biodiversity loss, with methods now available for addressing land-use change and freshwater use and pollution.240 Recognising the links between climate change and biodiversity loss, the SBTN also encourages companies to set climate targets through the SBTi.

3D.3 Voluntary Carbon Markets Integrity Initiative

The Voluntary Carbon Markets Integrity Initiative (VCMI) is an international initiative established in 2021 to support demand side integrity in voluntary carbon markets. It seeks to ensure that corporate engagement in carbon markets follows the mitigation hierarchy (avoid, reduce, offset), prioritising science-aligned direct emissions reduction over the use of offsets. The VCMI has developed a Claims Code of Practice (Claims Code) setting out standards and guidance on how organisations can incorporate carbon credits into their climate transition plans.241 It allows organisations to obtain a certified brandmark to communicate their use of carbon credits towards their net zero goal. Certification under the Code covers:

233 TNFD adopters list

234 SBTi Net-Zero Standard

235 SBTi Corporate Manual (Version 2.0, December 2021); See further, Jack Arnold and Perrine Toledano, ‘Corporate Net Zero Pledges: the bad and the ugly’ (1 Dec 2021)

236 Joanna Cabello and Ilona Hartleif, Why the SBTi’s proposal on carbon offsets will deepen the climate crisis’ Reuters (30 April 2024)

237 SBTi (n Climate, Community and Biodiversity Standards) 15

238 SBTi, From Ambition to Impact: How companies are reducing emissions at scale with science-based targets – Science-based Targets Initiatives Annual Progress Report 2020 (Progress Report, 2021); SBTi, Science-based Net Zero: Scaling urgent corporate climate action worldwide (Progress Report, 2022.)

239 SBTN Step 1 (n 80); STBN Technical Guidance, Step 2 Prioritize (Version 1, October 2023).

240 SBTN Step 3 (nn 83-8 ); SBTN Biodiversity Short Paper (n 81).

241 VCMI Claims Code of Practice

3D.4

• Foundational criteria – organisations must maintain and disclose an annual GHG emissions inventory; set and publicly disclose SBTi near-term emissions reduction targets for scope 1, 2 and 3 emissions and commit to reaching net zero emissions by no later than 2050; demonstrate that the company is making progress towards targets including through capital allocation, governance and strategy; and demonstrate that the company’s lobbying and advocacy supports Paris Agreement goals and does not hinder ambitious climate regulation.

• Different levels of Carbon Integrity Claim – Participating organisations can select from three levels of claim which reflect different levels of investment in carbon credits, on top of demonstrated progress towards near term emissions reduction targets – silver (companies purchase and retire credits to offset 10-50% of residual emissions), gold (companies purchase and retire credits to offset 50-100% of residual emissions), platinum (companies purchase and retire credits to offset 100% or more of residual emissions). Further flexibility is provided in relation to scope 3 emissions. Select companies are permitted to use high quality carbon credits to cover 50% or less of their scope 3 emissions each year, however credit use must decline to zero by 2035 or within 10 years.

• Links to supply side carbon credit integrity thresholds – VCMI defines high quality carbon credits as those that meet the Integrity Council for the Voluntary Carbon Market (ICVCM) Core Carbon Principles,242 and which qualify under its assessment framework. Carbon credits used against the Code must represent mitigation achieved outside the value chain of the company.

• Third-party assurance – following the VCMI Monitoring, Reporting and Assurance Framework. VCMI’s early adopter program to highlight and support a select group of companies in making a carbon integrity claim will be developed in 2024.

Voluntary biodiversity credit schemes are also emerging globally but are less developed.243 This includes supply-side integrity standards,244 and emerging attempts to provide high-level governance and integrity principles for the use of biodiversity offsets by organisations.245 Further investigation is required to consider which of these is attracting the participation of Australian companies.

Key Takeaways

The voluntary standards discussed here interact closely and there is relatively strong substantive alignment on core criteria across the examples profiled, although best practice expectations continue to evolve in relation to the use of offsets towards corporate net zero and nature positive goals. While these standards have the potential to play an important role in aligning company responses to global goals, uptake remains quite low, especially for the more ambitious standards that move beyond risk disclosure and seek to reduce harmful impacts in line with global goals. While climate change standards are more developed, naturerelated standards appear to be developing in broadly similar ways. A notable difference is the stronger emphasis of nature-related standards on moving beyond financial risk management at the entity scale to encourage actions which reduce adverse impacts of company activities throughout the value chain to address systemic risks posed by biodiversity loss. It remains unclear how companies will engage with emerging nature-related standards.

The interplay of voluntary standards with corporate law obligations (Part 3A) is significant. The TCFD standard paved the way for the introduction of mandatory climate reporting standards which use the TCFD model as their foundation. Similar developments can be expected in relation to the TNFD. It is also useful to consider how emerging voluntary standards for corporate participation in carbon and biodiversity markets differ from current formal regulatory settings under the ACCU Scheme and Nature Repair Market (Part 3C) and whether they could usefully guide the development of improved standards for these schemes going forward.

3E Advocacy and Engagement

Since the Paris Agreement was finalised in 2015, there has been a proliferation of advocacy and engagement initiatives involving civil society, institutional investors and other stakeholders, seeking to influence the approach that companies take to climate-risk disclosure and management. Institutional investors such as superannuation funds and fund managers, have been increasingly active in their engagement with companies on climate change. This includes private behind-the-scenes and public-facing

242 Integrity Council for the Voluntary Carbon Market (ICVCM) Core Carbon Principles

243 Pollination, State of Voluntary Biodiversity Credit Markets: A Global Review of Biodiversity Credit Schemes (Report, October 2023).

244 The Biodiversity Consultancy, Exploring Design Principles for High Integrity and Scalable Biodiversity Credits (Technical Working Paper, December 2022); IUCN Policy on Biodiversity Offsets (29 January 2016).

245 World Economic Forum in collaboration with McKinsey & Company, Biodiversity Credits: A Guide to Support Early Use with High Integrity (December 2023).

engagement on climate risk disclosure and management, voting on climate-focused shareholder resolutions (which are often initiated by civil society groups), and in some cases, divesting shares from companies on climate change grounds.246 Although in the early stages, similar initiatives are now emerging to address nature-related risks and to pressure and support companies to align their nature-related risk and impact management to nature positive goals.

When considering the potential influence of these engagement activities on company behaviour it is important to situate them within the context of the broader legal duties of institutional investors to act in the best financial interests of their members (in essence, providing retirement benefits to members) and with due care and diligence. Like corporate law obligations discussed in Part 3A, superannuation funds and their directors must ensure they manage the financial risks posed to their investments by climate change and other sustainability risks, including through the way they allocate capital and by engaging with the companies in which they invest.247 Because superannuation funds are long-term, diversified investors, financial returns depend on the overall performance of the economy, not only the profits of a single asset.248 In theory, this should encourage institutional investors to focus not only on the climate or indeed naturerelated financial risks posed to individual investee companies, but also on the way in which the activities of individual companies contribute to economy-wide systemic risks such as climate change as this will impact the performance of the economy as a whole.249 In a climate context, this should translate to increased investor pressure on high-emitting companies to reduce their impacts in line with global net zero goals. Yet in practice, investors also have competing short-term considerations which influence their approach to capital allocation and engagement and may lead to their continued ownership of climate-damaging assets that are well-performing in the short to medium term.250

This Part discusses examples of prominent investor-led advocacy and engagement activities that are relevant for large Australian companies. It highlights how these activities intersect with underlying corporate law obligations (Part 3A) and voluntary industry standards (Part 3D).

Table 13: Advocacy and engagement on climate and nature – Activities, Initiatives and Key Actors

Activities and Initiatives Key Actors

Climate Action 100+ – public-facing investor engagement initiative

Nature Action 100 – publicfacing investor engagement initiative

Shareholders resolutions on climate and nature brought to Australian companies.

Say on Climate –international shareholder advocacy initiative on climate change

Australian Council of Superannuation Investors (ACSI) – established in 2001, ACSI is a peak body for Australian industry superfund and fund managers.

United Nations Principles for Responsible Investment (UNPRI) – an international network of financial institutions that encourages investors to use responsible investment practices (including incorporating environmental, social and governance (ESG) into investment decisions and seeking ESG disclosures from companies).

Investor Group on Climate Change – a network of Australia and New Zealand institutional investors focused on climate risk.

Australasian Centre for Corporate Responsibility (ACCR) – a shareholder advocacy and research organisation, which uses shareholder resolutions, alongside litigation and advocacy to influence corporate approaches to climate (and nature-related) issues.

MarketForces – a civil society advocacy group, which uses shareholder resolutions, research and advocacy to influence corporate and investor approaches to climate (and nature-related) issues.

3E.1 Climate Action 100+ and Nature Action 100

Climate Action 100+ is an investor engagement initiative backed by 700 global investors, including many large Australian superfunds and fund managers. It targets 170 companies selected because they are high GHG emitters, highly exposed to climate risk, or have significant opportunities to drive the clean energy transition. Together these companies account for over 80% of corporate industrial GHG emissions globally. 14 companies from Australasia are included.251

246 Julie Ayling and Neil Gunningham, ‘Non-state

247 Noel Hutley and James Mack,

248

249 Ibid.

250

251

Using the Climate Action 100+ Net Zero Benchmark companies are assessed on their progress towards net zero using disclosure indicators (and publicly disclosed data from companies) and independent assessments of the alignment of company actions to Paris Agreement goals (Table 14).252 Company performance against the benchmark is publicly reported and investor members undertake private and sectoral engagement activities concurrently to drive further improvements. As the initiative has matured, the benchmark standards have evolved to reflect shifting best practice and there is now more transparent disclosure of the involvement of individual investors in specific corporate engagements and investor voting on climate-related shareholder resolutions.

Recent progress reports show overall improved company performance on long and medium-term GHG emissions targets, board-level governance and TCFD-aligned disclosure of climate-related risks. However, there are clear gaps surrounding short-term targets, aligning capital expenditure to climate targets, climate policy engagement, commitments to just transitions and disclosure of historical GHG emissions.253

Indicator

Net Zero GHG emissions by 2050 (or sooner)

GHG emissions Targets

Long term (2036-2050)

Medium term (2027-2035)

Short term (up to 2026)

Decarbonisation Strategy

– does the company disclose a strategy which explains how the company will meet its medium and long term GHG targets?

Expectations

Qualitative ambition statement that explicitly includes at least 95% of scope 1 and 2 emissions and the most relevant scope 3 emissions categories (where applicable)

Targets must cover at least 95% of scope 1 and 2 emissions and the most relevant scope 3 emissions. For scope 3 emissions, methodology should be specified.

Where emissions intensity targets are used, these must align to a 1.5°C-aligned sectoral emissions reduction pathway.

Set of actions to meet targets, which clearly refer to main sources of GHG emissions (including scope 3).

Quantified contribution of different decarbonisation levers to achieve targets (e.g., changing technology, supply chain measures).

Quantity of offsets, type of offsets, offset certification and any planned use of negative emissions technologies towards targets.

Quantified contribution of abatement measures that are technologically feasible under current economic conditions.

Role of climate solutions (technologies and products that will enable the economy to decarbonise, revenue or production generated from climate solutions), and targets to increase revenue or production from climate solutions.

Capital Allocation

– have companies committed to phase out investments in new unabated carbonintensive assets or products? Do they transparently disclose the value of capital allocated to unabated carbon-intensive assets or products?

Climate policy engagement – does the company conduct its policy engagement activities in accordance with the goals of the Paris Agreement?

An intention to phase out capital expenditures in new unabated carbon intensive assets or products by a specified year.

Value of capital expenditures towards unabated carbon intensive assets or products.

Value of capital expenditure on climate solutions in last reporting year.

Planned allocation of capital expenditures to climate solutions in the future.

A position statement / public commitment to conduct lobbying in line with Paris Agreement foals (specifying alignment with the 1.5°C goal).

A commitment to advocate for Paris-aligned lobbying within the trade associations of which it is a member.

A published review of the company’s climate policy position’s alignment with the Paris Agreement and of its trade associations climate positions and Paris alignment.

Table 14: Climate Action 100+ – Net Zero Benchmark

Climate Governance

– does the company board have clear oversight of climate change? Does the company’s executive remuneration scheme incorporate climate change performance elements? Does the board have sufficient capabilities and competencies to assess and manage climate-related risks and opportunities?

Just transition

– does the company commit to, plan for, and monitor progress towards a just transition?

Evidence of board oversight of climate risk management. A named position at board level with responsibility for climate change. Remuneration arrangements for the CEO and/or at least one other senior executive which incorporate climate performance (and progress towards climate targets) as KPIs.

Assessment of board competencies and details of criteria used to assess these.

Measures being taken to enhance board level competencies.

Commitment to just transition principles, recognising the social impacts of decarbonisation efforts.

Commitment to retain, retrain, redeploy and/or compensate works affected by decarbonisation efforts.

Commitment that new projects associated with decarbonisation efforts are developed in consultation with affected communities.

Just transition plan, developed in consultation with workers, communities and other key stakeholder affected by decarbonisation plans. Plan should include KPIs to track progress towards just transition.

TCFD disclosure – has the company publicly committed to TCFD? Does the company employ climatescenario planning to test its strategic and operational resilience?

Historical GHG emissions reductions – has the company’s emissions intensity decreased compared to a credible 1.5 sectoral pathway? What are the factors underlying emissions reductions?

Indicator

Capital allocation alignment

- How compatible is planned capital allocation and assetlevel decarbonisation with Paris aligned scenarios?

- Do investment plans and asset retirement schedules align wot Paris Agreement goals? What is the stranded asset risk?

Commitment to align disclosures with TCFD.

Results of scenario analysis which includes a 1.5°C-aligned emissions reduction scenario, covers the entire company, discloses key assumptions and variables and identifies key risks and opportunities.

GHG emissions intensity over the past 3 years and how this compares to credible sectoral pathways.

Factors that have impacted emissions trajectory for scope 1, 2 and 3 emissions, including large one-off items such as divestments, acquisitions, mergers or carbon credit retirement.

Alignment assessments

Expectations

Aviation, automotive, cement, steel & utilities

- Electricity utilities – is planned coal, gas, oil, hydro and renewables capacity aligned with 1.5°C-aligned emissions reduction scenarios? Has decarbonisation been achieved through real change at asset level (e.g., closure of fossil fuel plants or adding renewables to the grid, as opposed to ownership transfer of assets)?

- Automotive – Are 5 year production plans aligned with 1.5°C-aligned emissions reduction scenarios (internal combustion engines, hybrids, EVs)?

- Aviation, cement and steel – Is current emission intensity is approaching Paris-aligned 2030 scenarios?

Electric utilities and oil & gas

- Announcement of full phase out of unabated coal and gas units consistent with 1.5°C-aligned emissions reduction scenarios

- Operating and planned coal and gas capacity is aligned with 1.5°C-aligned emissions reduction scenarios

- Compatibility of recent upstream oil and gas investment (last 12 mths) with 1.5°C-aligned emissions reduction scenarios

- Compatibility of future investment in new upstream oil and gas projects with 1.5°C-aligned emissions reduction scenarios

- Compatibility with future upstream oil and gas production with 1.5°C-aligned emissions reduction scenarios

- Compatibility of company’s commodity price forecasts with 1.5°C-aligned emissions reduction scenarios

Climate Policy Engagement alignment

– what is the real-world alignment of company climate policy engagement actions (direct and indirect) with Paris Agreement goals?

Indicator

Climate Accounting and Audit

– do the company’s financial statements and auditor’s report reflect the consideration of the effects of climate risk (using a 1.5°C-aligned emissions pathway)?

Does direct engagement support Pari-aligned climate policy?

Does indirect engagement (through trade associations) support Paris-aligned climate policy?

How accurate is climate policy engagement disclosure – published account of company policy positions and engagement activities and those of relevant industry associations?

Has the company conducted a robust review process to identify, report on and address cases of misalignment between its climate policy engagement activities and the Paris Agreement goals?

Hybrid assessments of disclosure and alignment

Description

Do financial statements incorporate climate-related matters, including the disclosure of quantitative climate-related assumptions and estimates? Are these disclosures consistent with company’s other reporting?

Do audit reports demonstrate consideration of material climate-related matters?

Do financial reports and audit reports identify that the assumptions and estimates are aligned with Paris Agreement goals of achieving net zero by 2050 or sooner?

Nature Action 100 is an investor-led benchmark which follows a similar model to Climate Action 100+.

Supported by more than 200 investors to date, this new initiative is targeting 100 companies from developed and emerging markets in 8 key sectors, which are deemed to be systemically important in reversing nature loss, which have a high potential impact on nature, or which have a large market capitalisation within the sector.254 Nature Action 100 has set high-level investor expectations for companies and is currently developing a benchmark to assess company performance on nature-related risks and impacts. An overview of indicators is provided in Table 15.

Table 15: Nature Action 100 – Indicators 255

Indicator Description

Ambition Public commitment to minimise contributions to key drivers of nature loss and to conserve and restore ecosystems at the operational level and throughout the value chain by 2030.

Assessment

Assess and publicly disclose nature-related dependencies, impacts, risks and opportunities at operational level and throughout the value chain.

This includes disclosing the location of all assets and activities in direct operations and value chain that are situated in or adjacent to ecologically sensitive locations. It also demands an assessment of material dependencies and impacts, as well as associated risks and opportunities.

Targets Set time-bound, context specific, science-based targets informed by risk assessments on nature-related dependencies, impacts, risks and opportunities. Disclose annual progress against targets with reference to a baseline / reference condition.

Targets should include avoiding/reducing drivers of nature loss and restoring and regenerating ecosystems.

Companies should also explain how their nature-related targets, support, align or integrate with its climate targets.

Implementation

Develop a company-wide plan on how to achieve targets. The design and implementation of the plan should prioritise rights-based approaches and be developed in collaboration with Indigenous Peoples and local communities when they are affected. Annual progress should be disclosed against the plan.

The plan should include an explanation of how the nature-related actions support, align or integrate with company actions on climate. It should also include information on how the company requires its tier 1 suppliers to recognise and respect the rights of Indigenous Peoples and local communities and to obtain their free, prior and informed consent.

Indicator Description

Governance

Engagement

Establish board oversight and disclose management’s role in assessing and managing nature-related dependencies, impacts, risks and opportunities.

This should also include disclosure of board expertise, and the way in which long-term remuneration arrangements are linked to the achieving of company nature targets.

Engage with external parties including actors throughout the value chain, trade associations, policy makers and other stakeholders to create an enabling environment for implementing the plan and achieving targets.

This includes implementing nature-related criteria for tier 1 suppliers, providing financial and/or technical assistance to suppliers to meet these criteria and engagement with corporate customers and end-users on addressing nature-related impacts and dependencies.

It also covers processes for stakeholder engagement, including mechanisms for individuals or communities to raise complaints or concerns that they are or may be adversely impacted by the company, or in relation to the company’s adverse impacts on nature. Companies should also provide public disclosure of the alignment of direct and indirect lobbying activities with the biodiversity strategy.

3E.2 Shareholder Resolutions and Voting

Bringing and voting on shareholder resolutions and voting on board composition are well-established tools that investors use to engage with investee companies, provided for under corporate law.256 In recent years, there has been a significant increase in shareholder resolutions used by civil society and investors to escalate pressure on companies to improve their social and environmental risk and impact management, particularly in relation to climate change.

ACCR maintains an ESG Shareholder Resolution Database257 which provides a 20-year history of shareholder resolutions on environmental and social issues in Australia. This illustrates that shareholder resolutions are usually filed by civil society groups (especially ACCR and MarketForces) but have at times been co-filed by institutional investors. As larger institutional investors become more active in their engagement on climate change and other matters, voting rates on ESG resolutions have generally increased, but remain quite variable.258

Early ESG resolutions brought to Australian companies focused on climate risk disclosure, for example, seeking to drive the uptake of TCFD standards. More recent resolutions have requested companies to set Paris Agreement-aligned emissions reduction targets accompanied by decarbonisation plans that demonstrate alignment of company strategy and capital allocation to these targets; to disclose liabilities associated with decommissioning oil and gas infrastructure in line with Paris-aligned net zero scenarios;259 to disclose how their capital allocation to fossil fuel assets aligns with Paris Agreement goals;260 and to bring forward closure dates for coal assets in alignment with the Paris Agreement 261 No nature-focused resolutions are recorded in the database.

An international shareholder advocacy initiative – Say on Climate – has also been introduced to several large Australian companies. This does not involve activist shareholders lodging climate resolutions. Rather, it calls on company boards to voluntarily put forward ordinary resolutions that seek shareholder approval of the company’s climate transition plan and annual performance reporting against this plan.262 The climate change report should be based on TCFD best practice standards (Part 3D) as well as referencing the indicators assessed through the Climate Action 100+ Net-Zero Company Benchmark including science-based targets and performance measures linked to executive remuneration.

Say on Climate appears to be quite attractive to company boards as it grants them more control over the way in which they report to shareholders on climate change – indeed several large Australian companies, including fossil fuel companies, have voluntarily participated. It was also initially warmly welcomed by investor groups such as ACSI, which stated its intention to vote against company directors where key climate performance indicators were not achieved.263 However, early experiences with this initiative suggest

256 Corporations Act 2001 (Cth) ss 249D, 249F, 249N.

257 ACCR, ESG Shareholder Resolution Database

258 See also, Australasian Centre for Corporate Responsibility, Vote Like You Mean It: A Study of the Proxy Voting Records of Australia’s Largest Super Funds in 2018 (May 2019).

259 See, eg, resolution put to Woodside Energy’s AGM in 2022

260 See, eg, resolution put to BHP’s AGM in 2021

261 See, eg,: resolution put to AGL’s AMG in 2020

262 This initiative is supported by the Children’s Investment Fund Foundation, CDP, Share Action and the Australasian Centre for Corporate Social Responsibility (ACCR). For an overview, see Say on Climate, Shareholder Voting on Climate Transition Action Plans

263 ACSI, Climate Change Policy (26 April 2021)

that it may not heighten pressure on company boards to improve climate risk management as expected. In 2022, the average level of shareholder approval for Say on Climate votes globally was 90%.264 This may suggest that with limited resourcing and reliance on voting from external proxy voters, majority investors do not adequately scrutinise Say on Climate proposals. Approval of unambitious transition plans may ease pressure on companies to take additional action. As such, the initiative could undermine the ability and incentive for minority investors to escalate pressure on companies through shareholder resolutions and other engagement mechanisms.

In addition to ESG-focused resolutions, institutional investors have also voted against board-proposed, ordinary resolutions to express their dissatisfaction with directors’ governance on climate change. For example, in 2022, a shareholder with an 11.28% interest in AGL (a large Australian energy company that was at the time Australia’s largest GHG emitter),265 nominated four directors with climate risk and energy transition expertise to the AGL board. Despite AGL’s board recommending that shareholders vote against three of the proposed directors, all four were elected.266 At the 2022 AGM of Woodside Energy (a large Australian oil and gas company), 49% of shareholders voted against the company’s climate transition strategy. Following this, 31% of shareholders voted against the re-election of one board member at the 2023 AGM, with many noting his poor suitability to lead the company through the energy transition.267 At Woodside’s 2024 AGM, there was a coordinated strategy led by civil society groups and some institutional investors to vote against the re-election of the company chair in protest against the company’s climate transition plan and particularly the company’s ongoing allocation of capital to new oil and gas projects, comparatively minimal investment in clean energy technology and heavy reliance on offsetting to meet emissions reduction targets.268 The Chair was ultimately re-elected, but the company did record another high Say on Climate protest vote (58.4%) against its climate strategy.269

3E.3 Key Takeaways

While there has been considerable investor advocacy and engagement on climate change in Australia and this has been increasingly public-facing, nature-focused initiatives are only just emerging. This reflects the still-developing understandings of the financial materiality of nature-related risks and may also reflect limited investor capacity to act on the vast range of emerging ESG issues. Where they are emerging, naturefocused engagement initiatives are recognising that company responses to climate and nature-related risks are potentially interconnected. They are also placing considerable emphasis on related social considerations such as stakeholder consultation and recognition of Indigenous rights.

The links and commonalities between voluntary industry standards (Part 3D) and investor engagement and advocacy activities are strong. Both have contributed substantive guidance on best practice expectations for corporate risk and impact management, and both have also informed the recent hardening of corporate law obligations in Australia (mandatory, standardised climate risk reporting, Part 3A).

While it appears that these initiatives are important influences on company approaches to climate and nature-related risk and impact management, it is important to acknowledge their limitations. These initiatives are largely motivated by investor imperatives and legal obligations to manage financial risks to their investments. There is certainly a prominent expectation articulated throughout these initiatives that companies should align their climate risk management to global net zero goals, which does increase pressure on companies to contribute in a timely and proportionate way to reducing impacts that lead to systemic climate risks. This emphasis reflects the interests of institutional investors in reducing systemwide risks across the economy over the long term. However, investors are also influenced by short term imperatives to maximise investment returns. Variable voting practice and reluctance to support more radical engagement initiatives, such as voting on board elections or indeed divestment, suggests that the pressure that investors may place on companies in relation to reducing negative climate and nature-related impacts will be variable.

264 Principles for Responsible Investment, Climate Transition Plan Votes (Investor Briefing, December 2022).

265 Mark Humphery-Jenner, ‘Cannon-Brookes shakes up AGL: what now for Australia’s biggest carbon emitter’ (The Conversation 15 November 2022)

266 AGL, Notice of 2022 Annual General Meeting (Notice, 7 October 2022); Michael Janda and Peter Ryan, ‘AGL shareholders overrule board to elect directors nominated by Mike Cannon Brookes’ The Australian Broadcasting Corporation (Online, 15 November 2021).

267 ACCR, Members’ statements relating to the re-election of directors to the Woodside Energy board

268 Jonathan Barret, ‘Companies greenhushing to avoid scrutiny of climate goals, ASIC says’ (The Guardian, 5 June 2023).

269 Market Forces, Woodside suffers world record-breaking vote against climate plan, embarrassingly large vote against Chair (24 April 2024)