Why ESG matters in due diligence and healthcare and life science legal transactions

Alison Choy Flannigan
Hall & Wilcox, Sydney
Alison.ChoyFlannigan@hallandwilcox.com.au

The current ESG climate

Environmental, social and governance (ESG) is now becoming a growing issue for healthcare and education providers because more and more clients and funders of health and medical research are imposing grant and contractual conditions concerning ESG.

The impact of the Trump Administration’s executive orders and actions for academic institutions

A case in point is when the Trump Administration sent a survey in March 2025 to many Australian health and medical research organisations, including universities.

According to media reports, at least six universities in Australia have had American funding for research projects paused or cancelled as US agencies work to deliver President Donald Trump’s ‘America First’ agenda.^[1]

The Trump Administration has provided directives to recipients of US grant funding for health and medical research (which affects hospitals, health care providers and Australian universities) to support US ‘program determinations’.

The impact in Australia

In Australia, large corporate, insurance and government clients are also including ESG requirements in procurement contracts. For example, the Australian Standard Commonwealth Grant Agreement^[2] includes clauses which deal with:

• conflicts of interest;
• prohibited interests, including dealing with terrorists;
• anti-corruption;
• compliance with laws; and
• fraud and corruption.

The Australian Securities and Investments Commission (ASIC) and the Australian Competition and Consumer Commission (ACCC) have announced that ‘greenwashing’ is one of their key enforcement priorities.

Mandatory sustainability reporting

The Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Act 2024 (Cth) (the ‘Act’) received assent on 17 September 2024.

That Act amended the Corporations Act 2001 (Cth) and other legislation. Schedule 4, which commenced on 18 September 2024, introduced sustainability reporting. The amendments introduced mandatory climate reporting for certain entities.^[3] These changes have brought ESG to the forefront for consumers and businesses; as a result, ESG will play an increasingly important role in business and sale transactions.

Under the sustainability reporting regime under the Australian Corporations Act, large Australian businesses and financial institutions are required to prepare a sustainability report. Types of entities required to prepare and lodge financial statements include:

• listed entities;
• unlisted disclosing entities;
• other public companies (including companies limited by guarantee that are not registered with the Australian Charities and Not-for-profits Commission);
• large proprietary companies;
• certain small proprietary companies (for example, if foreign-controlled or subject to crowd-sourced funding);
• registered schemes; and
• registrable superannuation entities.

Greenwashing and environmental claims

What is greenwashing?

‘Greenwashing’ is a term used to describe false or misleading environmental claims, where a business appears more environmentally friendly than they really are.

Omitting information can amount to a false or misleading representation or misleading or deceptive conduct, depending on the circumstances and the overall impression created.

The Australian Consumer Law

Businesses have obligations under the Australian Consumer Law (ACL) (Schedule 2 of the Competition and Consumer Act 2010 (Cth)) not to make false or misleading representations or engage in misleading or deceptive conduct.

The ACL applies to all forms of marketing, such as information on packaging, in advertisements, on store signs, social media, websites or told to consumers in writing or verbally, and more generally to representations in connection with the supply or possible supply of goods or services, or to conduct, in trade or commerce.

When deciding if conduct is misleading or deceptive, or if a representation is false or misleading, the most important question to ask is whether the overall impression created would be misleading to the ordinary and reasonable consumer.

Any business that makes claims in relation to their business activity, goods or services must ensure that the claim is true and accurate, and that it is not likely to give consumers the wrong impression.

Eight principles for accurate environmental claims

The ACCC has released eight principles for accurate environmental claims,^[4] which are:

1. Make accurate and truthful claims.
2. Have evidence to back up your claims.
3. Don’t hide important information.
4. Explain any conditions on claims.
5. Avoid broad and unqualified claims.
6. Use clear and easy to understand language.
7. Visual elements shouldn’t give the wrong impression.
8. Be direct and open about sustainability transition.

Cases

ASIC v Mercer Superannuation (Australia) Limited 2024 [FCA] 850^[5]

In a landmark case for ASIC, the Federal Court has ordered Mercer Superannuation (Australia) Limited to pay an AU$11.3m penalty after it admitted it made misleading statements about the sustainable nature and characteristics of some of its superannuation investment options.

ASIC Deputy Chair Sarah Court said, ‘This was ASIC’s first greenwashing case brought before the Federal Court; a landmark case both for ASIC and for the financial services industry. It demonstrates the importance of making accurate ESG claims to investors and potential investors.’

The Court found Mercer made misleading statements on its website about seven ‘Sustainable Plus’ investment options offered by the Mercer Super Trust, of which Mercer is the trustee. These statements marketed the Sustainable Plus options as suitable for members who ‘are deeply committed to sustainability’ because they excluded investments in companies involved in carbon intensive fossil fuels like thermal coal. Exclusions were also stated to apply to companies involved in alcohol production and gambling.

The Court found members who took up the Sustainable Plus options had investments in companies involved in industries the website statements said were excluded, such as:

• 15 companies involved in the extraction or sale of carbon intensive fossil fuels (including AGL Energy Ltd, BHP Group Ltd, Glencore PLC and Whitehaven Coal Ltd);

• 15 companies involved in the production of alcohol (including Budweiser Brewing Company APAC Ltd, Carlsberg AS, Heineken Holding NV and Treasury Wine Estates Ltd); and

• 19 companies involved in gambling (including Aristocrat Leisure Limited, Caesar’s Entertainment Inc, Crown Resorts Limited and Tabcorp Holdings Limited).

ASIC v Vanguard Investments Australia Limited [2024] FCA 308

The Federal Court has found Vanguard Investments Australia^[6] contravened the law by making misleading claims about certain ESG exclusionary screens applied to investments in a Vanguard index fund.

At a hearing before Justice O’Bryan on 8 March 2024, Vanguard admitted to engaging in conduct that was liable to mislead the public and that it had made representations that were false or misleading.

On 28 March 2024, Justice O’Bryan found that Vanguard contravened the ASIC Act numerous times when it made false or misleading representations about the ESG exclusionary screens that were applied to the Vanguard Ethically Conscious Global Aggregate Bond Index Fund.

These representations were made to the public in a range of communications, including:

• 12 product disclosure statements;

• a media release;

• statements published on Vanguard’s website;

• a Finance News Network interview on YouTube; and

• a presentation at a Finance News Network Fund Manager Event which was published online.

Investments held by the Fund were based on an index called the Bloomberg Barclays MSCI Global Aggregate SRI Exclusions Float Adjusted Index (Index). Vanguard had claimed the Index excluded only companies with significant business activities in a range of industries, including those involving fossil fuels, but has admitted that a significant proportion of securities in the Index and the Fund were from issuers that were not researched or screened against applicable ESG criteria.

The Federal Court ordered Vanguard Investments Australia to pay AU$12.9m.

ESG due diligence tips

We recommend the following in relation to ESG due diligence.

• When drafting procurement contracts, set out the obligations, reporting and audit rights. Try not to be too broad and aspirational.
• ESG problems usually apply down the line of the supply chain and make it very difficult to detect human rights violations, including child labour and modern slavery – this issue can be dealt with requiring a cascade of these clauses down the supply chain.
• In some countries in South America, contractual due diligence in relation to criminal activity and money laundering is required.
• Some companies simulate activities for tax compliance.
• Proper due diligence and indemnification clauses are necessary. Do not necessarily trust certifiers at face value.
• Consider insurance for ESG claims.
• Dispute resolution clauses such as arbitration are important in countries where the courts may not be independent and may be corrupt.
• The right to terminate clause in the event of default is important from the supplier standpoint in relation to subcontracts.
• Is third party criminal theft a force majeure event in a logistics contract?
• The waiver of consequential damages is crucial for suppliers in logistics contracts.
• Carefully consider any ESG warranties and whether or not they are misleading or deceptive.
• Consider force majeure clauses if you are a supplier.
• Due diligence of supply chain is particularly related to the supply of food.
• Delegate to one team to ensure compliance.
• Train staff on what is greenwashing and how to avoid it is important.
• Always ensure your claims continue to be accurate.