Australian Update

Proposed Code of Practice to Reduce Modern Slavery Through Lending, Investment and Asset Management 

The New South Wales (NSW) Anti-Slavery Commissioner (Commissioner) recently released its discussion paper, A Code of Practice to Reduce Modern Slavery Through Lending, Investment and Asset Management (Proposed Code). This follows the Commissioner’s release of its Guidance on Reasonable Steps in December 2023.

The purpose of the Proposed Code is to address a number of concerns with the current regulatory and legislative regime regarding modern slavery in the financial sector. These concerns include:

• Efficacy of Reporting – the concern the approach taken by the Modern Slavery Act 2018 (Cth), which is to promote compliance and ethical practices through reporting, does not have the intended impact to reduce modern slavery or modern slavery risks.
• Lack of Certainty at the Investment Level – addressing previously identified issues in respect of
  1. Accessing scalable, reliable data on modern slavery risks at the level of specific investments; and 
  2. Improving the accuracy and quality of commercially available modern slavery or forced labour risk data.
• Silence on Remedies – given the financial sector’s significant leverage to promote and establish effective remedies for instances of modern slavery or modern slavery risks, the continued absence of discussions regarding remedies could potentially increase “liability where organisations’ financing or asset-management activities link them to modern slavery harms”.

The Proposed Code is targeted at wholesale investors, financial institutions conducting lending activities, and asset managers operating in NSW. It is not entirely clear if signing up to the Proposed Code will be voluntary or mandatory.

However, being a signatory could feasibly become a requirement for organisations when dealing with any NSW government entity.

Key features of the Proposed Code include the following:

• Specify Role – it specifies the role of lenders, investors and asset managers in combatting modern slavery, including to: conduct due diligence; identify and assist with the identification of people at risk of modern slavery; and provide or enable relevant remedies.
• Specific Commitments – it specifies that signatories to the Proposed Code commit to a range of activities, including to: use the best available data, typologies and indicators of modern slavery risks; train their personnel; improving the availability of financial services to those subject to modern slavery experiences; and to provide or enable effective remedies to such experiences.
• Participation Requirements – signatories to the Proposed Code must participate in a number of activities, including working with other signatories to develop practical initiatives to comply with their general and specific commitments, attend and contribute to at least two educational sessions each year hosted by the Commissioner, and consider in good faith any feedback given by the Commissioner in respect of the signatory’s implementation of the Proposed Code.

Feedback on the Proposed Code closed on 15 July 2024.

Australian Federal Government Unveils Sustainable Finance Roadmap

On 19 June 2024, Treasury released the Sustainable Finance Roadmap (Roadmap), setting out its vision for the implementation of key sustainable finance reforms and related measures. The Roadmap follows the government’s announcement in December 2022 of plans to “pursue a coordinated and ambitious sustainable finance agenda” and Treasury’s launch of the Sustainable Finance Strategy (Strategy) in November 2023, outlining the investments and reforms required to support a sustainable finance sector. The newly published Roadmap details the implementation of that Strategy. 

The Strategy is reflective of a developing global focus on “sustainable finance”, which is used as a term to describe financial flows that integrate considerations of impacts on ESG. Up until this point, the government’s primary focus has been on the introduction of mandatory climate-related financial disclosure, with legislation currently before Parliament. Now, with the Roadmap, the Albanese government will move to delivering on a more comprehensive list of stated policy objectives and priorities, each falling into one of three key pillars, as set out below:

Pillar 1: Improve Transparency on Climate and Sustainability 

• Priority 1 – Implementing Climate-Related Financial Disclosures 
  As reported by K&L Gates in June 2024, the Australian Accounting Standards Board is expected to finalise its climate reporting standards in August 2024. The Australian Auditing and Assurance Board is developing assurance standards for climate disclosures in late 2024, and reporting requirements for the first set of companies to be covered by the new rules will commence imminently.
• Priority 2: Developing the Australian Sustainable Finance Taxonomy in Partnership with the Australian Sustainable Finance Institution (ASFI)
  The taxonomy will provide a set of definitions of economic activities and assets that contribute to key sustainability objectives, serving as an important source of guidance and consistency for firms, investors, and regulators, improving transparency, and supporting the development of credible sustainable finance products. The ASFI will finalise the development of the initial taxonomy by the end of 2024. 
• Priority 3: Supporting Credible Net Zero Transition Planning
  In addition to mandatory climate reporting, the government is prioritising the creation of guidance for credible transition planning to enhance information integrity and reduce greenwashing risks. Treasury will develop and publish best practice transition plan disclosures to support credible corporate net zero transition planning by the end of 2025.
• Priority 4: Developing Sustainable Investment Product Labels
  Sustainable product labelling initiatives are set to commence by mid-2025, emphasising the importance of clear and consistent labelling to avoid greenwashing. This will cover “green” and “transition” activities that contribute to climate change mitigation in six priority sectors, as well as “do no significant harm” and “minimum social safeguard” criteria.

Pillar 2: Financial System Capabilities

• Priority 5 – Enhancing Market Supervision and Enforcement
  Sustainable finance is one of the Australian Securities and Investments Commission’s (ASIC) four external strategic priorities for the period 2023–2027. Under the priority, ASIC will support market integrity and efficiency through supervision and enforcement of current governance and disclosure standards to reduce harms from greenwashing while engaging closely on climate-related financial disclosure requirements. The government committed AU$10 million over four years for additional resourcing for ASIC to investigate and take enforcement action for greenwashing and other sustainability-related misconduct.
• Priority 6 – Identifying and Responding to Systematic Financial Risks
  The Council of Financial Regulators’ Climate Working Group, led by Australian Prudential Regulation Authority (APRA), is seeking to better understand how climate-related financial risks affect banks, insurers and market participants. In particular, APRA is conducting Climate Vulnerability Assessments (CVA) to evaluate the impact of climate risk on the affordability of general insurance over the medium term (to 2050). APRA plans to publish its findings from the insurance CVA by mid-2025.
• Priority 7 – Addressing Data and Analytical Challenges
  In November 2023, the treasurer wrote to the chair of the Council of Financial Regulators (CFR) requesting options to address key sustainability-related data challenges faced by financial system participants, including accessibility to corporate climate data, estimation and use of scope 3 emissions by business and financial institutions, and data to inform companies’ assessments of physical and transition-related climate risks. The CFR will make recommendations for addressing key sustainability data challenges to the government in early 2025. 
• Priority 8 – Ensuring Fit for Purpose Regulatory Frameworks
  Concerns have been raised about the annual superannuation performance test, and some stakeholders identified concerns suggesting the current design of the test is a barrier to integrating climate and other sustainability investment decisions. Consultation aimed at refining the test where appropriate was initiated in March 2024. The government has committed to continuing to work with financial regulators, governance experts and industry stakeholders to identify policy priorities such as this for mainstreaming sustainability considerations in corporate governance and financial institution decision-making.

Pillar 3: Australian Government Leadership and Engagement

• Priority 9 – Issuing Australian Sovereign Green Bonds
  The government is issuing green bonds, with its first AU$7 billion green bond issued on 4 June 2024. Money raised from the green bond will be deployed to climate, environmental and other sustainability-related projects.
• Priority 10 – Stepping Up Australia’s International Engagement
  The government has made a commitment to promote the development of consistent global standards and high-quality interoperable frameworks through international engagement and such initiatives as hosting the 2024 Global Nature Positive Summit and advocacy through G20 engagements.

In a statement announcing the release of the Roadmap, Treasurer Jim Chalmers, said:

“This Roadmap will help mobilise the significant private capital required for Australia to become a renewable energy superpower, modernise our financial markets and maximise the economic opportunities associated with net zero and our sustainability goal”

“This is about creating well designed and well informed financial markets to help companies and investors make investments with confidence, better manage climate and sustainability risks, and help finance the transition to net zero.”

Kristy Graham, CEO of the ASFI, said the Roadmap provided “welcome clarity” and praised the mentions of nature and climate adaption.

New Database to Assist Farmers and Agribusiness Operators

The Department of Agriculture, Fisheries and Forestry has established the Sustainability-Related Regulations Database (SR Database) which collates and explains current Australian laws relating to agricultural sustainability. 

The SR Database has been launched with the aim to assist Australian agricultural stakeholders in identifying sustainability and ESG regulations relevant to their business. 

The SR Database uses the Australian Agricultural Sustainability Framework, a consolidated list of sustainability objectives set out by the National Farmers’ Federation and supported by the Australian government, to collate relevant data. Information on the SR Database can be filtered by a range of topics, for example, commodity and location, and can be transferred to sustainability reporting platforms. 

The launch of the SR Database is timely for businesses who will be subject to mandatory climate-related financial disclosure imminently (as reported by K&L Gates in June 2024). 

The SR Database includes information on federal and state/territory legislation and regulation. However, it does not currently include local government legislation. 

The SR Database can be found at this link. The SR Database will undergo continued development until July 2025.

Australian Securities Exchange (ASX) Listed Company Pays Two Infringement Notices for Greenwashing

On 21 June 2024, Fertoz Limited (Fertoz) paid AU$37,560 to comply with two infringement notices issued by ASIC. The notices allege Fertoz made false and misleading statements in respect of its reforestation project in the Philippines (Philippines Reforestation Project).

ASIC alleged that Fertoz made statements in an ASX-published presentation on 15 November 2023 that conveyed the Philippines Reforestation Project would obtain a partner or receive funding by the end of 2023 and begin planting in the fourth quarter of 2023.

ASIC alleged that the statements were false and misleading as discussions with previous potential partners ended in April and August 2023, which delayed the timeframe of securing of a funding partner and initial planting. In addition, ASIC alleged that Fertoz had not secured any funding necessary for the progress of the project, nor had they signed any letters of intent or nondisclosure agreements indicating that they were at the stage of reaching completion by end of 2023.

ASIC Deputy Chair Sarah Court emphasised that greenwashing continues to be one of ASIC’s enforcement priorities, stating that “[t]his case is another example of ASIC enforcement action where we consider there to be inaccurate or misleading statements made in sustainability-related claims.”

Payment of an infringement notice is not an admission of guilt or liability. 

Senate Economic References Committee on ASIC’s Investigation and Enforcement Capabilities

On 3 July 2024, the Senate Economic References Committee (Committee) handed down its report on the investigation and enforcement capabilities of ASIC. The report presents a number of concerns regarding ASIC’s effectiveness in protecting Australian consumers and investors, stating corporate law is underenforced in Australia. 

ASIC’s Approach to Investigation

ASIC is uniquely placed to investigate alleged misconduct, receiving thousands of reports from industry and the public every year. However, based on evidence received by the Committee, ASIC appears reluctant or unwilling to commence investigations despite:

• Expanded enforcement powers, pursuant to the recommendations made by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry 2017–2019;
• An increase in total resources from AU$607 million in 2016–2017 to AU$861 million in 2021–2022; and
• An increase of ASIC staff by 19% over the same period.

Over the 2021–2022 financial year, ASIC took no further action in 66% of the reports received from the public. Further, most statutory reports submitted to ASIC by insolvency practitioners go without investigation. The report states ASIC commenced an average of 117 investigations per year, which is only a fraction of what is actually reported. Further, when investigations are commenced, evidence provided suggests that the process can be marred by delay and inefficiency.

ASIC’s Enforcement Outcomes and Dispute Resolution

ASIC has substantial powers to enforce corporate law, yet it is clear that only a fraction of reports of alleged misconduct result in enforcement action. For example, ASIC received 17,503 misconduct reports in 2022–2023, which resulted in only 32 individuals charged with criminal offences through ASIC’s enforcement activities. 

Additionally, the Committee received evidence that ASIC is blind to the litany of unlawful conduct on the ASX, including insider trading, market manipulation, failures in meeting disclosure obligations and breaches of directors’ statutory duties. The Committee emphasises that redressing the underenforcement of corporate law in Australia should be a national priority.

Recommendations

The Committee has made 11 recommendations to the Australian government calling for change. These include:

• A separation of ASIC’s functions between a company regulator and a financial conduct authority to remedy ASIC’s failure to fulfil its regulatory responsibilities;
• Reform to investigation and enforcement work by making it a legislative requirement to investigate reports of alleged misconduct at an appropriate rate;
• Develop consistent standards to transparently report data to the public on the handling of reports of alleged misconduct and establish a searchable public register of civil or criminal outcomes arising from reports of alleged misconduct received and the outcome of the proposed regulatory authorities’ handling, similar to the approach taken by the US Consumer Financial Protection Bureau;
• Investigate amending the whistleblower protection provisions under the Corporations Act to include pecuniary incentives and compensation for whistleblowers who make a substantiated disclosure; and
• Reform to senior governance and funding arrangements to correct the allocation of resources by increasing funding directly resourced with proceeds of regulatory fines.

ASIC is yet to respond publicly to the report, but the market should be weary of a crackdown on investigation and enforcement as a show of defiance and strength from the regulator.

The View from Abroad

ESMA Introduces Measures to Enhance Corporate Sustainability Reporting

On 5 July 2024, the European Securities and Markets Authority (ESMA), the European Union’s financial markets regulator and supervisor, released its:

• Final Report – Guidelines on Enforcement of Sustainability Information (GLESI); and
• A Public Statement on the first application of the European Sustainability Reporting Standards (ESRS).

Both documents propose measures to support corporate sustainability reporting and ensure consistent application and supervision of sustainability reporting requirements across the European Union. 

The GLESI addresses bodies which undertake supervision of sustainability information prepared by issuers listed on an EU regulated market and provides guidance and a framework to harmonise supervisory practices on sustainability reporting. ESMA notes that its goal is to “foster a unified approach among national authorities, enhancing the clarity and comparability of sustainability information for investors”.

The Public Statement is aimed at first time adopters – being large public-interest entities and listed issuers during the initial phase of implementing the ESRS. The Public Statement helps entities in preparing their first sustainability statement by providing guidance on the reporting requirements and pinpointing areas of focus. The ESMA notes that “[b]y providing clear guidance, we hope to facilitate a smoother adoption process for large companies”.

Topics of relevance in the preparation of ESRS sustainability statements include:

• Establishing governance arrangements and internal controls that can promote high-quality sustainability reporting;
• Properly designing and conducting the double materiality assessment and being transparent about it;
• Being transparent about the use of transitional reliefs; 
• Preparing a clearly structured and digitisation-ready sustainability statement; and 
• Creating connectivity between financial and sustainability information.

Looking ahead, ESMA will continue to monitor sustainability reporting practices in 2025 and the application of the GLESI.

Hong Kong’s Sustainable Debt Soars to US$18.2 Billion in 2023 to Become the Fifth Largest Worldwide

The latest report (June 2024) from the Climate Bonds Initiative notes the unprecedented growth of Hong Kong’s sustainable debt market, which has propelled it to be a leader in Asia and is in the top 10 in green bond issuance globally. This growth is largely driven by substantial issuances by the Hong Kong government and their continued efforts in supporting global decarbonisation. 

Highlights of the report:

• Hong Kong has formulated its own climate goals and strategies in response to the Paris Agreement and the Central People’s Government decarbonisation agenda.
• The volume of green, social, sustainability, sustainability linked, and transition debt originating from Hong Kong reached US$18.2 billion, representing a year-on-year growth of 236% in 2023.
• Most of this debt (US$15.6 billion) was issued under the “green” theme, while the “social” theme accumulated US$2.6 billion.
• Hong Kong’s green bonds volume in 2023 ranked in the global top 10 for the first time. 92% of the green bond volume (US$14.4 billion) came from the Hong Kong government with the remaining coming from financial corporates.

Click the links to access the full report and the accompanying media statement. 

Nathan Bodlovich, Dhivya Kalyanakumar, Cathy Ma, Daniel Shlager, and Bernard Sia contributed to this article