a Companies and Boards Are under Pressure to Act

Companies are under growing pressure from investors (including individual shareholders and institutional investors), investor groups, consumers and the public to disclose and address the risk that may arise out of environmental, social and governance issues and in particular climate change.

Companies are being pursued because of their actions and also inactions on climate change risks including advice that they have given on climate change risks. Companies are being required to provide much greater transparency on the climate change risks and the assessment and management of those risks. Mark McVeigh v Retail Employees Superannuation Pty Limited NSD1333/2018 is an example of such climate activism and focused on the disclosure of climate risk. In this case the parties reached a settlement where the Australian pension fund agreed to incorporate climate change financial risks in its investments and implement a net-zero by 2050 carbon footprint goal.

In Abrahams v Commonwealth Bank of Australia NSD864/2021, two shareholders brought an action against the Commonwealth Bank of Australia (CBA) in the Federal Court seeking access to details of the bank’s alleged involvement in seven oil and gas projects which potentially infringed its Environmental and Social Framework and Environmental and Social Policy. These policies required the bank to carry out an assessment against its project in respect of their environmental social and economic impacts and whether they are consistent with the objectives of the Paris Agreement. On 4 November 2021 orders were made in favour of the Applicant (Abrahams) granting his legal team access to a wide range of documents including board room minutes, on a confidential basis, to assess the representations made by CBA. This matter is ongoing at the time of writing.

b Decision Makers Are Not Exempt from Action

Australia is increasingly seeing cases against state and federal governments (including regulators) to limit the prevalence and intensity of emission intensive projects due to impact on climate change. These cases predominantly rely on environment and planning law, as well as administrative and constitutional law.

In O’Donnell v Commonwealth FCA VID482/2020, a class action is being brought against the Australian government for failing to disclose the impacts of climate change to investors in sovereign bonds. The claim was made under section 12DA of the Australian Securities and Investments Commissions Act 2001 (Cth), which prohibits misleading and deceptive conduct in relation to financial services. This matter is ongoing.

In Bushfire Survivors v NSW EPA [2021] NSWLEC 92, the plaintiff was successful in its action against the NSW Environment Protection Authority (NSW EPA) for failing to perform its duties under the relevant legislative scheme and having adequate policies to deal with the consequences of climate change. The NSW EPA recently received mandamus orders that compelled it to introduce instruments to better protect the state from the effects of climate change.

There is increasing scrutiny by activists on consent authorities and their assessment of the climate change impacts of projects. In Sharma by her litigation representative Sister Marie Brigid Arthur v Minister for the Environment [2021] FCA 560, 8 young people filed a class action in the Federal Court to stop an extension to a coal project that would allow the colliery to extract an additional 33 million tonnes of coal and would in turn result in 100 million tonnes of carbon dioxide being emitted into the air when that coal is burned. The Court found that the Minister has a duty of care to the applicants to exercise her decision-making powers in a manner that does not cause the children harm. Although the Minster’s duty of care was established, the Court refused to grant the injunction sought. The Court’s decision was overturned on appeal.

In Gloucester Resources Limited v. Minister for Planning [2019] NSWLEC 7 the Land and Environment Court confirmed the refusal to grant an authorization to commission a cut coal mine in New South Wales which proposed to produce 21 million tonnes of coal over a period of 16 years. The Court held that the project was not in the public interest and in coming to this conclusion considered several factors including the climate change impacts of the mine’s direct and indirect greenhouse gas emissions.

We have also seen causes of action against decision makers based on human rights law. In Waratah Coal Pty Ltd v Youth Verdict Ltd (Queensland Land Court, MRA050-20 (ML70454) EPA051-20 (EPML00571313)) (Waratah Coal) an environmental group challenged the decision to grant a mining lease and rights to develop a coal mine based on the Human Rights Act 2019 (Qld) (Human Rights Act). The Human Rights Act provides that it is unlawful for a public entity to act or make a decision that is not compatible with human rights or that fails to give proper consideration to human rights. Youth Verdict alleges that the grant of the mining applications will contribute to climate change and thereby infringe a number of rights under the Human Rights Act. The case is on-going at the time of writing but is likely to be important as it may provide the precedent for future human rights-based climate change litigation in Australia.

c Scientific Basis and Communities

There is an increasing reliance by the judiciary on climate change attribution science to inform its decisions on findings of harm suffered by individuals or groups.

In a recent decision, Stockland Development Pty Limited v Sunshine Coast Regional Council & Ors [2022] QPEC 30, Stockland Development Pty Ltd lodged an unsuccessful appeal with Queensland’s Planning and Environment Court after the Sunshine Regional Council refused it consent to build a residential and business precinct on a former cane farm. Like in the Sharma decision, the Court relied on climate attribution science to demonstrate the increasing risk of harm to humans and the climate due to climate change and cautioned Stockland for relying upon high rainfall figures while failing to consider the drier than average periods occasioned by climate change.

There has also been a rise in claims by communities in relation to failures by government against the background of climate attribution science. For example, in Pabai and Guy Paul Kabai v. Commonwealth of Australia VID622/2021 representative proceedings are, at the time of writing, being brought on behalf of all Torres Strait Islander persons from 1985 onwards who have suffered loss or damage as a result of the government’s conduct in failing to mitigate and adapt to climate change and to reduce emissions. The applicants claim that the Commonwealth breached its duty to the Torres Strait Islanders by not setting carbon emissions reduction targets consistent with the best available science. The outcome is likely to be interesting, especially in light of the recent findings of the United Nations Human Rights Committee determined in an action brought by Torres Strait Islander representatives in which it was alleged that Australia failed to take mitigation and adaption measures against the effects of climate change. The Human Rights Committee found that Australia had infringed the rights of the Torres Strait people protected by the International Covenant on Civil and Political Rights.²

d Regulatory Scrutiny and Greenwashing

These cases should also be viewed in light of the position adopted by certain regulators in Australia (including Australian Securities & Investments Commission (ASIC), Australian Prudential Regulation Authority and the Australasian Centre for Corporate Responsibility (ACCR)).

There is increased regulatory scrutiny on corporate disclosures and directors’ duties and with it a shift by industry to report both in terms of mandatory and voluntary reporting frameworks in order to meet their obligations under various company laws. Many companies are adopting the TCFD reporting framework to ensure robust reporting. ASIC released a tranche of material last year which reiterates the need for listed companies to report to comply with their disclosure obligations and to also disclose useful information to investors. The most notable trend, likely because of the pressure on companies to disclose information, is increased regulatory interest in “greenwashing”.

ASIC specifically requires climate-related disclosures to be included in a company’s operating and financial review under section 299A(1)(c) of the Corporations Act 2001 (Cth) (Corporations Act) where climate risk is a material issue that affects the company’s achievement of its financial performance.

Companies need to be careful when making disclosures and commitments under this regime as they can give rise to liability risks where such commitments are considered misleading or deceptive under the Australian Consumer Law; Corporations Act and ASIC Act 2001 (Cth).

The Australian Competition & Consumer Commission has recently noted that the burden of proof is reversed for environmental claims that are forward-looking³ and that business should be particularly careful when making forward-looking statements about their response to climate change as the company making the claim “has to validate it and substantiate it, and if they are not in a position to do so there is a presumption of breach”.

Legal challenges on the basis of greenwashing have already begun. For example, in August 2021, the ACCR sued Australian oil and gas company Santos over its claims that it provides clean energy natural gas and has a plan for net zero emissions by 2040. ACCR raises 2 major claims:

• (i) ACCR alleges that Santos’ claims that natural gas is “clean fuel” that provides “clean energy” misrepresents the true effect of natural gas on the climate, including the large releases of CO2 and methane during extraction and burning.

• (ii) Santos’ claim that it has a clear and credible plan to achieve net zero emissions by 2040 is misleading. ACCR alleges that Santos plans to expand its natural gas operations and that its plan depends on undisclosed assumptions about the effectiveness of carbon capture and storage processes. ACCR alleges that these misrepresentations are in violation of Australian consumer protection and corporations’ laws.

The ACCR has since expanded its case to include alleged greenwashing in Santos’ 2020 investor day briefing and 2021 climate change report and has amended its pleadings to allege that the company’s representations that blue hydrogen is “clean or “zero emissions” constitutes misleading or deceptive.

Energy companies have been the recipients of infringement notices for making claims considered by ASIC to be unsubstantiated. In this regard, an ASX listed company, Black Mountain Energy Ltd, was issued with an infringement notice in the amount of $39,960 after it ASIC alleged that the company made 3 ASX announcements about the creation of a natural gas development with “net zero carbon emissions”.⁴ ASIC said the company had not progressed any specific works to achieve its net zero goal, nor allocated funding for such works. It had not developed a detailed plan to achieve its aim. It had not specifically modelled the likely CO₂ emissions, or the likely cost in offsetting those emissions. Similarly, Tlou Energy Ltd was given a $53,280 infringement notice by ASIC for making announcements it said had no reasonable basis in relation to the company’s carbon neutral energy production and low emission gas-to-power projects.⁵

ASIC has also issued notices to investment companies for greenwashing claims. For example, a superannuation trustee, Diversa Trustees Ltd, was issued with an infringement notice of $13,320 as ASIC believed that it overstated the exclusions (aka investment screens) applying to its Cruelty Free Super (CFS) product, in statements on CFS’s website. CFS did apply investment screens, but they were more specific and limited than its website suggested. The screens did not exclude “polluting and carbon intensive activities” outside the context of destroying “valuable environments”. Nor did the screens exclude “financing or support of activities which cause environmental or social harm” other than predatory lending. The screens did not exclude companies based on a substantive review of corporate governance issues beyond those subject to “controversy”.⁶ ASIC also issued an infringement notice ($39,960) to an investment management company, Vanguard Investments Australia Ltd, for issuing Product Disclosure Statements (PDS) that overstated it claim not to invest in tobacco. The PDS noted an exclusion claiming a particular index fund “excludes securities involved in the production, manufacturing, or significant sales of tobacco”. The index fund only excluded manufacturers/producers of cigarettes and other tobacco products, but it did not exclude companies involved in the sale of tobacco products.⁷

a Publicly Traded Companies

Publicly Traded Companies will have to provide, at least annually, to the Financial Market Commission and the general public, information referring to the environmental and climate change impacts of their activities, including the identification, evaluation and management of the risks related to these factors, together with the corresponding metrics.¹⁰

The investment policies of investment funds must mention as a minimum, the way in which their investment strategies, corporate governance, risk management, and investment and diversification decisions incorporate environmental factors, with a specific reference to environmental impacts and climate change.¹¹

b Pension Fund Management Companies

Pension Fund Management companies must now include in the investment policies of each type of pension funds they manage, as a minimum, the way in which their investment strategies, corporate governance, risk management, and investment and diversification decisions incorporate environmental factors, with a specific reference to environmental impacts and climate change.¹²

Nevertheless, such reporting requirements are still to be further refined by the Chilean Financial Market Commission, which will issue a General Instruction (‘Norma de Carácter General’) detailing the frequency in which investment policies must be reviewed and updated.

a Publicly Traded Companies

If publicly traded companies fail to provide the required information in time, the Financial Market Commission may apply actions ranging from a reprimand to a revocation of a licence to operate.¹⁵ A fine can also be issued of up to 15,000 UF (382,000 GBP currently, approx.) or 30% of the value of the operations carried out in breach of the Law or double of the benefit obtained as a result of the irregular operation. A reprimand or fine may be applied to either the company itself, or its directors, managers, employees, external auditors or liquidators.

b Investment Funds

Lack of compliance with their investment policies may lead the Chilean Financial Market Commission to suspend the offering or commercialization of the fund until any non-compliance is corrected. If the lack of compliance persists, the Commission may order the liquidation of the relevant fund.¹⁶

c Pension Fund Management Companies

Lack of compliance with their investment policies can result in the application of sanctions ranging from reprimand to revocation of license to operate.¹⁷ A fine can also be issued of up to 15,000 UF (382,000 GBP currently, approx.) or 30% of the value of the operations carried out in breach of the Law.

2.3.1.1.1 What Human Rights, Climate or Nature-Related Corporate Due Diligence and Reporting Requirements Exist in Mainland China?

The Announcement on Enterprise Environmental Information Disclosure, issued by the former State Environmental Protection Administration in 2003, may be regarded as China’s first piece of legislation requiring corporates to disclose environmental information. A number of pieces of legislation addressing corporates’ environmental information disclosure were issued thereafter.²²

More recently, the Reform Plan for the Law-based Disclosure Regime of Environmental Information (the “Reform Plan”) was issued in May 2021 and set out the general principles and goals for the disclosure of environment-related information with a macro perspective.²³

On 8 February 2022, the Administrative Measures for Enterprise Environmental Information Disclosure (the “New Measures” – 《企业环境信息依法披露管理办法》), promulgated by the PRC Ministry of Ecology and Environment, came into effect.²⁴

Taken together, the New Measures and the Reform Plan unify various legislation previously issued for the purposes of regulating the disclosure of corporate environmental information in China. They set out (among others) the scope and timeframe for corporates to disclose environment-related information and the legal consequences if any corporate fails to do so.²⁵

2.3.1.1.2 What Is the Impact of Corporate Due Diligence Requirements on Business Operations, Corporate Governance, Finance and Relationships with Supply or Value Chain Partners?

The New Measures imposes disclosure obligations upon entities with large environmental impact and high public concern. According to Articles 7–10 of the New Measures,²⁶ entities subject to compulsory disclosure of environment information include (among others):

• (i) key pollutant dischargers;

• (ii) enterprises that implement mandatory cleaner production audits;

• (iii) listed companies and subsidiaries within the consolidated financial statements; and

• (iv) enterprises that utilise public debt financing instruments and meet the prescribed circumstances.

The time limit to satisfy corporates’ disclosure requirements under the New Measures is tight. For example, pursuant to Article 17 of the New Measures, any temporary disclosure of environmental information must be submitted within five working days from the date of receipt of relevant legal documents.²⁷

The New Measures also clarifies the scope of environmental information subject to disclosure. This includes, for example, corporates’ environmental management information, and carbon emission information. The content and scope of disclosure obligations depends on the type of the entity concerned (New Measures, Articles 11–16).²⁸

The measures are expected to enhance allocation of environmental resources, promote corporates’ research and development on usage of clean energy, and supervise corporates’ implementation of environmental protection regime. They are also expected to help consolidate social consensus and encourage corporates to collaborate with others in the supply chain which have complied with environmental laws in China.²⁹

2.3.1.1.3 What Remedies Exist for Breaches of Corporate Due Diligence & Reporting Requirements?

The New Measures impose higher fines on more types of acts in breach of corporates’ disclosure requirements than applied before their introduction.

According to the New Measures, following types of illegal acts, are subject to administrative penalties, such as rectification by order, public warning, and fines. They are:

• (i) failure to disclose environmental information, or when the disclosed information is later found to be untrue or inaccurate;

• (ii) disclosure of environmental information without meeting the requirements on form and content prescribed by the environment protection authorities;

• (iii) failure to disclose environmental information within the time limit; and

• (iv) failure to upload environmental information to the corporate environmental information disclosure system according to the law.³⁰

If a corporate commits any illegal acts as set out above, the current fine for item (i) above ranges from RMB 10,000 to RMB 100,000; and for items (ii) to (iv) above, it can be up to RMB 50,000.³¹

According to a press report, in the fourth week of May 2022, 45 affiliated companies (related to 39 listed companies) in China received administrative penalty decisions relating to ecology and environmental issues, decisions ordering correction of illegal environmental acts, or untrustworthy scoring decisions on environmental impact assessment.³²

2.3.1.2.1 What Are the Recent Trends in the Courts?

Chinese courts are dealing with an increasing number of environmental disputes. There was a total number of 11,300 cases involving over 11.7 billion yuan ($1.64 billion) of compensation for ecological and environmental damage in 2021.³³

According to a press report dated 20 September 2022, over the past 10 years, a total of 1.965 million of environmental resource related cases were heard before the Chinese courts, including (among others) 244,000 criminal cases, 1.378 million civil cases, and 343,000 administrative cases.³⁴

Notably, the Supreme People’s Court of China has set up trial courts specifically dealing with environmental resource disputes. 2,426 of specialised institutions or organizations have also been established across China in resolving climate-related disputes.³⁵

2.3.1.2.2 What Are the Outcomes of Climate-Related Litigation? What Is the Court’s/Judge’s Approach?

Chinese courts have been treating climate-related litigation seriously. Severe punishment has been imposed upon crimes such as illegal discharge of wastewater, illegal dumping, and disposal of hazardous waste.³⁶

Special reviews have been conducted on mineral mining contracts in ecologically protected areas. In turn, companies spending a considerable time and cost on mining exploration may not be granted a licence to actually mine the field, if the State decides to maintain the field as an ecological protection area.

Notably, on 13 January 2022, the Supreme People’s Court of China issued a judicial interpretation which clarifies the application of punitive damages in ecological and environmental infringement disputes (the “Judicial Interpretation”). According to the Judicial Interpretation, malicious wrongdoers in breach of environmental laws in China may be ordered to pay an amount of compensation exceeding the amount of actual loss.³⁷

2.3.2.1.1 What Human Rights, Climate or Nature-Related Corporate Due Diligence and Reporting Requirements Exist in Hong Kong?

There is no single regulation governing corporations’ due diligence or reporting requirements in Hong Kong.

The Environmental Impact Assessment Ordinance (the “EIAO”), which came into force 24 years ago, imposed a mandatory procedure for the assessment of environmental impacts and risks caused by a range of designated development projects, such as transport infrastructure, reclamation of land and industrial facilities. However, while the EIAO requires that consideration be given to the environmental consequences of a specific project, it does not address climate change, energy efficiency, human rights, noise or light pollution.

Instead, individual regulators impose their own requirements. In order to co-ordinate the management of climate and environmental risks to the financial sector, the Green and Sustainable Finance Cross-Agency Steering Group (the “Steering Group”) was established in May 2020. The Steering Group is co-chaired by the Hong Kong Monetary Authority (“HKMA”) and the Securities and Futures Commission (“SFC”), with membership comprising the Environment Bureau, the Financial Services and the Treasury Bureau, the Hong Kong Stock Exchanges and Clearing Limited (“HKEX”), the Insurance Authority and the Mandatory Provident Fund Schemes Authority. This has markedly increased the consistency of approaches between regulators.

By way of example only, the Hong Kong Stock Exchange’s requirements are set out in Appendix 27 to the Main Board Listing Rules (the “Listing Rules”) and Appendix 19 to the GEM Listing Rules.³⁹ These provide an “Environmental, Social and Governance Reporting Guide”, which includes mandatory disclosure requirements in Part B, and “comply or explain” requirements in Part C (i.e. issuers are required to disclose, or otherwise explain why disclosure is not required).

In December 2021, the Hong Kong Monetary Authority (“HKMA”) introduced a new Climate Risk Management module, entitled “GS-1”, in its Supervisory Policy Manual for authorised financial institutions. Compliance is required by 30 December 2022. In conjunction with GS-1, the HKMA published a circular setting out “Sound practices supporting the transition to carbon neutrality”.

GS-1 provides guidance and requirements relating to governance, strategic planning, climate risk management and disclosures. It also clarifies that climate-related risks are covered by the Seventh Schedule to the existing Banking Ordinance (Cap. 155 of the laws of Hong Kong), i.e. Authorised Institutions must (i) maintain adequate accounting systems and systems of control, and (ii) conduct their business with integrity, prudence and professional competence and in a manner which is not detrimental to the interests of depositors or potential depositors, and these aspects do encompass climate-related risks.⁴⁰

Similarly, on 20 August 2021 the SFC concluded a consultation on the Management and Disclosure of Climate-related risks by Fund Managers and amended the Fund Manager Code of Conduct to require Fund Managers⁴¹ managing collective investment schemes to take climate-related risks into consideration in their investment and risk management processes and make appropriate disclosures.⁴²

2.3.2.1.2 What Is the Impact of Corporate Due Diligence Requirements on Business Operations, Corporate Governance, Finance and Relationships with Supply or Value Chain Partners?

Given the nature of the regulatory environment in Hong Kong, specific advice should be sought in each individual case. However, by way of example for listed companies, the Listing Rules require:

• (i) Issuers to publish ESG reports on an annual basis; and

• (ii) the Directors’ Report for each financial year to include, within its business review, a discussion of the Issuer’s environmental policies, its performance against those policies, compliance with relevant laws and regulations and an account of its relationships with employees, customers and suppliers.

In addition, the mandatory disclosure requirements include disclosure of:

• (i) the board’s oversight of ESG issues, management approach and strategy, including risk evaluation processes, and conclusions from the Board about progress made (if any);

• (ii) the processes in place to identify, and criteria for the selection of, material ESG factors;

• (iii) information on the standards, methodologies, assumptions and/or calculation tools used for reporting emissions and energy consumption (if applicable);

• (iv) any changes in the KPIs or assessment methodologies used; and

• (v) the scope of the ESG report, and process used to determine that scope.

The “comply or explain provisions” require further evaluation and reporting on the policies in place, statistics and progress of key performance indicator’s (“KPI’s”) for the following categories:

• (i) Environmental, including emissions, generation of waste, efficient use of resources (energy, water and packaging), and other impacts on the environment and climate change;

• (ii) Social, including as employment (compensation, dismissal, working hours, rest periods, equal opportunities, diversity, anti-discrimination and specific KPIs for the workforce and turnover rate in terms of gender, age and geographical region), health and safety measures (fatalities, injuries and measures adopted, implemented and monitored), development and training activities, and measures in place to avoid child labour;

• (iii) Operating practices, including environmental and social risks arising out of the supply chain management, product responsibility (healthy and safety, advertising, labelling and privacy matters) and anti-corruption cases, preventative measures and training; and

• (iv) Community engagement.

Extensive internal due diligence will therefore be required in order to allow listed companies to identify risks, set KPIs and report on compliance. In order to assist issuers to comply with the above obligations, the HKEX published practical “Guidance on Climate Disclosures”, dated November 2021.

2.3.2.1.3 How Does Corporate Due Diligence Ensure Accountability for Climate or Social Harms Throughout the Supply Chain?

As the focus is presently on ensuring corporate governance procedures and policies are in place, at present it is difficult to say that accountability is ensured throughout the supply chain. Further, compliance will ultimately be determined/investigated by each regulator independently and there is little data available to determine the resources available to them or the efficacy of such processes.

For example, while the Listing Rules require listed companies to have targets (KPIs) in place in order to allow ESG policies and management systems to be evaluated, such targets are set by the issuer themselves and are subject to materiality thresholds determined by the board, i.e. the board determines which ESG issues are sufficiently important to investors and stakeholders to warrant reporting, and the level of their associated KPIs.

Similarly, while Fund Managers of large funds with more than HK$8 billion under management are required to make reasonable efforts to disclose available Scope 1 and Scope 2 GHG emissions data, the SFC has recognised that this is a developing area and there are reliability issues around calculating GHG emissions. The SFC therefore applies a “reasonable and practical approach”, allowing Fund Managers to state their methodologies, limitations and any assumptions.

2.3.2.1.4 What Remedies Exist for Breaches of Corporate Due Diligence & Reporting Requirements?

Each of the respective regulators may take enforcement action to ensure compliance with their rules. The consequences can be severe. By way of example, if a breach of the Listing Rules is identified, the Listing Committee of the HKEX may issue public or private criticism or censure, state publicly that in its opinion the involvement of an individual as a director or in senior management of the issuer may cause prejudice to the interests of investors, suspend trading or cancel the listing of the issuer’s securities, ban its professional advisors or order remedial action be taken within a specified period. In each such case the party who is subject to such proceedings has the right to a hearing.

2.3.2.2.1 What Are the Recent Trends in the Courts?

Climate-related litigation of the type contemplated by this note is in its infancy in Hong Kong and there are yet to be any notable trends or developments in the courts. The Environmental Protection Department (the “EPD”) is, however, active in enforcing existing environmental legislation such as the Air Pollution Control Ordinance (Cap. 311 of the laws of Hong Kong), the Waste Disposal Ordinance (Cap. 354 of the laws of Hong Kong), the Water Pollution Control Ordinance (Cap. 358 of the laws of Hong Kong) and the Noise Control Ordinance (Cap. 400 of the laws of Hong Kong) amongst others. While the number of prosecutions brought by the EPD has remained reasonably consistent over recent years, the level of fines levied has consistently reduced, dropping from over HK$6 million in 2017 to under HK$2.5 million in 2021. Imprisonment and community service is also ordered for serious offences.

a Duty of Vigilance Act dated 27 March 2017 (Loi de Vigilance)⁴⁵

The provisions of the Duty of Vigilance Act are included in articles L. 225-102-4 and L. 225-102-5 of the French Commercial Code (Commercial Code).

The Duty of Vigilance Act requires all large French companies with over 5,000 employees in France or over 10,000 worldwide to undertake due diligence with regard to: (i) their activities; (ii) the activities of their subsidiaries and the companies under their control; and (iii) the activities of all their subcontractors and suppliers with which they have an established commercial relationship, provided these activities are related to their commercial relationship.⁴⁶

The Duty of Vigilance Act has a two-fold structure by:

• (i) enshrining the duty of vigilance which seeks to prevent (risks of) violations of fundamental rights to health, personal safety and the environment, resulting from the companies’ activities; and

• (ii) providing a redress and liability mechanism applicable to companies which breach their duty of vigilance.⁴⁷

According to Article L. 225-102-4, I, paragraph 3 of the Commercial Code, the duty of vigilance covers serious violations of human rights and fundamental freedoms, health and safety, and the environment. The Duty of Vigilance Act requires companies to only prevent and/or mitigate the “severe violations” caused to the previously mentioned human rights, and does not require companies to prevent and/or mitigate all potential impacts resulting from their activities.⁴⁸

The Duty of Vigilance Act requires companies to take “reasonable vigilance measures”.⁴⁹ The standard applicable to the criteria of the “reasonable vigilance measures” varies depending on the seriousness of the risk, its nature, the maturity level of the companies and the tools at their disposal.

The Duty of Vigilance Act requires companies to develop a vigilance plan in consultation with stakeholders and trade unions. The vigilance plan must (i) identify, analyse and map the risks arising from the company’s activity which are likely to affect human rights and the environment; and (ii) include appropriate measures to mitigate these risks.⁵⁰

More specifically, the plan should include the following measures:

• (i) risk mapping to identify, analyse and prioritise risks;

• (ii) procedures to regularly assess the situation of the company’s subsidiaries, subcontractors or suppliers with whom there is an established commercial relationship, pursuant to the risk mapping measure provided in (i);

• (iii) appropriate actions to mitigate risks or prevent serious harms: this is the core of the vigilance plan;

• (iv) a mechanism to alert and collect reports on the existence or occurrence of risks. This mechanism is established with the trade unions of the company. It must assure protection to whistle-blowers (e.g. anonymity and non-reprisal) and must be accessible to people outside the company who could be affected by the company’s activities, including people with knowledge of risks and/or people who are representing the interests of the people affected and/or people who are representing environmental interests; and

• (v) a system to monitor the measures implemented and evaluate their effectiveness.⁵¹

The vigilance plan must be published yearly and be publicly available to enable stakeholders to participate in the development of the plan, to review its implementation and to be informed of the risks related to a company’s activities.⁵²

If a company that the Duty of Vigilance Act applies to, fails to publish or implement a vigilance plan, the following consequences may arise:⁵³

• (i) the company may be subject to court ordered injunctions or periodic penalty payments;⁵⁴ and

• (ii) the parent company may be held liable if damages occur as a result of their failure to properly implement an adequate plan, provided a (i) fault, (ii) damage and (iii) causal link between (i) and (ii) is proven.⁵⁵

The victim of the wrongful act, who has an interest in bringing a legal action, may do so. The legal action cannot be brought by a third party acting on behalf of the victim.⁵⁶ An association can support or organise the victim’s legal action, it cannot however initiate or join the legal action. The mechanism excludes class actions.

The Paris judicial court (tribunal judiciaire de Paris) has jurisdiction to hear cases brought on the basis of the Duty of Vigilance Act. The court may order the publication, dissemination, posting of its decision or an extract of it.⁵⁷

b The Non-Financial Reporting Directive 2014/95/EU of 22 October 2014 (NFRD)

The NFRD has been transposed in France by Order No. 2017-1180 of 19 July 2017. This Order requires certain large companies to publish a non-financial performance statement in their annual report, which contains, in particular, information on the way they take into account the social and environmental consequences of their activities.

This reporting obligation will be extended to all listed companies and major unlisted companies after 2024, when the NFRD should be replaced by the Corporate Sustainability Reporting Directive.⁵⁸

c The PACTE Law No. 2019-486 of 22 May 2019

The PACTE Law requires with regard to corporate due diligence that all companies to be managed in such a way that the social and environmental issues related to their activities are taken into account.⁵⁹ At the date of writing, no express sanctions are provided.

d Law No. 2021-1104 of 22 August 2021 on the fight on climate change and resilience (Climate and Resilience Law)

The Climate and Resilience Law provides, inter alia, for a special duty of care regarding imported deforestation, which will enter into force on 1 January 2024.⁶⁰

It will include two paragraphs under article L. 225-102-4, I of the Commercial Code, which provide that companies producing or marketing products from agriculture or forestry, the vigilance plan required under the Duty of Vigilance Act must include reasonable measures to identify risks and prevent deforestation associated with the production and transport of imported goods and services to France.⁶¹

Further, the Climate and Resilience Law increases the consultative powers of social and economic committees in companies. Indeed, in companies with at least 50 employees, the social and economic committees must be informed of and take into account the environmental consequences of a company’s decision on the management, economic and financial development, the organisation of work, vocational training and production techniques.⁶²

e Proposed EU Directive on Corporate Sustainability Due Diligence

In February 2022, the European Commission adopted a proposal for a Directive on Corporate Sustainability Due Diligence (Proposed Directive).⁶³ The Proposed Directive sets out a corporate due diligence duty to ‘identify, prevent, bring to an end, mitigate and account for adverse human rights and environmental impacts in the company’s own operations, its subsidiaries and their value chains’.⁶⁴ This duty is inspired by the 2017 Duty of Vigilance Act discussed above. The Proposed Directive broadens the scope of applicability of the duty of vigilance. Indeed, according to the Proposed Directive, the duty of corporate due diligence will apply to the following groups of companies:

• (i) Large EU limited liability companies:

  1. Group 1: EU companies employing more than 500 people and with a net turnover of more than €150 million worldwide;

  2. Group 2: EU companies operating in defined high-impact sectors which do not meet the above thresholds but employ more than 250 people and have a net turnover of €40 million or more worldwide

• (ii) Non-EU companies active in the EU with turnovers generated in the EU that are aligned with the turnover threshold of either Group 1 or Group 2 above.

The Proposed Directive will require companies that fall within this scope to (i) integrate due diligence into their policies; (ii) identify potential or actual adverse environmental and human rights impacts; (iii) prevent or mitigate the potential impacts identified, and/or bring to an end or minimise the actual impacts identified; (iv) establish and maintain a complaints procedure; (v) monitor the effectiveness of their due diligence policy; and (vi) measure and publicly communicate on due diligence.⁶⁵

The Proposed Directive also provides for the creation of independent national authorities which would verify companies’ compliance with their duty of corporate due diligence. These authorities should have adequate resources, infrastructure, expertise and facilities. They would be granted large powers of investigation and sanction.

Further, Member States would be free to determine the applicable sanctions in case of a company’s failure to comply with the requirements of the Directive. Examples provided in the Proposed Directive include fines calculated on the basis of the company’s turnover, exclusion from public contracts or exclusion from state aid rights.

At the date of writing, the Directive remains in draft.

f Corporate Sustainability Reporting Directive (CSRD)

In parallel with the Proposed Directive discussed above, the European Commission developed the CSRD to replace the NFRD. The CSRD was recently adopted by the European Parliament in November 2022 and will be phased in from 1 January 2024.⁶⁶

The CSRD has amended and updated the NFRD by expanding the scope of companies which are covered by the reporting requirements and the information to be reported by these companies. The CSRD will apply to the following types of companies:

• (i) Large Companies that are incorporated in the EU, including EU-incorporated subsidiaries of non-EU companies. Companies will be considered a ‘Large Companies’ if they meet any two of the following criteria:

  1. A net turnover of over €40 million; and/or

  2. More than 250 employees; and/or

  3. Balance sheet total assets of over €20 million.

• (ii) Parent companies that are incorporated in the EU, if the corporate group collectively meets the ‘Large Company’ requirement set out previously.

• (iii) Companies not incorporated in the EU if they meet the following criteria:

  1. The non-EU incorporated business has a net turnover in the EU of over €150 million per annum for two consecutive financial years; and

  2. The non-EU incorporated business has either (i) a branch in the EU generating a net turnover of at least €40 million; or (ii) a subsidiary in the EU that meets at least two of the ‘Large Company’ requirements.

• (iii) Companies listed on an EU-regulated market.⁶⁷

• (iv) Captive insurance and reinsurance undertakings, as well as small and non-complex financial institutions.⁶⁸

The CSRD requires companies to report simultaneously on sustainability matters that are (i) financially material in influencing business value and (ii) material to the market, the environment, and people. In other words, the companies must detail both their impact on the environment and the climate-related risks they face, i.e. how sustainability matters may impact their position, performance and development. This is known as the ‘double materiality’ principle.⁶⁹

Companies subject to the CSRD will have to report according to the European Sustainability Reporting Standards (ESRS) once these are finalised. Further, these companies will have to have an audit of the sustainability information they report.⁷⁰

a On the Basis of the Duty of Vigilance Act

To date, the first court decisions rendered on the basis of the Duty of Vigilance Act have only dealt with jurisdictional issues. Several notices based on Article L. 225-102-4, II of the Commercial Code have been issued. Indeed, between 19 June and 1 October 2019, five notices were issued to the following companies registered in France: Total, Teleperformance, EDF and XPO Logistics Europe. Two of these notices led to referral to the courts:

• (i) On 23 October 2019, a case against TotalEnergies (TTEF.PA) was brought by six French and Ugandan activist groups at the Tribunal de Grande Instance de Nanterre (now the Tribunal Judiciaire – Judicial Court). They requested that the Court ordered Total to conform with the Duty of Vigilance Act and include the environmental and human rights implications of their mining project in Uganda in their vigilance plan. The court declined jurisdiction on 30 January 2020, stating that the commercial court had jurisdiction to hear this case.⁷¹

• (ii) On 28 January 2020, a coalition of NGOs filed a complaint asking a Nanterre court to order Total to recognize the risks generated by its business activities and make it conduct consistent with the goal of limiting global warming to 1.5°C. A judge ruled in February 2021 that a judicial tribunal should have jurisdiction and hear the case, rejecting Total’s claims that the court did not have judication.⁷²

In 2022, three companies were issued with a notice for their activities in Russia:

• (i) Non-Governmental Organizations (NGOs) Greenpeace France and Friends of the Earth France issued notices to Total in March 2022. The NGOs allege that, by maintaining (i) investments in various oil and gas projects in Russia and (ii) business relationships with Novatek, a Russian gas company, Total is contributing to finance the war and related serious human rights violations.⁷³

• (ii) NGO Greenpeace France issued a notice to Orano and EDF on 22 March 2022. The NGO alleges that the companies’ business relations with Rosatom, a Russian state-owned nuclear company, contributes to human rights violations committed by Russia.⁷⁴

On 2 March 2022, three environmental associations filed a deceptive trade practices’ lawsuit against Total before the Paris Judicial Court, alleging that the company’s advertisements promoted false information to consumers about its carbon neutrality.⁷⁵

On 26 October 2022, three NGOs issued a notice to BNP Paribas under Article L. 225-102-4, II of the Commercial Code. The NGOs demand an exhaustive carbon assessment of the bank, including on the emissions induced by its finance of fossil fuel projects.⁷⁶ On 23 February 2023, the NGOs started legal proceedings against BNP Paribas before the Paris Judicial Court. They claimed that BNP Paribas breached its duty of vigilance by failing to provide a plan which identifies, mitigates and prevents environmental and human rights risks arising from its activities, and demanded that BNP Paribas stop financing the fossil fuel industry and adopt an oil and gas exit plan.

On 24 January 2023, in response to the NGOs’ claims, BNP Paribas announced that it has (i) stopped oil project financing since 2016; (ii) committed to reduce outstanding financing for oil extraction and production by 25% by 2025; (iii) committed to reduce outstanding financing for oil extraction and production to less than 1 billion euros by 2030, which represents a decrease of more than 80% compared to the current balance of 5 billion euros, and (iv) committed to reduce outstanding gas extraction and production by more than 30% by 2030.⁷⁷ The NGOs did not consider BNP Paribas’ commitments to be sufficient to meet the 1.5°C target under the Paris Agreement. Therefore, in a press release of 23 February 2023, the NGOs dismissed BNP Paribas’ response and communicated the requests formulated in their legal action brought against BNP Paribas. They requested:

• (i) a clear and regularly updated plan which presents, analyses and prioritises the serious risks which might result from BNP Paribas’ activities in the fossil fuel sector;

• (ii) a quantification of the impact of its activities on the risks identified, including an exhaustive account of the greenhouse gas emissions;

• (iii) appropriate measures to prevent serious harm and to mitigate risks, in line with BNP Paribas’ commitment to comply with the Paris Agreement objective to limit global warming to a 1.5°C increase and to reach carbon neutrality by 2050;

• (iv) a mechanism to regularly monitor the measures implemented on the basis of the plan and assess the effectiveness of these measures; and

• (v) the establishment of an appropriate alert and reporting mechanism.⁷⁸

Other big companies have also recently been subject of formal notices made on the basis of the Duty of Vigilance Act, including Danone, Casino and Suez.⁷⁹

Further, even more recently, the first decision in application of the Duty of Vigilance Act was rendered by the Paris Judicial Court ruling in interim proceedings.⁸⁰ In this case, three associations brought a claim against Total Energies, requesting the court to order Total Energies to establish and implement a due diligence plan by suspending its work on the Tilenga and Eacop projects, which are oil exploration projects in Uganda. The court rejected the associations’ claims. It first noted that, in the context of interim proceedings in application of the Duty of Vigilance Act, the court has jurisdiction to issue an injunction if a company has either completely failed to establish a due diligence plan, or if the plan is overly brief and limited, or if the plan is manifestly illegal. However, the court cannot assess the reasonableness of the plan if such assessment requires an in-depth examination of the facts of the case, as such an assessment would fall within the jurisdiction of the court ruling on the merits.

The court then held that the associations had failed to give prior notice to the company, as they are required to under the Duty of Vigilance Act. They had given prior notice to Total Energies in 2019 regarding a plan established by Total Energies at the time. However, their current legal action was based on a different plan published by Total Energies in 2021 and regarding which the associations had not given prior notice. Therefore, their current legal action was based on different grounds than those raised in its 2019 notice. The court also held that Total Energies’ plan is sufficiently detailed. Total Energies had submitted several exhibits in the proceedings concerning specific operations of significant complexity, which are the subject of the vigilance plan at issue.

In the absence of a precise standard of vigilance set by the law, the claims made against Total Energies exceeded the jurisdiction of the Court ruling in the context of interim proceedings; and the plan was held to not be manifestly unlawful. Consequently, for these reasons, the court held that the associations’ claims were inadmissible and dismissed them.

All the above targeted companies had published a vigilance plan by 2019. These plans were all deemed unsatisfactory by the claimants in the cases and the stakeholders were not sufficiently consulted before establishing these plans, as required by the Duty of Vigilance Act.⁸¹ All of these notices illustrate the diversity of (i) the claimants, which include associations, trade unions and local authorities; and (ii) the allegations, which include violations of human rights, rights of local communities and indigenous peoples, workers’ rights, the environment and biodiversity and inaction on climate change.

b Other Legal Bases

The Conseil d’État, which is the highest administrative jurisdiction in France, has rendered two important judgments.

The first was in the case Commune de Grande Synthe, on 19 November 2020 and 1 July 2021 (Nos. 427301).⁸² The action was brought by the commune Grande Synthe and certain associations against the French government’s refusal to take additional measures to meet the target of reducing greenhouse gas emissions (GHG) by 40% by 2030 set out in the Paris Agreement.

In its first decision of 19 November 2020, the Conseil d’État considered that it did not have at its disposal sufficient elements to assess the compatibility between the GHG reduction target and the government’s refusal to take any additional measures. The Conseil d’État therefore ordered a three-month additional investigation.

In its second decision of 1 July 2021, the Conseil d’État enjoined the government to take all necessary measures to enable France to comply with the GHG emission target to which it had committed in the Paris Agreement. Three key points can be observed from the second decision:

• (i) the Conseil d’État stated that the international law instruments on climate change⁸³ must be considered as genuine commitments entered into by France;

• (ii) the Conseil d’État recognised the binding nature of the instruments on carbon targets and carbon budgets; and

• (iii) the Conseil d’État ruled on France’s failure to comply with the GHG emission targets for a past period, i.e. from 2015 to 2018.

The second was in the case L’affaire du siècle, on 14 October 2021 (No. 441415).⁸⁴ The action was brought to seek compensation for the French government’s failure to act in response to the environmental damage caused by an increase of GHG emissions from 2015 to 2018. Among other things, the applicant organisations relied on Articles 2 and 8 of the European Convention on Human Rights (ECHR)⁸⁵ and the French Charter of the Environment,⁸⁶ as well as the “right to a preserved climate system”.

The Conseil d’État found that there were insufficient actions from the State during that period and ruled that the State is responsible for a failure to act. As a result of such failure, the State failed to meet the targets of the first carbon budget (2015–2018), which led to an aggravation of the environmental damage. As a result, the Conseil d’État ordered the State to pay a symbolic amount of one euro each to the four NGOs who brought the action.

a Business Governance Guidelines

The King Code is a set of guidelines for business governance, which is currently on its fourth iteration, being King IV Report on Corporate Governance for South Africa (“King IV”), and contains a set of principles and leading practices which are recommended for companies to adopt. Whilst the King Code is generally voluntary, the application of its principles, as well as certain practices, are mandatory for all companies listed on the JSE in terms of the JSE Limited Listing Requirements. One of the underpinning philosophies of King IV is Corporate Citizenship, which confers rights, obligations, and responsibilities on an organisation towards the natural environment on which a society depends. King IV acknowledges that the success of any organisation relies on three sub-systems, one of them being the natural environment. It emphasises the concept of sustainable development calling it an ethical imperative which seeks to create value over time by responding and interacting with the challenges presented. It further advises that governing bodies should regularly monitor the activities and their effects. Part of the responsibilities mentioned include those in respect of pollution and waste disposal and protection of biodiversity.

In July 2021, the King Committee published a guidance note titled the “Responsibilities Of Governing Bodies In Responding To Climate Change”, which highlights the real impacts of climate change on sustainability and the consequences organisations may face for non-action. Ultimately, the guidelines states that organisations are exposed to a variety of risks when it comes to climate change but understanding what these risks are and having internal and external mechanisms to mitigate these risks will determine how well organisations respond to these risks. Part of these mitigation includes transparency in quantitative and qualitative manner. The guideline provides a list of seven considerations for governing bodies in the context of climate change while embodying the principles in King IV:

• (i) Leadership;

• (ii) Impact on organisation strategy, risks and opportunities;

• (iii) Management and accountability systems;

• (iv) Internalisation of externalities;

• (v) Reporting disclosure considerations;

• (vi) Assurance on disclosures; and

• (vii) Legal considerations.

Another draft guidance paper which is currently in development is the draft document outlining Principles and Guidance for Minimum Disclosure of Climate Related Risks and Opportunities, which is expected to be released shortly. It is being prepared by the Disclosure Working Group of the Climate Risk Forum, and aims to guide reporters and create a platform for building a common understanding between regulators and industry on disclosure in the financial sector.

While the JSE climate change disclosure guidance for listed companies and the King IV advise boards of directors to report on sustainability issues, “environmental reporting” is not currently a corporate compliance and governance obligation in South Africa, and reporting on ESG is currently optional. Large-scale emitters, however, frequently demonstrate their willingness to share such information to gain finance because it is a requirement that financial lenders are placing on private corporations more frequently.

Though corporate due diligence is still in a development stage, various legislation in South Africa may be utilised to hold corporations accountable. One example is the Carbon Tax Act, which acknowledges that greenhouse gas emissions and climate change are pertinent issues that must be addressed, and utilises a market based instrument to do so by imposing a tax on greenhouse gas emissions, while additionally allowing for incentives for the efficient use of energy. The Carbon Tax Act divides emissions into three schedules, being fuel combustion emissions, fugitive emissions and industrial process and product use emissions.

Another piece of draft legislation which addresses climate change is the Climate Change Bill, which is aims to enable the development of an effective climate change response and a long-term, just transition to a low-carbon and climate-resilient economy and society for South Africa. It will be the first piece of legal framework that responds to the effects of climate change, and focuses on a number of aspects, including requiring organs of state to amend and align their policies to the objects of the Bill by adopting a coordinated response to climate change, and creating governmental forums in which spheres of government will need to report their responses to climate change after having carried out needs and response assessments. The Bill requires that the Minister must determine a national greenhouse gas emissions trajectory and sectoral emissions targets, as well as publishing a list of greenhouse gasses which cause or are likely to cause or exacerbate climate change, and a list of activities which emit one or more of the listed gases. Carbon budgets are then required to be allocated to anyone carrying out such a listed activity, which carbon budget refers to the amount of greenhouse gas emissions that an entity is permitted to emit over at least three successive five-year periods. The Minister must review carbon budgets at the end of the five-year commitment period, or upon request by an entity subject to a carbon budget. If an entity has been allocated a carbon budget, it must prepare a greenhouse gas mitigation plan which outlines the mitigation measures that the entity proposes to implement in order to remain within its allocated carbon budget. The failure to prepare and submit a greenhouse gas mitigation plan to the Minister constitutes an offence in terms of the Bill that being a maximum fine of R5 million, imprisonment for a maximum period of five years or both such fine and such imprisonment.

b Greenwashing and Director’s and Officers’ Liability

Whilst ESG integration is the practice of incorporating non-financial factors into business processes, greenwashing is the art of pretending to do so. South Africa does not currently have any laws which specifically deal with greenwashing, but does have various voluntary and legislative tools available to tackle greenwashing. In light of the global focus by regulators on preventing and minimising greenwashing, and the recent focus on ESG reporting, it is anticipated that greenwashing-specific legislation may be introduced in due course.

For the past 20 years, directors’ and officers’ liability has largely been driven by governance issues, but the next wave of liability is expected to be led by environmental and social impacts as directors and officers are held to account for their organisations’ environmental and societal impacts. ESG issues are a key source of emerging liability for directors and officers. As businesses evolve and expand, investors, employees and consumers will expect companies to actively address ESG considerations and a range of ESG-related disclosure requirements and regulation. Companies that fail to address these issues open themselves up to the risk of litigation and/or regulatory investigations and actions. Currently, ESG litigation has been largely climate-related, although many other environmental and social issues could drive future litigation and regulation, including environmental disasters, deforestation, water and biodiversity degradation, as well as equal pay or human rights abuses within supply chains. Climate related claims can come in various forms – companies can face action for their non-disclosure, for their direct contribution to climate change, or their failure to mitigate and prepare for climate change associated risk.

There have not yet been any instances of directors in South Africa being found guilty of fiduciary violations or failings connected to climate change. However, the potential for such liability is present in the existing legislative framework, being the Companies Act of 2008. Fiduciary obligations include a duty to act with reasonable care, skill, and diligence as well as the obligations of good faith, honesty, and loyalty. According to the Companies Act of 2008, a company’s directors must act in the best interests of the company and in good faith when exercising their duties as directors. According to the “business judgment rule,” a director is presumed to have carried out their duties with reasonable care, skill, and diligence and in the best interests of the company if they took reasonable steps to learn about the situation, avoided any conflicts of interest, or complied with the rules regarding such conflicts, and then either made their own decision on the matter or supported the board’s or committee’s decision. However, if corporate decisions were taken in good faith, with care, and with knowledge, it can also lighten the necessary duty of care, skill, and diligence and may lead to courts exercising restraint when holding directors accountable for those actions, particularly those related to climate change. Directors may violate these obligations, particularly when physical or transitional climate risks pose a significant financial risk to the company and the directors have either neglected to take this risk into account or have not responded to it with reasonable care and skill. It will be harder for directors to avoid accountability for poor decisions under the business judgment rule given the volume, breadth, and availability of studies addressing climate change and company risk.

Directors in South Africa also face liability in terms of the express provisions of the National Environmental Management Act, 1998 (NEMA). NEMA is a framework legislation which places an overarching duty of care on every person who causes, has caused or may cause significant pollution or degradation of the environment to “… take reasonable measures to prevent such pollution or degradation from occurring, continuing or recurring, or, insofar as such harm to the environment is authorised by law or cannot reasonably be avoided or stopped, to minimise and rectify such pollution or degradation of the environment.” Various specific environmental legislation exists under the framework of NEMA, and governs particular aspects of environmental law, such as air quality, water, waste and biodiversity. The penalties for non-compliance under NEMA and the specific environmental legislation which falls under its umbrella are severe, including fines of up to ZAR10 million, imprisonment for a period of between one and ten years, or both a fine and imprisonment.

In terms of NEMA, directors (both past and present) who occupy positions of authority in companies at the time when offences are committed by those companies may themselves be guilty of offences, and liable upon conviction for monetary penalties, in addition to potentially having to compensate organs of state or affected third parties by way of damages for carrying out remediation, as well as the costs of the prosecution. For example, in terms of the National Environmental Management: Air Quality Act, 2004 (NEMAQA), the Minister may require persons falling within a category specified to draft a notice to prepare, submit to the Minister or MEC for approval, and implement pollution prevention plans in respect of a substance declared as a priority air pollutant (which includes greenhouse gasses). In terms of NEMAQUA, read with the National Pollution Prevent Plan Regulations, 2017, published in terms of NEMAQA, the failure to submit a pollution prevention plan in relation to greenhouse gasses is a Schedule 3 offense under NEMA, rendering directors potentially liable as co-defendants guilty of an offence “… if the offence in question resulted from the failure of the director to take all reasonable steps that were necessary under the circumstances to prevent the commission of the offence: Provided that proof of the said offence by the firm shall constitute prima facie evidence that the director is guilty under this subsection”. Directors may therefore be held personally accountable if it can be shown they did not take all necessary precautions to stop the crime from being committed. The director responsibility clauses in NEMA may be applicable to the Climate Change Bill because it has been developed as a particular Environmental Management Act.

South African companies may also be affected by reporting requirements included in the Corporate Sustainability Reporting Directive (CSRD) adopted by the European Parliament,⁸⁸ and the Proposed EU Directive on Corporate Sustainability Due Diligence (the Proposed Directive).⁸⁹

The CSRD requires large companies with EU activities to report on sustainability matters in their management reports. The reporting requirements may impact South African companies if they are: (i) listed on an EU regulated market; (ii) have a net turnover of over €150 million per annum in the EU; (iii) have a branch in the EU generating a net turnover of over €40 million per annum; or (iv) have a subsidiary in the EU that meets at least two of the ‘Large Company’ requirements.⁹⁰

The Proposed Directive aims to encourage sustainable corporate behaviour throughout a company’s value chain, to introduce human rights, climate change and environmental consequences of director’s duty to act in the best interest of the company and to advocate oversight of a corporate sustainability due diligence policy, which includes an identification, prevention, ending and mitigation effects of companies and any adverse human rights violations. The Proposed Directive will apply to South African companies if they are (i) subsidiaries of large EU companies;⁹¹ (ii) part of the global value chain of such large EU companies; (iii) are active in the EU and have large turnovers generated in the EU in accordance with either Group 1 or Group 2 companies;⁹² or (iv) are part of a value chain of a non-EU company that fulfils the criteria at (iii).

c Shareholder/Parent Company Liability

Between the two extremes of having clear environmental shareholder liability rules and having none at all, South Africa lies in the middle. Although there is no specific legislation or case law dealing with the matter, it is possible that, under certain conditions, a shareholder may be held liable for the environmental effects of a company’s activity by drawing from other cases that recognise shareholder liability and by carefully examining the statutory duties created generally towards the environment.

Although South African courts do not lightly disregard a company’s separate personality, they will occasionally “pierce the corporate veil” to acknowledge a parent company’s actual control over a subsidiary and/or allow the company’s owners to personally be held accountable for the company’s decisions. In certain situations, there must be fraud or other wrongful behaviour, and the plaintiff must be without access to other remedies.

Additionally, NEMA has provisions that give the authorities the ability to pursue legal action against anyone who was or is “in control” of an activity that has caused or is producing pollution or environmental degradation, including potential harm from climate change. If the parent/subsidiary control aspect is established, it has been suggested that these clauses could allow a judge to pierce the corporate veil as well.

d Due Diligence

Although it is still in its infancy, due diligence on climate change is becoming more common in corporate transactions. Lenders and buyers are increasingly looking for proof that the target has the necessary licenses, such as those required by the Customs and Excise Act for the purpose of paying the carbon price, greenhouse gas reporting, and pollution prevention plans. Similar to this, due diligence reviews evaluate how climate change is included into environmental impact assessments (EIA) for new developments, looking for confidence that these issues have been effectively covered in the EIA and confirmation of the scope of the risk to operations and the law posed by these predicted impacts.

e Conclusion

We recommend that companies adopt an “enlightened shareholder value approach” which takes into account the maximisation of shareholder value in the long run while also considering the broader factors effecting the company such as the interests of other stakeholders, the well-being of employees and the impact of the company’s operations on the environment and its communities.

a Environmental Litigation

The favourite tool in South African environmental civil society’s toolkit is the administrative procedure followed by entities seeking to obtain environmental authorisation for their projects, and in particular the public participation process. This is clear in the majority of environmentally related litigation in South Africa, and was again highlighted in the recent interdict granted against Shell in December 2021, preventing it from carrying out seismic surveys off the coast of South Africa. Although the negative environmental impacts of the surveys, including the climate change impacts, were raised by the various challenges to the decision to allow these surveys to be carried out, it was ultimately the failure to carry out sufficient and effective public participation processes which ultimately led to Shell being interdicted from carrying out such surveys.

South Africa contributes significantly to global GHG emissions, due to its heavy reliance on coal fired power stations, but it is simultaneously extremely vulnerable to climate change given the socio-economic conditions and the water scarcity experienced in the country. In recent years South Africa has seen a rise in litigation and legislative development linked to climate change, with both the legislature and the judiciary recognising the impact which it will have on South Africans.

South Africa’s first climate change case involved an application brought in 2016 by a non-profit organisation, Earthlife Africa Johannesburg (Earthlife), in the High Court to review and set aside the environmental approval which had been granted for the construction of the 1200MW Thabametsi coal-fired power station, which would have been one of the most emission-intensive plants in the world. Earthlife maintained that the Department was obliged to consider the climate change impacts of the proposed power station before granting an environmental authorisation, and that it had failed to do so. The Court held that on a plain reading of the relevant legislation (being the National Environmental Management Act), climate change impacts are a relevant factor that must be considered prior to the issuing of an environmental authorisation, and that the absence of an express provision in the statute requiring a climate change impact assessment does not entail that there is no legal duty to consider climate change as a relevant consideration. The matter was referred back to the Minster to properly consider the climate change impacts when deciding the internal appeal process on whether to set aside the environmental authorisation, and although Earthlife was unsuccessful in the reconsideration of the internal appeal, upon launching a second review application in relation to the decision to grant the environmental authorisation and the second internal appeal process, an order was taken by agreement in the High Court, in terms of which both the environmental authorisation and decision to dismiss the internal appeal were reviewed and set aside, and the application for the environmental authorisation was remitted back to the original decision maker afresh. Ultimately, the funding for the Thabametsi power plant was withdrawn, and the project was abandoned.

b Decisions Made by Environmental Authorities

Recently, there have also been several challenges to the proposed use of gas as an alternative power generation source in South Africa, with the environmental authorities (led by the Minister responsible for the environment) recognising that the climate change impacts of this alternative energy resource. In 2020, Karpowership, submitted an application for an environmental authorisation for a gas-to-power operation to be carried out off the coast of South Africa in Saldanah Bay (as well as operations in Richards Bay and Ngqura, and this authorisation was refused on inter alia the basis that the public participation process had been flawed, and that the effects on the environment could not be adequately assessed largely because the underwater noise levels was not fully investigated. The Minister then refused an internal appeal brought by Karpowership against this decision, stating that despite the dire lack of electricity in South Africa, she was duty bound to uphold section 24 of the Constitution, and that amongst other things, the climate change impacts of the proposed project could not be overlooked, and that other bases of electricity generation are available. Citing the Earthlife judgment, she stated that a Climate Change Impact Assessment was a necessary part of the environmental impact assessment process for projects with climate impacts, and that such comprehensive assessment must assess inter alia the impacts of climate change on the proposed project itself, and the ways in which the project might aggravate the impacts of climate change in the area. Finding that the Climate Change Impact Assessment conducted on behalf of Karpowership did not comply with these requirements, she noted the report did find that “Because of greenhouse gas emissions associated with the proposed projects and the abovementioned international consensus on the anthropogenic causes of climate change, the likelihood of the impact occurring is definite. The impact is therefore rates as High negative significance and cannot be mitigated below a High negative rating.” On this basis, amongst other things, the internal appeal was dismissed.

In addition to climate change impacts, air pollution in particular has been a focus for both civil society organisations and the environmental authorities in South Africa. In what has become known as the ‘deadly air’ case, civil society organisations launched constitutional litigation to request the court to acknowledge that poor ambient air quality in the Highveld Priority Area constitutes a violation of section 24 of the Constitution, and in March 2022 successfully obtained an order acknowledging such breach, and ordering the Minister to publish regulations within 6 months. The environmental authorities themselves are also focussing on air quality contraventions, with their enforcement division, known as the ‘Green Scorpions’, targeting the country’s power utility, Eskom, for failures to comply with air emissions licence conditions at its Kendal power plant. Despite the dire electricity shortage, in 2020 the Green Scorpions issued a compliance notice instructing the shutdown of two units at the Kendal power station, and the submission of a plan for maintenance to be carried out on an additional four units. Although more time was ultimately granted to Eskom to bring the Kendal units, as well as units at its various other power plants, into compliance with legislative standards, charges were laid against Eskom for the breaches to its air emissions licence, as well as supplying false and misleading information to the air quality officer.

There is therefore a recognition by the courts of the fact that climate change is a critical consideration for authorities in assessing whether the environmental impact of projects is balanced with the need and desirability of such projects, and an application of this principle by the authorities themselves. We anticipate that this principle will become a standard assessment criteria across all new projects in South Africa, and that to the extent that the effects of climate change are not properly considered, this will be viewed by the courts as a ground to find that the administrative decision-making process was flawed. There is also a growing recognition that the environmental impact of a project cannot be ignored purely on the basis that it is desirable from an economic perspective, and that the cost of such project (both for current and future generations) must be properly taken into account.

c Shareholder Activism

In addition to external challenges to projects on the basis of their climate change impacts, there has also been substantial growth in the use of shareholder powers to effect internal change in organisations in South Africa, through what is known as ‘shareholder activism’. Activist shareholders purchase shares in publicly listed entities and, using their rights as shareholders to engage with management and to put forward resolutions to be voted on by the body of shareholders, have pushed a climate change agenda in order to force businesses to acknowledge and react to the effects of their operations on people and the environment.

The non-profit organisation Just Share is particularly active in this regard in South Africa, and has focussed its attention on banking institutions and oil majors. In April 2019, Just Share and the Raith Foundation proposed two climate change-related motions for consideration at the 2019 Annual General Meeting of Standard Bank. A report on Standard Bank’s assessment of the greenhouse gas emissions resulting from its financing portfolio and its exposure to climate change risk in its lending, investing, and financing activities was mandated by the first resolution. The second resolution proposed that Standard Bank must create and make public a lending policy regarding loans to coal-fired power plants and coal mining ventures. The board advised shareholders to vote against both resolutions on the grounds that they would not give investors a more thorough understanding of the company’s exposure to and risk management for climate change, that it was unclear how the Standard Bank group would actually implement the resolutions, and that it did not believe the resolutions were in the interests of the group as a whole. While only 38% of shareholders voted in favour of the first resolution, 55% of shareholders voted in favour of the second resolution, making the latter binding on Standard Bank. In accordance with this decision, Standard Bank announced the release of their Coal Fired Power Finance Policy. With the help of this policy, shareholders were able to evaluate whether Standard Bank had adequately addressed the financial and environmental risks associated with the financing of new coal-fired power infrastructure. Additionally, this policy gave shareholders access to information that they could use to make well-informed investment choices. These resolutions had the result that Standard Bank was forced to increase the transparency and information it provided about its climate change policy.

A similar strategy has been adopted by Just Share in relation to various of the other major South African banks, as well as Sasol. We anticipate that the prevalence of shareholder activism in South Africa will continue to grow and be used as a tool by concerned investors and non-profit organisations.

a Task Force on Climate-Related Financial Disclosures (TCFD)

The TCFD published a list of recommendations on how corporate filings can include climate-related financial risk disclosures in June 2017. The TCFD recommendations are structured around four thematic areas that represent core elements of how organisations operate:

• (i) Governance

• (ii) Strategy

• (iii) Risk management

• (iv) Metrics and targets

TCFD was introduced as a voluntary, market-led initiative, yet many governments, including the UK, are encouraging or requiring companies to make disclosures based on the TCFD recommendations.⁹⁶

From 1 October 2021, the UK government has made it mandatory for trustees of occupational pension schemes with more than £5 billion in relevant assets, all authorised master trust schemes and authorised collective money purchase schemes to make TCFD-aligned, climate-related, financial disclosures.⁹⁷ Furthermore, the UK government approved two further regulations in January 2022, requiring limited liability partnerships with more than 500 employees and a turnover of more than £500 million and UK companies with more than 500 employees that are listed in section 414 of the Companies Act 2006⁹⁸ to make TCFD-aligned, climate-related financial disclosures.⁹⁹ This means that these entities need to make climate-related disclosures in line with the four pillars of the TCFD covering governance, strategy, risk management and metrics and targets.

The UK’s Financial Conduct Agency (FCA) has also introduced requirements for various regulated firms to make TCFD-aligned, climate-related disclosure requirements on a comply or explain basis.¹⁰⁰

b Taskforce on Nature-Related Financial Disclosures (TNFD)

Similarly, there is a growing awareness of the potentially disastrous impacts of biodiversity loss and ecosystem degradation on the global economy and supply chains.¹⁰¹ This is one of many factors leading to the establishment of the TNFD, a nature-related financial disclosure framework, which is currently published in beta form.¹⁰² The TNFD operates in parallel with the TCFD and sets out a framework in which companies and financial institutions can assess, manage, and report on their opportunities and risks in relation to nature.¹⁰³ It aims to assist with the appraisal of nature-related risk and the redirect of global financial flows away from nature-negative outcomes and towards nature-positive outcomes.¹⁰⁴

Although the UK government supported the establishment of the TNFD,¹⁰⁵ it has yet to formally adopt its recommendations, which are still in draft form. It is hoped that the UK government and regulators will include TNFD in UK companies’ mandatory reporting requirements.

c International Sustainability Standards Board (ISSB)

Although the TCFD is currently seen as the gold-standard for sustainability and climate-related reporting, the UK has indicated its intention to follow the reporting standards of the International Sustainability Standards Board (ISSB) once these are published.¹⁰⁶ The ISSB was established in November 2021 by the International Financial Reporting Standards Board to create an integrated sustainability reporting mechanism, building on and incorporating the TCFD guidelines. The ISSB has committed to working with the TCFD and the TNFD to ensure that it aligns its standards to the recommendations by both taskforces.¹⁰⁷ The ISSB standards aim to deliver a comprehensive global baseline of sustainability-related disclosures that meet investors’ needs.

d 2011 UNHRC Guiding Principles on Business & Human Rights (UNGPs)

Under the UNGPs, all businesses have a responsibility to respect human rights, which requires continuous human rights due diligence.¹⁰⁸

e Corporate Sustainability Reporting Directive (CSRD)

The EU’s Corporate Sustainability Reporting Directive (CSRD),¹⁰⁹ adopted in November 2022, will require a broader scope of ‘large companies’ (approximately 50,000 companies) to carry out sustainability reporting on their global supply chain from 1 January 2024.¹¹⁰

The compulsory due diligence reporting requirements under the Directive will apply not only to EU businesses but also to UK and other non-EU incorporated businesses ‘which have a significant activity on the territory of the Union’¹¹¹ if they meet certain criteria.¹¹²

Both EU and non-EU incorporated businesses to which the CSRD applies will be required to comply with a range of new sustainability reporting standards over various topics. These include reporting on environmental matters, such as biodiversity and climate change, and on social factors such as working conditions and human rights.¹¹³ Companies will not only have to include information about their own operations but also about their value chain, including on their products and services, their business relationships and their supply chain.¹¹⁴

In parallel with the reporting requirements in the CSRD, companies may need to adopt more corporate sustainability due diligence in accordance with the Proposed Directive on Corporate Sustainability Due Diligence (the Proposed Directive) once this is adopted by the European Parliament.¹¹⁵