Australian Update

AU$12.9 Million Penalty Imposed on Trustee

On 25 September 2024, the Federal Court ordered a large superannuation trustee (Trustee) to pay the highest penalty imposed for greenwashing conduct yet – AU$12.9 million. This comes off the back of the Federal Court in early August this year ordering Mercer Superannuation (Australia) Limited to pay an AU$11.3 million penalty after it admitted it made misleading statements about the sustainable nature and characteristics of some of its superannuation investment options.

Justice Michael O’Bryan found that the Trustee made misleading claims about an “ethically conscious” fund (Fund), contravening sections 12DF(1) and 12DB(1)(a) and (e) of the Australian Securities and Investments Commission Act 2001 (Cth) (Act) (Contraventions).

Justice O’Bryan outlined that the Contraventions consisted of:

• Media release representations, which conveyed representations that:
  • The Fund offered an ethically conscious investment opportunity, and that the Fund did this by seeking to track the Bloomberg SRI Index.
  • Before being included in the Bloomberg SRI Index (and therefore the Fund), securities were researched and screened against applicable environmental, social, and governance (ESG) criteria.
  • Securities that violated applicable ESG criteria were excluded or removed from the Bloomberg SRI Index and therefore the Fund.
• YouTube representations and representations made at an FNN Fund Manager event (which were later published online) which conveyed the same representations as the media release representations, save for the fact that they did not refer to the Bloomberg SRI Index.
• The PDS representations and the website representations which conveyed the same representations as the media release representations save for the fact that those materials conveyed that only securities issued by companies (rather than securities generally) were screened against ESG criteria.

The above representations were found to be misleading within the meaning of section 12DF(1) and section 12DB(1)(a) and (e) because:

• The research and screening for the Bloomberg SRI Index (and therefore the Fund) had limitations which meant that not all securities were screened against ESG criteria.
• A significant proportion of securities in the Bloomberg SRI Index and the Fund were from issuers that were not researched or screened against applicable ESG criteria.
• The Bloomberg SRI Index and the Fund included issuers that violated applicable ESG criteria.

Importantly, Justice O’Bryan found that:

• Due to limitations of the Bloomberg SRI Index, approximately 74% of the securities were not researched or screened against applicable ESG criteria.
• The misrepresentations enhanced the Trustee’s ability to attract investors to the Fund and its reputation as a provider of investment funds with ESG characteristics, as compared to the situation where the Trustee disclosed the screening limitations and the Fund’s exposure to issuers engaged in excluded industries.
• The contraventions should be regarded as serious, as it concerned the principal distinguishing feature of the Fund, which the Trustee developed and promoted in response to market demand.

Justice O’Bryan conducted a balancing exercise in coming to the penalty amount of AU$12.9 million, which he found struck an appropriate balance between deterrence and oppressive severity.

That the conduct was serious, continued for two and a half years, concerned a substantial investment fund and that senior employees were involved in the preparation of the misleading disclosures, among other factors, increased the need for deterrence.

The decision comes following both the Australian Securities and Investments Commission (ASIC) and the Australian Competition and Consumer Commission making greenwashing an enforcement priority (as reported on by K&L Gates here).

ASIC Updates Guidance for Participants in Carbon Market

On 30 September 2024, ASIC released its updated Regulatory Guide 236 Do I need an AFS licence to participant in carbon markets (Guide) following consultation earlier this year in May.

The Guide provides guidance for participants in the carbon market who need to decide whether or not they need an Australian financial services licence (AFSL). This includes:

• People involved in the Australian Carbon Credit Unit (ACCU) scheme.
• Responsible emitters for safeguard facilities.
• Market intermediaries.
• Market advisors (in the carbon market).

Essentially, an AFSL is required to provide financial services while carrying on a financial services business in Australia (unless an exemption applies).

An entity provides a financial service if it, among other activities, provides financial product advice or deals in a financial product.

The Guide has been updated to:

• Address the safeguard mechanism legislative reforms that commenced on 1 July 2023, which enable the Clean Energy Regulator to issue safeguard mechanism credit units (SMCs).
• Make it clear that ACCUs and SMCs are financial products.
• Provide additional guidance on when an advisor may be taken to provide financial product advice, in which case the key question is whether the advice is intended to or can be taken to intend to, influence a person’s decision about a financial product.

Global Nature Positive Summit Sparks Industry Optimism

In early October, the Australian and New South Wales Governments hosted the inaugural Global Nature Positive Summit (Summit) with the aim of accelerating collective action to drive private sector investment in nature and strengthen activities to protect and repair the environment.

“Nature Positive” refers to improving the diversity, abundance, resilience and integrity of ecosystems from a baseline. Following the release of its Nature Positive Plan in December 2022, the Australian Government has committed to a three-stage approach:

Stage 1

Establishment of the Nature Repair Market via the Nature Repair Act 2023 (Cth) and Nature Repair (Consequential Amendments) Act 2023 (Cth).

Stage 2

Establishment of Environment Protection Australia and Environment Information Australia via the Nature Positive (Environment Protection Australia) Bill 2024 (Cth) and Nature Positive (Environment Information Australia) Bill 2024 (Cth).

Stage 3

Introducing the Nature Positive (Environment) Bill 2024 (Cth) and Nature Positive (Transitional and Consequential Amendments) Bill 2024 (Cth).

At the Summit, leaders and attendees explored ways to realise global commitments under the Kunming-Montreal Global Biodiversity Framework, to which 200 countries are signatories. It sets a target of US$200 billion funding per year to spend on protection and restoration of 30% of land and waters by 2030.

More than half the world’s economy directly depends on nature. Biodiversity loss threatens global financial stability, putting at least AU$64 trillion of economic value at risk.

The Taskforce on Nature-related Financial Disclosures (TNFD), a global science-based and government-backed initiative consisting of financial institutions, corporates and market service providers, announced at the Summit that the total number of Australian companies and financial institutions that have committed to voluntary reporting of their nature-related risks and issues in line with the TNFD recommendations now stands at 23. This includes a number of Australia’s leading Australian Securities Exchange-listed companies and fund managers.

The TNFD recommendations set out the corporate reporting requirements of organisations across jurisdictions to be consistent with the global baseline for corporate sustainability reporting and to be aligned with the global policy goals in the Kunming-Montreal Global Biodiversity Framework.

Whilst the TNFD recommendations are not yet compulsory in Australia, the ongoing reforms and discussions at the Summit are clear signals that nature-related risks and issues should be carefully considered when implementing ESG strategies.

Increased Investment in Data Centres Raises Energy Warning

Australia’s superannuation and investment funds are increasingly interested in digital infrastructure, looking to invest in assets like data centres, fibre optic networks, and telecommunications.

However, investment in data centres is potentially putting large Australian fund managers’ net zero emissions obligations at risk. Data centres may offer high returns but are typically amongst the most energy-intensive of all assets, which could result in a delay of fund managers’ transition strategies and the possibility of funds engaging in greenwashing.

The appetite for data centres has come amid regulatory crackdowns on greenwashing and customer pushback over fund managers’ fossil fuel investments. However, it has been noted that high amounts of energy are needed to fuel data centres, leading to increased emissions and a strain on the power grid in periods of extreme weather, which will only worsen with climate change.

As such, superannuation and investment fund managers have been advised to consider the investments in light of their net zero commitments and also to consider escalation plans, including selling data centres if the companies managing them were failing to progress their transition plans.

Fund managers who invest in data centre assets may be given an opportunity to obtain a seat on the board of the respective data centre company. This inevitably means more influence over the company’s decisions and more responsibility in respect of sustainability reporting.

Both data centres and fund managers are being urged to show they have credible plans to reach net zero emissions by 2050. These ventures provide data centre companies and fund managers the opportunity to align their decarbonisation strategies, enhancing the industry approach to meeting net zero targets.

View From Abroad

United States: ESG Working Group Releases Final Staff Report

During the current administration, the United States House of Representatives has maintained a strong focus on overseeing ESG issues. At the beginning of this administration, the House Committee on Financial Services, which oversees the Securities and Exchange Commission, established the House GOP ESG Working Group (ESG Working Group). This group is dedicated to addressing ESG-related regulatory matters and issues related to nonfinancial risk disclosure.

On 1 August 2024, the ESG Working Group issued its final staff report entitled “The Failure of ESG: An Examination of Environmental, Social, and Governance Factors in the American Boardroom and Needed Reforms”. This report summarises current ESG-related trends and analyses relevant legal and policy matters. It concludes with a list of recommendations, focusing on proxy voting issues, shareholder activism, the materiality of climate-related financial risk and the fiduciary duty of investment advisors. 

The key recommendations include:

• Reform the proxy voting system to safeguard the interests of retail investors.
• Promote transparency, accountability and accuracy in the proxy advisory system.
• Enhance accountability in shareholder voting by aligning voting decisions with the economic interests of shareholders.
• Increase transparency and oversight of large asset managers to ensure their practices reflect the pecuniary interest of retail investors.
• Improve ESG rating agency accountability and transparency to safeguard retail shareholders.
• Strengthen oversight and conduct thorough investigations into federal regulatory efforts that would contort our financial system into a vehicle to implement climate policy.
• Demand transparency, responsibility and adherence to statutory limits from financial and consumer regulatory agencies.
• Protect US companies from burdensome European Union regulations, safeguarding American interests in global markets.

Read our US Policy and Regulatory alert on this topic here.

Canada Introduces Mandatory Climate Disclosure Requirements for Large Companies

The Canadian government has advanced two significant sustainable finance initiatives to ensure the country meets its ambitious net-zero emissions target by 2050. On 9 October 2024, at the Principles for Responsible Investment conference in Toronto, Deputy Prime Minister and Minister of Finance Chrystia Freeland announced:

• The government’s intention to amend the Canada Business Corporations Act to require climate-related financial disclosures for large, federally incorporated private companies.
• A plan is underway to create Made-in-Canada sustainable investment guidelines. These guidelines will serve as a voluntary tool for investors and other stakeholders to assess whether economic activities are “green” (activities with low or zero emissions that do not have significant scope 1 and 2 emissions) or “transition” (decarbonising activities that do have significant scope 1 and 2 emissions).

These measures aim to increase transparency in climate reporting and encourage greater private sector investment in sustainable activities. This announcement builds on the government’s previous commitment to develop a sustainable finance taxonomy to promote credible climate investment in its 2023 Fall Economic Statement and Budget 2024.

The authors would like to thank graduate Daniel Nastasi for his contribution to this legal insight.

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