Understanding and navigating 'soft law'
Voluntary schemes and soft law
The term ‘soft law’ refers to rules, principles or guidelines that are not themselves legally binding, but nonetheless play an important role in promoting compliance with certain standards of behaviour. Rules of ‘soft law’ can often act as a precursor to the emergence of ‘hard law’.
With many governments slow to act on climate change, there has been an increasing number of soft law instruments that seek to impact on corporate responses to climate change.
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Relevance of soft law to climate change
For example, in January 2019 the World Economic Forum (which hosts the annual Davos gathering) published a set of principles for effective corporate climate governance, building on the TCFD framework. The principles have been rolled out globally through board networks and chapters. In August 2019, the Business Roundtable, an association of CEOs of leading US companies, issued a Statement on the Purpose of a Corporation, which included a commitment to ‘protect the environment by embracing sustainable practices across our businesses’.
Soft law can also have a narrower focus. For example, for the project finance sector the Equator Principles provide a risk management framework for financial institutions that allow them to assess and manage social and environmental risk associated with new projects.
Rules of soft law also intersect with other areas of climate-related risk, such as human rights considerations. The UN Guiding Principles on Business and Human Rights require certain conduct of businesses where their activities may affect human rights, including where those activities may have an adverse impact on the environment. Theories of human rights, once confined to the protection of social and political freedoms, continue to evolve and take into account rights to, among other things, clean air, health, water and food, along with the rights of indigenous and other groups whose cultural and political identity is tied to the environment.
Consequences of failure to comply with soft law
For companies, a failure to comply with soft law can carry particular reputational risks due to an expectation of a certain standard of behaviour, even if not legally required. It may also provoke a backlash from the market, seen, eg in the response to Siemens’ decision to honour its signalling contract for rail infrastructure for Adani’s Carmichael coal mine. Soft law standards can also intersect with compulsory dispute resolution mechanisms.
A pertinent example of soft law having operation in relation to climate change risks can be found in the Friends of the Earth complaint made in January 2020 against ANZ to the Australian National Contact Point for the OECD Guidelines for Multinational Enterprises, which is a non-judicial dispute resolution body for alleged instances of non-observance of the Guidelines. The complaint alleges that ANZ has breached the Guidelines by failing to disclose high risk greenhouse gas emissions resulting from its lending and investment, to conduct adequate due diligence regarding climate-related risks, and to mitigate its adverse environmental impact. The complaint requests that ANZ divest from coal and phase out its investment in other fossil fuels, commit to emission targets in line with the Paris Agreement and disclose climate-related scenario analyses for all sectors it finances.
Key risks and opportunities
Although rules of soft law and voluntary schemes to which a company might subscribe do not themselves impose legal obligations, they still present risks. A business that states a commitment to rules of soft law, but fails to comply with them, may be exposed to reputational and commercial risks, as well as a risk of legal action, such as for misleading and deceptive conduct. Conversely, failing to pursue soft law standards may also carry a reputational risk, or the risk of non-litigious dispute resolution processes being triggered through the OECD NCP, particularly where other businesses within the same industry have made such a commitment. Additionally, there is a risk that widely accepted norms of soft law may create an accepted ‘reasonable standard’ for the purposes of bringing legal claims in negligence or for breach of directors’ duties, even where the business in question has not made its own commitment.
There may be opportunities for businesses that anticipate the development of hard law and commit to those standards as they exist as rules of ‘soft law’ ahead of others. Doing so may assist in both heading off conflict with stakeholders and anticipating risks that may arise from non-compliance with those standards.
Two recent decisions demonstrate an increased willingness on the part of courts to hold companies to standards found in policies and guidelines, and in rules of international soft law.
The 2019 decision of the UK Supreme Court in Lungowe v Vedanta Resources Plc allowed for the possibility that a company might be held liable for the adverse environmental and human rights consequences of a foreign subsidiary’s activities, based, in part, on the public statements and commitments of the parent. 1,826 Zambian villagers brought a claim in the UK against a Zambian mining company, KCM, and its UK-based parent, Vedanta. The court held that it was arguable Vedanta itself owed a duty of care to the claimants as it had published a sustainability report emphasising it had oversight over its subsidiaries; released public statements on its commitments to addressing environmental risks and technical shortcomings in KCM’s mining activities; provided environmental, health and safety training across its group companies; and both funded and controlled KCM’s activities. In this sense, a commitment by a parent company to adhere to soft law standards, such as the UN Guiding Principles on Business and Human Rights, and to implement such commitments through training, monitoring and enforcement throughout the group, may be used as a hook by claimant groups to bring a claim against a business to the extent it fails to meet such standards at an operational level.
A claim currently before court in Canada concerns the liability of a Canadian-based mining company for alleged violations of international human rights law in Eritrea. In late February 2020, the British Supreme Court rejected an attempt by Nevsun Resources to have the suit dismissed. The ultimate decision in the case will be important in determining the extent to which companies can be held liable for their actions under international human rights law and customary international law, and the role of domestic courts in determining such questions.
Asking the right questions
- What are your organisation’s publicly stated commitments in relation to climate change-related risks, and are these aligned with soft law instruments to which it is committed?
- Who within your organisation is responsible for approving any commitment to a soft law instrument before it is published?
- How is your organisation assessing its alignment with these commitments, and is this being done on an ongoing basis?
- Are there key additional soft law standards in your organisation’s sector to which your organisation is not currently committed? How does this situate you in relation to the rest of your industry, and is there any associated reputational and/or commercial exposure?
The ‘just transition’ is frequently used to refer to a framework for a transition to a low-carbon economy that takes into account the associated economic and social costs and opportunities.
It has been defined as:
‘An economy-wide process that produces the plans, policies and investments that lead to a future where all jobs are green and decent, emissions are at net zero, poverty is eradicated, and communities are thriving and resilient’.
A just transition is particularly relevant in Australia given that much of our economy and workforce is devoted to carbon-intensive activities.
At the same time, the last few years have seen rapid investment and growth in Australia’s renewables market (such as in solar, wind, energy efficiency, hydro, bioenergy, energy storage, geothermal and marine energy). In April 2019, the Clean Energy Council reported that there was a 100% increase in investment in large-scale energy projects in 2018, and around 14,000 jobs had been created as a result of the renewable energy construction boom in the same year. The discussions around just transition are pertinent in the context of the post-COVID-19 economic stimulus and recovery plan.
While not specific to Australia, there is increasing interest within the investment community in whether companies are adequately aligned with the ‘just transition’ framework. For example:
- Signatories to the United Nations Principles for Responsible Investment (UNPRI) are committed to integrating environmental, social and governance factors into their decision making. The ‘social’ element is likely to include aspects of the just transition framework. Signatories also commit to assessing and disclosing their progress and can be delisted if they do not do so. At the end of 2019, more than 2,500 investors with over US$90 trillion in assets had signed up to the UNPRI.
- In December 2018, the Grantham Institute, together with the Initiative for Responsible Investment at the Harvard Kennedy School, the UN PRI and the International Trade Union Confederation, published a report entitled ‘Climate Change and the Just Transition: A Guide for Investor Action’. The report recommends investors support a ‘just transition’ by incorporating just transition factors in investor expectations, requesting disclosure, benchmarking performance and pressing for improvement. The report also encourages investors to promote disclosure by companies, asset owners and asset managers using the framework of the Task Force on Climate-related Financial Disclosures (TCFD). The Investor Group on Climate Change (IGCC), a collaboration of more than 70 institutional investors from Australia and New Zealand with total funds under management of over $2 trillion, is encouraging investors to implement a climate change policy and to report against the TCFD. This includes implementing long-term strategies that would support ‘a just transition in communities impacted by shifting global and domestic markets’.
- In his 2020 letter to CEOs, BlackRock Chairman Larry Fink announced BlackRock’s intention to require the companies it invests in to disclose sustainability information and climate-related risks. Writing of his belief that ‘we are on the edge of a fundamental reshaping of finance’, he described the need to ‘be mindful of the economic, scientific, social and political realities of the energy transition’, and for the private sector to work with government to ensure a transition that is ‘just and fair’. According to Fink, a company’s prospects for growth are ‘inextricable from its ability to operate sustainably’, and operating sustainably requires engagement with the full set of a company’s stakeholders. It is by being transparent about this engagement that companies will attract investment most effectively.
The secretariat of the UN Framework Convention on Climate Change has identified 1.5 billion people employed in sectors that are critical to climate stability.
Those sectors include energy, agriculture, transport, resource-intensive manufacturing and forestry.
Key risks and opportunities
We consider it unlikely that there will be legislative reform in relation to mandate planning regarding a just transition in Australia in the near-to-medium term. Nevertheless, overlooking just transition at an organisational level could result in commercial disadvantage or reputational damage as investor and market expectations on the topic continue to evolve.
Where investors have made commitments to act, assess and report on progress towards a just transition, investee companies may experience increased requests by investors for details of their relevant strategy.
In the United States, the Shareholder Association for Research and Education has sought information from utility companies planning the closure of coal-fired plants as to their strategy for ensuring a just transition. Some major Australian companies are already responding to actual or perceived demands for such an approach, incorporating statements of their position on social or community risks associated with the transition to a low-carbon economy in recent AGM notices.
Asking the right questions
- Is your organisation aware of the concept of just transition, and aware of the relevance to its business?
- Does your organisation have a realistic just transition strategy in place? Is it effectively communicating this strategy to stakeholders? Are your organisation’s strategy, governance and risk managements teams talking to each other on these issues?
- How does your organisation engage with investors on issues relating to a just transition, and does it adequately allow for investors to report on these issues?
- How will your organisation respond to a shareholder resolution requesting detail on your assessment of risks related to the just transition?
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