Reflections on the new landmark opinion on directors' role in managing climate risk

Building on a series of expert opinions from Noel Hutley and Sebastian Hartford Davis on the role of boards in managing climate risk, a new legal opinion authored by Sebastian Hartford Davis and Zoe Bush (commissioned by Pollination Law and the Commonwealth Climate and Law Initiative) concludes that:

'Directors of companies should at least identify the company’s nature-related dependencies and impacts, and consider the potential risks this may pose to the company. Directors who fail to consider nature-related risks could be found liable for breaching their duty of care and diligence'.

An expert panel – Sarah Barker (Founding Partner and Board member of Commonwealth Climate and Law Initiative), Laura Waterford (Director, Pollination Law), Nicolette Rubinsztein (Non-executive Director) and Zoe Bush (Senior Solicitor in the Environmental Defenders Office’s Safe Climate (Corporate) team, and an Adjunct Lecturer at the University of Western Australia Law School) - moderated by Geoff Summerhayes (Chair, Senior Advisor Group Pollination) discussed the implications for boards.

Here are our key takeaways.

Why are we talking about nature?

The starting point for the discussion was acknowledgement that:

• nature underpins and is not separate from the global economy
• Australia's economy is heavily dependent on nature
• the impacts of the rapid deterioration of nature are already being felt – companies are already feeling the direct and indirect effects of their dependencies and impacts on nature
• directors should be thinking of nature as a risk issue

As such directors should be turning their minds to nature-related as a potential source of financial, reputational and legal risk (as well as a source of potential opportunities). This is confirmed by the 2023 Harford Davis and Bush opinion.

Importantly, the panel observed that while global momentum on nature-loss has been building for a number of years, and while nature-loss is an area of increasing focus from many quarters – for example from: investors (eg the launch of Nature Action 100+ initiative); standard setters (eg the establishment of the International Sustainability Standards Board (ISSB) and the release of the first two global sustainability reporting standards); governments, regulators and the community more broadly – it is not (yet) receiving the same attention from boards as other risks.

Many boards are still at the 'why' stage on nature-related risk

The panel agreed that nature-related risk is set to have as large an impact on the way companies operate as the move to net zero, but that as yet, many boards have yet to 'come to grips with the issue'.

Having said this, it was suggested that there is variation in the level of board focus and the level of priority currently being given to nature-related risk with listed companies (generally) more likely than others to be engaged, and more advanced in their understanding.

It was also observed there is some variation along industry lines (though listed companies across sectors were observed to be more engaged than others).

This is understood to be in part because organisations in some sectors – for example, financial services institutions – may consider that they have no direct exposure. However, it was pointed out that many financial services organisations are likely to have some exposure to nature-related risks arising from their indirect nature impacts.

For example, banks may be indirectly exposed to nature-related risks as a result of their lending practices.

To illustrate: lending to agricultural businesses whose operations disrupt ecosystems through deforestation, soil erosion and/or water exploitation, has been linked to a decline in pollinating insects like bees. Falling crop yields is likely to impact the stability of agricultural businesses, which in turn impacts their ability to repay loans. This, in turn, poses a risk to banks, as it could lead to loan defaults.

Separately, it was noted that businesses may be exposed to reputational risks arising from their impacts on nature - even where they are operating within the letter of existing regulation - as a result of rapidly shifting community attitudes. An example of this is a construction company that acquired land for building purposes, with the necessary land-clearing approvals. However, the land to be cleared was koala habitat. The company in this instance ultimately chose not to proceed (despite the costs it had already incurred in acquiring the land) as it assessed the reputational risk of doing so to be more costly than proceeding.

Australian directors are highly exposed relative to directors in other jurisdictions

The combination of the Australian economy's acute level of exposure to nature-related risks, the relatively high bar imposed on directors - ie our relatively strict director's duties and stringent continuous disclosure and misleading and deceptive conduct regimes – and the relative weakness of hard environmental protection laws, means that Australian directors' level of exposure to potential litigation risk in this context is high (relative to other jurisdictions).

This is evident in the high level of climate litigation in Australia relative to other jurisdictions – on a per capita basis, Australia is the global leader of ‘climate-related litigation’ (read: Climate litigation development: Australia leading the pack).

Nature-related risk will likely follow the same trajectory as climate risk, but on 'fast forward'

The panel expects nature-related risk to follow the same trajectory as climate risk though at an accelerated rate.

This is because:

• Nature-loss is occurring at a rapid rate – we are moving ever close towards the edge of several 'tipping points'
• Nature and climate are inextricably linked, rather than separate issues and climate is already on the agenda for most organisations. Nature-related risks could be considered to be a compounding factor, rather than an entirely new risk area for companies to understand (though this is not to diminish the complexity inherent in the task)
• Organisations already have a head-start in that many already have the necessary governance frameworks in place – though they this is not to say no work is required in extending these to integrate nature-related risk. In support, the panel pointed to the high level of uptake of the Taskforce on Climate-related Financial Disclosure framework (TCFD) across listed companies and observed that the newly minted Taskforce on Nature-related Financial Disclosure (TFND) recommendations adopt a similar approach. Likewise, organisations are likely to be able to draw on the lessons learned in other contexts eg implementation of the modern slavery regime.
• The TNFD has been developed to be consistent with the recently released International Sustainability Standard Board (ISSB) global sustainability standards and with the existing TCFD framework. Importantly, while the TFND is not binding on business as yet, the panel expects that it will become so in time.
• The level of investor concern and focus on nature-related risk is increasing. In the US, shareholder proposals on a range of nature-related risk issues are already being filed, and companies are moving to respond. It's expected that Australian investors are likely to follow suit.
• Jurisdictions outside Australia – eg the EU - are already moving to tighten regulation, which has implications for business operating in those jurisdictions, and (the panel suggested) may signal that other jurisdictions will also tighten requirements.

Nature-related risk is a complex area but doing nothing/putting off taking action is the more risky option

The panel acknowledged that nature-related risk is a complex challenge given that the risks for every organisation will be specific to the organisation and its particular circumstances, and that unlike climate risk there is no one metric that can be used to measure progress.Added to this, it was acknowledged that:

• boards may not already have an understanding of nature-related risks and/or existing and/or emerging nature-risk specific frameworks
• there may be data challenges
• boards already have a 'full agenda'.

However, the panel underlined that directors should not allow the difficulty and complexity of the challenge to be an excuse for inaction observing that:

• nature-loss is accelerating and by extension, so are the financial, reputational and legal risks arising from organisations' direct and indirect dependencies and impacts on nature;
• inaction – failure to identify, consider and assess the nature-related risks likely to harm your business - will not insulate boards (or the organisations they lead) from exposure to liability
• regulatory requirements and expectations appear likely to tighten. For companies with markets in the EU, tighter regulation may already limit their ability to sell certain products (eg products such as beef produced on land subject to deforestation post 2020)

[Note: The 2023 Hartford Davis and Bush opinion includes detailed discussion of the impact of EU regulation on Australian beef production a paragraphs 27 to 28.]

What steps should boards be taking now?

As a first step, it was suggested that:

• Directors be proactive in educating themselves about nature-related risk, by drawing on the materials/data available including the material available on the TNFD website. A joint publication from the CCLI and the Australian Institute of Company Directors - Biodiversity Risk: Legal implications for companies and their directors– was also suggested as a useful resource.
• It was suggested that organisations give consideration to the TNFD's four-phase LEAP risk and opportunity assessment approach. This process assists organisations to: 1) Locate the interface with nature; 2) Evaluate the priorities/impacts; 3) Assess material risks/opportunities; and 4) Prepare to respond and report. Given the urgency of the problem, boards were urged to 'get started' – to prioritise what is a significant, and urgent challenge rather than put off taking action.

[Source: This article is based on notes taken a panel discussion hosted by Pollination Law entitled “Nature-related Risk and Directors’ Duties” 03/11/2023]

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