Why your ESG policy is more than just lip service

July 11, 2022
8 min read
Louise Horrocks

In the last 12 months, the popularity of socially responsible investment and demand for companies to address environmental and sustainability concerns in their operations has surged. Investors are increasingly measuring and comparing corporate performance by reference to environmental, social and governance (ESG) criteria. More than ever before, directors are under pressure to disclose their strategy for responding not just to ESG risks but also the opportunities created in their businesses.  

Globally, shareholders are driving the level of disclosure by increasingly directing their investments to those companies with evidenced and sophisticated ESG disclosures. They are also acting against companies and their boards, resulting in regulators around the world taking notice. This has been most notable with companies like ExxonMobil which replaced three directors last year, following shareholder support for ESG initiatives reaching 32%.  

Australia does not currently have a specific regulatory framework requiring ESG disclosure or standards for such disclosure for companies and their directors. Presently, ESG disclosure obligations are regulated indirectly, through companies’ reporting obligations and the ASX listing rules, and through the enforcement of directors’ duties. These indirect means of enforcement present both a risk and an opportunity for Australian companies, making ESG considerations not the ‘nice to have’ it once was, but a fundamental operating requirement.  

Director’s duties

A director’s duty to act with care and diligence, requires directors to balance potential benefits and foreseeable risks and also to arm themselves with the information necessary to make these decisions. Directors must not only turn their mind to the information before them, but actively seek out what else is required to exercise their own judgement and make informed decisions. This position was re-enforced by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, which put directors on notice by making it clear that ‘wiithout the right information, a board cannot discharge its functions effectively’.

Directors of listed companies carry the additional burden to include disclosure of the company’s business strategies. Directors in breach of their disclosure obligations may face removal by shareholders or civil penalties under the Corporations Act 2001 (Cth) (Corporations Act). Serious breaches of directors’ duties, false or misleading disclosure, and dishonest conduct, may lead to criminal charges, resulting in significant criminal fines and prison sentences of up to 15 years.  

Such severe penalties may easily be avoided by directors seeking out and considering the information a reasonable person in their position would need to make properly informed decisions. ESG criteria provides a mechanism for directors to obtain that knowledge, and the more disciplined a company’s ESG framework, the more comfort its directors can have.  

It is important to remember that there may well be instances where short to medium term profit may outweigh action by companies to move towards practices which prepare them for various climate change scenarios. A director who is aware that climate change, will or is likely to have, an adverse impact on a business does not necessarily have to advocate for change if they have a reasonable foundation for the inaction. An ESG informed risk analysis and reporting regime that underpins this decision making will allow a director to demonstrate they acted reasonably in the course of their decision making.  

ASX reporting

ESG reporting is not completely absent from Australia’s regulatory landscape. In 2003, the ASX Corporate Governance Council introduced its Corporate Governance Principles and Recommendations (CGPR), and since then, listed companies have been required (under Listing Rule 4.10.3) to disclose in their corporate governance statements the extent to which they have adhered to the CGPR and, where they have strayed, specifying how and why. Significantly, CGPR recommends that material exposure to environmental or social risks is disclosed, including how the risk is managed. These reporting standards however are not keeping pace with consumer and international demands for more detailed and data-based reporting.  

Traditionally, Listing Rule 4.10.3 has focused on direct physical risks posed to a company and its business, such as:  

  • extreme temperature changes affecting a company’s operations;  
  • supply chains;
  • transport needs; and  
  • employee safety.  

In the last few years however, companies have started to include more detailed ESG reporting in response to this requirement and consumer and international demands. Risks are no longer limited to direct physical risks, but also include the need to respond to the risk of climate change under certain scenarios – essentially, what a company will do if global temperatures rise by more than 2 degrees, or 1.5 degrees. The focus is shifting towards transition risks, i.e. how companies will manage the policy, legal, technology, market and reputation risks they encounter, as they are faced with the transition to a lower-carbon economy.  

Listed companies are contractually bound to comply with the Listing Rules, which are given legal effect under the Corporations Act. Where the ASX identifies a disclosure breach, its response may be as simple as making the company release a corrective announcement to the market. However, if the ASX perceives the breach as severe, it may suspend trading in a company’s securities.  

The ASX is not the only source of enforcement actions. The Australian Securities and Investments Commission (ASIC) may commence proceedings pursuing civil or criminal penalties. Shareholders too have shown they are more than willing to take action for what they perceive to be wrongful actions, or inaction, by boards. It is therefore increasingly important that a robust ESG mechanism is in place to ensure that directors are not at fault.


The growing demand from consumers for more sustainable products and ESG-conscious companies has seen the rise in a practice known as ‘greenwashing’. Greenwashing occurs when a company exaggerates its environmental credentials, or brings in superficial processes that may address only a small part of a company’s carbon or environmental footprint. The best-known example of this is Volkswagen, who was caught cheating on emissions tests whilst spruiking its green technology.  

Greenwashing may breach misleading or deceptive conduct prohibitions contained in the Australian Consumer Law, the Corporations Act and the ASIC Act 2001 (Cth), and expose directors to risks including prosecution and shareholder backlash.  

These potential breaches are being tested by shareholders:  

  • Santos currently faces a potential landmark claim, with shareholders commencing proceedings in the Federal Court of Australia (Federal Court) over misleading claims, for example, that Santos provides ‘clean energy’ because natural gas is a ‘clean fuel’. The shareholders also claim Santos’ net-zero strategy to be misleading because it is unevidenced and based on misinformation.  
  • in what appears to be an increasingly frequent trend, both BHP and AGL Energy have recently been subject to shareholder resolutions relating to their respective commitments to Paris Agreement targets.  
  • third parties, including financiers, are also feeling these risks. In November 2021, the Federal Court ordered that the Commonwealth Bank of Australia (CBA) produce documents to the trustees of a shareholder concerned that CBA’s involvement in several projects worldwide was inconsistent with its own employment & safety framework and policy. HSBC has also been subject to accusations that its promotion of its green credentials is misleading, due to its funding of fossil fuel projects.  
  • With a rise in the number of websites and forums dedicated to ‘arming’ consumers, and to ‘calling out’ unsubstantiated claims, we expect there will be more cases filed in the future. Implementing and acting on a resolute and substantiated ESG process will offer a defence to greenwashing claims, and companies will quickly realise that this also provides opportunities through the advanced identification of risks.  
  • ASIC Commissioner, Cathie Armour, has put companies on notice that the Commission will be increasing its scrutiny of greenwashing. Ms. Armour said that ASX listed companies found to be greenwashing may face enforcement action. Prospectuses too face unprecedented scrutiny, with ASX hopefuls being told that ESG-related statements must be supported by detailed plans. ASIC’s four core messages to directors on ESG reporting are listed below:


ASIC’s four core messages to directors for 2022 on ESG reporting

Understand and reassess both existing and emerging risks

Consider how comfortable you are with the current level of oversight

Listed companies with material exposure to climate risk should consider reporting under the TCFD recommendations


The key for companies will be the way in which they tie ESG disclosures with their financial reporting, to present investors with a precise account of the opportunities and risks that lie ahead. Although the ASX released the first edition of its ESG reporting guidance back in 2011, there is still no universal reporting standard and a lack of regulatory guidance in Australia. The quality of reporting is currently investor driven, in part due to the real threat of shareholder action. Change is not far off however – the UK, EU, Japan, Singapore and New Zealand are mandating specific disclosures in line with recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), while the US Securities and Exchange Commission has a draft proposal for climate-related disclosures and is considering the framework it will adopt.  

There is not a ‘one size fits all’ approach for Australian businesses. The Australian Prudential Regulation Authority (APRA) last year released its draft guidelines for managing climate risks, which align with the TCFD framework. At the same time, TCFD updated its guidance on metrics, targets and transition plans, identifying investor emphasis on transition planning in 2022 as companies pivot to attract funds. These tools must be at the forefront of board discussions, fostering pro-active planning rather than re-active responses.  

A number of companies in the energy and resources sector are now participating in the Clean Energy Regulator’s ‘Corporate Emissions Reduction Transparency Report’ (CERT Report). The CERT Report publishes information submitted by participants detailing net emissions, pledges and progress towards reducing operational emissions and switching to renewable energy, among other initiatives.  

Businesses that start including ESG reporting and risk analysis, will be better placed to address the risks and benefit from the rewards of a market increasingly focused on sustainability and climate change. Carrying out an ESG analysis does not mean a company needs to become net zero overnight. It is simply a mechanism through which boards and companies can effectively meet their obligations to consumers and regulators and be better prepared for the challenges that climate change will bring to their businesses.