Year in Review – Climate Change and the Construction Industry

Key trends over the past year

In the past year we have seen a multitude of legal issues relating to climate change which are relevant for construction clients.In Australia, they include the following:

1. Companies are under growing pressure from a broad range of stakeholders including investors (both individual shareholders and institutional investors), consumers, counterparties, clients/principals and the general public to disclose and address the risks that may arise out of environmental, social and governance issues and in particular climate change. Companies are being called on to assess, identify and provide greater transparency and disclosure of their climate change risks and to put in place climate change strategies. Mark McVeigh v Retail Employees Superannuation Pty LimitedNSD1333/2018 is an example of such climate activism and consideredthe adequacy of disclosures of climate related risks in an investment portfolio to investors.In this case the parties reached a settlement where the Australian pension fund agreed to incorporate metrics to assess climate change financial risks in its investment strategy and implement a net-zero by 2050 carbon footprint goal.
2. The second key trend is the increasing recourse to litigation by activists and other interested groups in relation to the 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 block 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 declined to grant the injunction sought. Earlier 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 an open- cut coal mine in New South Wales which proposed to produce 21 million tonnes of coal over a period of 16 years. The Land and Environment Court found that the project was not in the public interest after weighing the costs and benefits of the project, including the climate change impacts of the mine’s direct and indirect greenhouse gas emissions.
3. The third key trend is the increased regulatory scrutiny on corporate disclosures and directors’ climate change related 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.[1] We have seen many companies adopting the TCFD reporting framework in order to ensure robust reporting. The Australian Securities & Investments Commission (ASIC) released a tranche of material last year which reiterates the need for listed companies to specifically report in respect of climate related matters in order to comply with their disclosure obligations and to also disclose relevant and useful climate related information to investors.[2]
4. The most notable trend, likely because of the pressure on companies to disclose information, is increased regulatory and judicial interest in “greenwashing”.

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.

Construction companies need to be particularly 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).

Potentially misleading disclosures and claims in the environmental or climate change sphere could be seen as ‘greenwashing’, a term which involves making an unsubstantiated or misleading claim about the environmental status of a business or the environmental benefits of a product, service, technology or company practice.

There are several aspects of a company’s climate reporting obligations which may give rise to allegations of greenwashing, including:

1. Climate-related disclosures: financial and other disclosures regarding exposure to climate related risks, opportunities and transitional or adaptation plans and timeframes;
2. Broad corporate goals and representations in relation to:
   1. alignment with Paris Agreement goals;
   2. achievement of net zero or other emissions reductions targets by a specified date; and
3. Green marketing: product, services and brand marketing which makes representations about products, supplies or practices being environmentally friendly, sustainable or ethical.

Companies and other businesses involved in unsubstantiated ‘greenwashing’ will contravene section 1041H of the Corporations Act which prohibits conductwhich is misleading or deceptive, or likely to mislead or deceive.[3]

For example,a ‘net zero’ commitment, being in some cases a promise to achieve a certain carbon emissions profile by a certain date, will constitute a representation about a future matter. Section 769C of the Corporations Act provides that, if a person makes a representation about a future matter, and the person “does not have reasonable grounds for making the representation”, then the representation is “taken to be misleading”.[4] Companies must therefore ensure that any net zero commitments are founded upon ‘reasonable grounds’ and are carefully framed. To establish reasonable grounds, there must have existed ‘facts sufficient to induce that state of mind in a reasonable person.’

The prohibitions in these statutes are deliberately drafted in wide terms, and do not require that any person is actually misled or deceived or that the organisation in question intended to mislead or deceive anyone. A likelihood that consumers or other stakeholders will be led into error is enough.This can arise through vague or confusing messaging, a failure to properly disclose the basis on which representations are made where these are relevant, and representations about the future that are not based on reasonable grounds.

Legal challenges to alleged greenwashing have already begun. For example, in August 2021, the Australasian Centre for Corporate Responsibility (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 raised 2 major claims;

1. 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.
2. Santos’ claims that it has a clear and credible plan to achieve net zero emissions by 2040 are misleading. ACCR alleges that Santos plans to expand its natural gas operations and their 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.

This action is not yet determined.

Looking forward

This year we expect that companies will continuebe subject to increased and more rigorous scrutiny from regulators and stakeholders . Companies and their directors should take steps to:

1. identify and manage climate risks;
2. ensure that only accurate and appropriate climate related disclosures are included in public announcements, including in advertising and promotional materials, pitches, proposals and tender responses and in all mandatory and voluntary reporting materials; and
3. ensure that there is a proper and substantiated basis for any public commitments relating to climate risk which can be justified and evidenced if necessary in the event of a challenge.

It will also be important for construction companies to consider their climate risk in relation to the use of materials, the method and manner of construction and siting of works.Construction companies should consider risks to health and safety because of climate change, for example the risk to workers as a result of extreme weather conditions. It is critical that construction companies consider whether their contractual arrangements are climate resilient and their obligations are responsibilities are achievable and deliverable over the life of the construction project and after completion and handover. This is especially so given that climate change related extreme weather events may lead to extended delays, costs, or force majeure events. This may in turn cause projects to be in breach of project timelines or have to be redesigned and re-negotiated mid-project. We have put together a comprehensive list of the key legal considerations in relation to climate change for the construction sector which can be downloaded here.

At Clyde and Co, wehave considerable experience in assembling and managing effective multi-disciplinary teams who can assist clients with the range of issues they face over climate change, including:

If you would like to discuss the issues raised and how this may impact your business please contact Jacinta Studdert; Dean Carrigan; Brooke Moerk or Valencia Govender.

[1] It is widely accepted that Australian law requires any material exposure to climate change risks be incorporated into the various financial disclosures mandated by the Corporations Act 2001 (Cth), particularly in directors’ reports (s 299 and s 299A(1)), annual financial reports (s 295) and continuous disclosure obligations (s 674).

[2] See also Guy Abrahams & Kim Abrahams as Trustee for the Guy & Kim Abrahams Family Trust v Commonwealth Bank of Australia No. NSD864/2021 wherein he Federal Court on 4 November 2021, granted authority to shareholders, Guy and Kim Abrahams, to inspect all documents created by Commonwealth Bank of Australia in relation to seven gas and oil projects that the bank played a role in financing pursuant to s247A of the Corporations Act.

[3] Section 12DA of the ASIC Act 2001 (Cth), and s 18 of the Australian Consumer Law, contain similar prohibitions.

[4] Section 12BB of the ASIC Act 2001 (Cth) and s 4 of the Australian Consumer Law are similar.