New supply chain engagement guidance and sector specific industry plans; regulator greenwashing focus continues on

August 18, 2023
15 min read
Louise Horrocks

Supply chain engagement is the next step in demonstrating strong ESG performance - new guidance now available

Scope 3 emissions reduction and supply chain engagement are two challenges that have stalled corporates as they seek to progress on their decarbonisation journeys. This month, the Science Based Targets initiative (SBTi) released new guidance to outline how larger companies can engage with their supply-chain and get suppliers to set their own science-based or other targets, to address these challenges.

The guidance addresses Scope 3 emissions that occur in the supply chain which are often the largest contributor to a company's overall emissions profile. The Carbon Disclosure Project (CDP) has estimated that the average large, multinational corporation will generate over 11 times more emissions in its supply chain than in its direct operations.  Supply chains can also expose companies to several other adverse ESG risks, including waste, water use and modern slavery to name a few. It is essential that for best ESG practice, companies engage deeply with their supply chain to understand their full emissions profile, and any other risks they may be exposed to through their value chain.

Engagement with value chain partners can present a challenge if some suppliers are unwilling to work with customers on sustainability and will not disclose information for ESG purposes. The new guidance coming from the SBTi outlines that acting on Scope 3 decarbonisation requires companies to build relationships and develop internal and external structures to enable supply chain transparency.

It is recommended that companies identify suppliers best placed to be included in an engagement activity and that action is taken to ensure continuous engagement in order to drive progress over time. It suggests that this be completed through workshops, coaching, e-learning, webinars, or other support to enhance supplier capacity to engage and work towards their own sustainability targets.  It is crucial to focus on supply chain emissions for a solid sustainability plan. This helps bring transparency and resilience throughout the value chain and boosts credibility with important stakeholders. As expectations increase for businesses to tackle emissions and ESG risks, addressing these matters becomes even more vital.

Some sectors are also facing downstream Scope 3 challenges when addressing and mitigating the emissions of their customers.  Commercial real estate is one such sector and has been described as a 'sleeping giant' in the climate discussion, with the Department of Climate Change, Energy, the Environment and Water estimating that the sector represents 10% of Australia’s total carbon emissions. Asset owners have responded so far by pursuing five-star ratings under the voluntary National Australian Built Environment Rating System (NABERS) but have since flagged the need to take more action to develop decarbonisation pathways. Energy efficiency is seen as an opportunity for asset operators as it can lead to higher valuations and rental returns through lower carbon emissions and operating costs. Resilience of assets to physical climate risks is also a key priority for ESG in the sector, as it can impact insurance, pricing, and the attractiveness of assets to investors.

In pursuing the development of ambitious decarbonisation pathways, Scope 3 emissions resulting from tenants’ electricity usage presents a challenge for the sector, as those emissions are often larger than the base building and are more difficult to capture data around and mitigate.  This will soon become the key ESG focus of the sector, as demonstrating strong sustainability performance will require more than a 5-Star NABERS energy rating, rather, it will require a plan to decarbonise the whole of the asset including addressing Scope 3 emissions from tenants.

Minister Bowen (Climate Change and Energy) has announced Australia’s plans to create sectoral decarbonisation plans to develop a more proactive approach to targeting net zero emissions by 2050. A decarbonisation plan for the built environment will create a clear path and transition process to boost confidence for commercial real estate as the sector explores net zero solutions.

At McR ESG we acknowledge the difficulties in addressing Scope 3 emissions when striving to develop a best practice decarbonisation pathway.  We work with our clients to implement effective supply chain engagement in order to unlock decarbonisation opportunities that can come from partnering within the value chain. If you would like to have a more detailed conversation around your specific circumstances, please contact the team at McR ESG.

Chris Bowen announces sector-specific net zero decarbonisation plans for Australia

This month, in an address delivered at the Clean Energy Council (CEC) conference, Minister for Climate Change and Energy Chris Bowen announced an update to Australia’s Net Zero 2050 Plan, stating that the government will develop sector-specific decarbonisation plans for key industries to further the government’s net zero ambitions.  In his address the Minister went on to slam the official net zero plan lodged by the previous Coalition government as a “fantasy” which assumed future technologies would do the heavy lifting, without offering any effort or investment to bring them about.

Creating sectoral decarbonisation plans was a recommendation by the Climate Change Authority (CCA), the government agency responsible for providing independent advice on climate change policy, on the basis that the Net Zero 2050 plan needed to be updated and underpinned with plans for major economic sectors. The CCA advice was off the back of calls by Australian and international investors for plans to be established on the basis that a more proactive approach to targeting net zero emissions is needed with this approach having been adopted more recently by financial institutions – one such example being CBA’s announcement earlier this month that its fossil fuel clients will be required to commit to verifiable transition plans by 2025.

To implement updated sectoral plan, the Federal government has said they will work with all of industry, the climate movement, experts, unions, and the wider communities with this level of engagement and dialogue aimed to differentiate these plans from prior efforts. Climate and energy ministers have also agreed to work collaboratively and closely with the government to deliver sectoral plans electricity and energy, built environment, agriculture and land, transport, and resources industries. All developed sectoral decarbonisation plans will include a focus on circular economy.

The next step is for Parliament to issue a reference to the CCA to develop sector pathways to help inform the plans. The CCA is then expected to issue their statutory advice under the Climate Change Act on the 2035 target by late 2024 with the plans aimed to feed into both Australia’s Net Zero 2050 plan as well as the 2035 decarbonisation targets which have been lodged in accordance with commitments under the Paris Agreement.

Vanguard faces greenwashing allegations from ASIC over $1 billion ethical fund

Amongst ASIC’s claims is that Vanguard made false and misleading statements regarding the ESG criteria of the Vanguard Ethically Conscious Global Aggregate Bond Index Fund (the fund), including promises that investments would exclude bond issuers with significant business activities in a range of industries. The regulator is alleging that contrary to these claims, the bonds exposed investor funds to investments that breached ESG criteria, including bonds linked to fossil fuel activities like oil and gas exploration. ASIC has previously issued Vanguard with three infringement notices totalling $40,000 for separate greenwashing conduct related to product disclosure statements.

Investments held in the fund were based on the Bloomberg Barclays MSCI Global Aggregate SRI Exclusions Float Adjusted Index, with ESG research being completed by MSCI ESG Research on behalf of Bloomberg. It is alleged by ASIC that ESG research was not conducted over a significant proportion of bond issuers in the index, resulting in 46% of the bonds coming from issuers that were not researched or screened against the ESG criteria. For the index, at least 42 issuers (which collectively issued at least 180 bonds), breached the ESG exclusionary criteria. For the fund, 14 issuers (which collectively issued at least 27 bonds), breached the criteria.

In early 2021, Vanguard self-reported a breach to ASIC after identifying a weakness in its product disclosures. It then halted trading on the fund and issued a supplementary product disclosure statement (PDS) to better reflect the benchmark index methodology. Despite this rectification, ASIC is focussing its claim on the effectiveness of the exclusionary screens applied by Vanguard and whether statements made about these screens were likely to mislead consumers.

ASIC is claiming that Vanguard failed in its due diligence to screen out these investments, therefore misleading consumers in statements made about the ESG credentials of the fund, including in:

  • PDSs published between 2018 and 2021;
  • a media release issued in August 2018;
  • statements on the Vanguard website;
  • an interview with the Finance News Network; and
  • statements made in a presentation at a Finance News Network fund manager event which was recorded and published online.

Based on these statements, ASIC has lodged a proceeding against Vanguard Investments in the Federal Court.

When addressing these allegations, ASIC deputy chair Sarah Court said, “we consider that the screening and research undertaken on behalf of Vanguard was far more limited than what was being promoted to investors, and we consider this constitutes another example of greenwashing”. The court also noted that investors are increasingly seeking investment options that exclude certain industries and that requires confidence that they can rely on funds to effectively screen investments.

Following the allegations from ASIC, Vanguard has stated that there was never any intention to mislead consumers and an apology was issued for any concern it may have caused for its clients.  ASIC is seeking penalties and declarations of wrongdoing out of Vanguard, as well as an order that it publicises its contraventions. The date for the first case management hearing is yet to be scheduled.

ASIC’s proceeding against Vanguard is the second major greenwashing case from the regulator this year, the first coming against superannuation fund Mercer for misleading members of its Sustainable Plus fund about excluded investments. ASIC has also issued over $140,000 in infringement notices, including the $40 000 issued to Vanguard, for alleged greenwashing following a warning in 2022 that it was cracking down on misleading claims relating to ethical and social responsibility.

Product issuers are warned that ASIC is taking action retroactively on misleading conduct. While this cannot be avoided, careful steps will need to be taken in future to ensure consumer communications are not misleading, and that exclusion screens are applied. Moving forward, product issuers should be reviewing external researchers, reviewing PDSs and any other relevant marketing material and ensuring that any limitations to research and exclusions are made clear to consumers.

Landmark lawsuit brought against government agencies over support for fossil fuel projects

Environmental lobby group Jubilee Australia has filed a landmark case in the Federal Court against two government agencies. The case aims to enforce compliance laws that require agencies to reveal the full suite of harms that the fossil fuel projects they fund have on the environment. Jubilee has stated that if the case is successful, it will give taxpayers far more transparency about how agencies allocate their spending. This case demonstrates the growing pressures financial stakeholders are facing with climate litigation targeted at the financing of fossil fuel projects expected to increase.

The case is targeted at Export Finance Australia (EFA), the government agency which provides financing to Australian exports, and the Northern Australia Infrastructure Facility (NAIF), the $7 billion fund for infrastructure in Northern Australia. Both agencies provide taxpayer-subsidised finance for new fossil fuel and infrastructure projects.

These agencies have taken on a more critical role in financing coal, oil and gas projects in recent years as private banks and super funds seek to reduce their exposure to emissions-heavy activities. As these financiers are publicly subsidised, Jubilee has criticised the organisations for failing to disclose the full environmental impacts of the fossil fuel projects they support. The environmental organisation claims that most people are unaware of the Australian government's use of taxpayer money to fund fossil fuel projects. The case brought before the Federal Court attempts to provide greater transparency for taxpayers about the environmental impacts of the EFA and the NAIF.  

In a recent report by Jubilee, it was estimated that between 2009 and 2020, the EFA had provided over $1.5 billion in financing for fossil fuels. It was further estimated that as of mid-2020, NAIF had provided $91.3 million to fossil fuel projects and a further $522 million to projects with a fossil fuel component. This report also noted that the EFA has a partial exemption from Freedom of Information laws that make it virtually impossible for taxpayers to track where the government agency directs its funds.

The legal foundation of this lawsuit is a provision of the Environmental Protection and Biodiversity Conservation Act (1999) (EPBCA) that has never been used in a climate action case. The provision is broad and requires government agencies and departments to provide reports on the environmental impacts of their activities, and the EPBCA further requires agencies to report on the measures that are being taken to minimise these impacts. If successful, the action could set a precedent for other government entities to report on the climate impacts of their activities.

This action could signify a wave of climate litigation to come that targets the financing of fossil fuel projects and demands transparent disclosure about climate impact. Heavy emitting industries should remain abreast of any updates from financiers in the face of rising climate litigation and should be mindful of increasing expectations from stakeholders as they face their own ESG and decarbonisation pressures.

APPEA advertisement banned for misleading sustainability claims

An advertising campaign by the Australian Petroleum Production and Exploration Association (APPEA) has been banned for making misleading environmental claims. The peak body for exploration companies was called out by the Advertising Standards Community Panel, an independent advertising watchdog that manages the self-regulating system of advertising in Australia, for a series of television ads that made claims about natural gas as a cleaner source of fuel.

The panel received complaints for a claim made in the ad which stated, “It’s 50% cleaner, so together with renewables it gets emissions down." The complaint was made on the basis that this statement did not state what Australian natural gas is 50% cleaner than. Complaints made to the advertising watchdog took issue with the advertisement for making blanket misleading claims about gas being ‘clean’ or ‘green’ which ignore the detriment that the exploration, extraction, and processing of gas has on the environment. The complaints called out the ad for being a form of greenwashing.

In response to the complaint, APPEA said that the campaign centres on several substantiated claims, including the statement identified in the complaint. The APPEA further claimed that it was clear from the broader context of the ads that the relevant comparison is between coal and gas and that an ordinary member of the public would not be misled by the claim.

Belinda Noble, founder of environmental nonprofit Comms Declare who made a complaint about the advertisement stated that, “we hope this is a turning point in preventing greenwashing by coal, oil, and gas companies.” The ruling of the advertising watchdog led to the advertisement being banned on the rare basis of making a misleading or unsubstantiated environmental claim. Environmental groups are becoming increasingly worried that Australia has fallen behind in the regulation of green claims, considering this advertisement is only the fourth time a complain has been upheld on environmental grounds since 2011.

The final determination was that the environmental claim made by the APPEA in the advertisement was not specific and it was misleading as it did not make the basis for the comparison clear. The ad was banned as it was found to breach advertising codes covering environmental claims. The ad has since been updated to take the determination of the watchdog into account.

The watchdog determined that the environmental claim was not specific, nor did it make clear the basis for the comparison and therefore was misleading. The APPEA has since updated some campaign material to take the determination of the panel, that APPEA gas breached its codes covering environmental claims, into account.

Greenwashing remains a hot button issue as the Australian Competition and Consumer Commission (ACCC), the industry regulator, has released draft guidance for businesses making environmental and sustainability claims which includes 8 principles that outline the steps that can be taken to avoid misleading conduct. The advertising standards are also conducting a review of its environmental claims code. Any businesses looking to make claims about sustainability should follow the guidance of the ACCC to avoid any accusations of greenwashing.

If you would like to have a more detailed conversation around your specific circumstances, please contact the team at McR ESG.