As it becomes clear that most companies depend on nature, biodiversity and ecosystems to some extent, directors need to start to identify relevant nature-related risks and consider whether they are material in the context of their companies. We look specifically at the existing law in the UK but this analysis will also be relevant in many other jurisdictions.
A new legal opinion shines a spotlight on the relevance of nature-related risks to directors’ duties under English law. This sits alongside a broader panoply of emerging law and disclosure obligations in the “nature” space.
On 11 March 2024, Sharif A. Shivji KC, Rebecca Stubbs KC, James Burton, Karl Anderson and Hossein Sharafi published a legal opinion commissioned by Pollination Law and Commonwealth Climate and Law Initiative (CCLI) setting out directors’ duties relating to nature-related risks under the laws of England and Wales (the opinion). The executive summary of the opinion can be found here and the full opinion can be found here. The conclusions of the opinion are not controversial but they shine a light on how the existing law may apply to the emerging topic of biodiversity and natural capital.
The opinion analyses the three distinct roles of directors under company law: (i) the duty to promote the success of the company for the benefit of the members as a whole – “enlightened shareholder value” (s 172 Companies Act 2006 (CA 2006)); (ii) the duty to act with reasonable care, skill and diligence (s 174 CA 2006); and (iii) the obligations of a director to disclose information about the company in its narrative reports.
Fiduciary duties: directors should consider nature-related risks, dependencies and impacts
Whereas the opinion concludes that nature-related risks fall under the category of risks that a director ought to have regard to when fulfilling their duties, the degree of relevance to any one business or another is ultimately a fact-based question.
Given that internal analysis of the Bank of England found that 52% of UK GDP and 72% of the stock of UK lending was dependent on ecosystem services, directors should consider the extent to which their company is dependent on nature and natural capital, including ecosystem services, and the current and future state of those assets.
The “duty to promote the success of the company” under s 172 CA 2006 is ordinarily a subjective duty: whether the director honestly believed that the relevant act or omission was in the interests of the company is key. However, directors who give no consideration as to whether specific actions or omissions promote the success of the company will be held to a higher objective standard.
Directors who fail to consider nature-related dependencies, risks and impacts may be subject to regulatory investigations, heightened disputes risk and reputational damage as well as civil liability.
The opinion suggests that directors take the following steps to fulfil their duties
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Identify any nature-related risks facing the company;
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Assess which risks are relevant and not trivial, taking expert advice where appropriate;
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Decide in good faith whether a course of action should be taken to mitigate those risks and take the relevant steps, if so; and
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Record all decision-making in writing.
The opinion also considers that the recommendations and guidance of the Taskforce on Nature-related Financial Disclosures (TNFD) are useful tools for companies to start to identify dependencies, risks and opportunities and to integrate nature-related considerations into decision making.
Financial reporting: do directors have to account for nature-related risks in their reports?
It depends.
The relevant financial disclosure regimes applicable to UK companies (including, broadly, UK disclosure rules as derived from the Task Force on Climate-Related Financial Disclosures, CA 2006 requirements, applicable accounting standards and the EU Corporate Sustainability Reporting Directive, where a relevant UK company is in scope) permit the disclosure of nature-related risks. They may also require disclosure of nature-related risks as a result of concepts of “materiality” that are expressed in such rules, but they do not expressly refer to “nature”.
Nonetheless, directors of companies may still be required to disclose nature-related risks.
Disclosure regimes are piecemeal and may be different for different companies. Under s 414CZA CA 2006 some larger companies are required to produce a ‘section 172(1) Statement’ describing how directors had regard to the matters set out in ss 172(1)(a) to (f) CA 2006 when performing their duty under s 172: including the impact of the company’s operations on the environment.
Certain larger and listed companies are required to provide ‘climate-related financial disclosures’ under TCFD and listed companies have to make additional financial disclosures on ‘environmental matters’. Therefore the extent to which a company can or must disclose the financial implications of nature-related risks will vary.
Without understanding the nature-related risks of a business, it may be difficult for a board, or any individual director, to comply with these obligations.
We see a trend towards investors and stakeholders requiring nature-related risk disclosures.
More detail on these points can be found in the opinion itself, as well as the legal opinion given by George Bompas KC on the duty to prepare annual accounts which provide a true and fair view of the company’s assets, liabilities, financial position and profit and loss.
Not just for directors: pension fund trustees also need to consider climate change and potentially nature
These obligations are steadily being expanded across the fiduciary universe. On 6 February 2024, the Financial Markets Law Committee (FMLC) published guidance for pension trustees providing a general explanation of the legal position and identifying uncertainties and difficulties which exist when considering climate change in the context of fiduciary duties for pension fund trustees.
The FMLC remarked that given the potential significance to financial risk and return, it is difficult to imagine that pension fund trustees, advisers or investment managers could leave climate change out of their considerations when going through the process of reaching decisions, stating that “Matters of a systemic nature or carrying material long-term implications are properly to be identified as such.” They expressly noted that similar considerations may be relevant to matters relating to nature, environment, community and biodiversity.
Next steps for business leaders: further materials to support your board conversation on nature
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The “questions for directors” set out in paragraph 74 of the New Zealand opinion given by Chapman Tripp and commissioned by Pollination Law and CCLI can be used to frame initial conversations about nature-related risks.
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The World Economic Forum CEO Briefing about investing in a nature-positive, net zero and equitable global economy sets out how and why business leaders can and should lead the transition to a nature-positive economy in their organisations.
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Consider the Chapter Zero tools that have been developed, including this information on Five ways to tackle nature loss and climate change in the board room.
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Get ahead of the curve and consider how to integrate nature into your transition plan: read the advisory paper produced by the Transition Plan Taskforce’s Nature Working Group on The Future for Nature in Transition Planning. Explore the synergies and trade-offs between nature and climate as risks and opportunities in this area ultimately need to be considered together.
Our Sustainable Finance & Investment team creates thought leadership to ensure that you can navigate your sustainable business future. Please contact us for help in understanding fiduciary obligations in this area, how the issue applies in your jurisdiction/organisation and how to integrate nature into your risk management and business strategy.
This note is intended to be a general guide and covers questions of law and practice. It does not constitute legal advice.
Authored by Emily Julier and Bryony Widdup.
