Overview

The Commonwealth Climate and Law Initiative (CCLI) together with Pollination Law have published a new legal opinion authored by Sebastian Hartford Davis and Zoe Bush explaining the extent to which the authors consider that directors' existing duty under Australian law to exercise 'care and diligence' already requires directors to take into account nature-related risks and cautioning that they may be held liable for their failure to do so.  

The opinion is intended to provide practical guidance to directors, managers and practitioners on this question and builds on the earlier landmark 'Hutley' opinions on climate risk (on which Sebastian Hartford Davis was junior counsel).  

Here's our brief breakdown of the key points. 

Setting the scene: Why are we talking about 'nature-related risk'? 

That nature-loss has implications for the world's economy and for broader society – both of which rely on nature – is increasingly being acknowledged and recognised by investors, regulators and by global standard setters.  

As the Taskforce on Nature-related Financial Risks (TNFD) states: 

'The science is clear.  Nature is deteriorating globally and biodiversity is declining faster than at any time in human history.  The majority of the vital ecosystem services on which business and society depend, and which provide the foundation for every economy, are in decline…There is growing evidence that this poses risks for businesses, capital providers, financial systems and economies, and that these risks are increasing in severity and frequency.'

To give a sense of the level of the global economy's dependency on nature more than half of the world’s gross domestic product (GDP) is moderately or highly dependent on nature and as a result, exposed to risks from nature loss.

Looking at Australia specifically, approximately 49% or $896bn of Australia's GDP has been found to have a moderate to very high direct dependence on “ecosystem services”.

What exactly are nature-related risks?

The Taskforce on Nature-related Financial Disclosure (TFND) defines nature-related risk as the:

'potential threats (effects of uncertainty) posed to an organisation that arise from its and wider society’s dependencies and impacts on nature.'

For clarity: 

• Dependencies in this context refers to the dependencies of organisations on nature - 'the ecosystem services that an organisation relies on in order to function'.  These dependencies could be direct – eg reliance by company on clean water to produce its product - or indirect – eg a retailer relying on farmers who need healthy soil and stable weather conditions to grow their crops.   Disruption to these dependencies is likely to have operational and financial consequences for organisations.  
• Impacts in this context refers to the direct, indirect and/or cumulative effects of an organisation’s activities on nature.  An example of an indirect impact could be a fast food chain contributing to deforestation or habitat loss through its supply chain's demand for palm oil.  This is indirect because the fast food chain is not itself cutting down the trees, or destroying habitat, but its demand for certain products leads to deforestation/habitat loss.  Companies' impacts on nature can lead to risk of reputational damage, increased exposure to regulatory action and/or litigation risk and financial losses.  

Pressure is building on companies to respond 

Market expectations around how companies manage their nature-related risk are increasing as are regulatory expectations.

The authors single out both the signing of the Kunming-Montreal Global Biodiversity Framework (GBF) by almost 200 countries (including Australia) and the release of the Taskforce on Nature-related Financial Disclosure Recommendations (TNFD recommendations) as key 'drivers of the type of market expectations which informs analysis of risk'.  

The authors observe that: 

'Even before the [TNFD] framework was finalised, there was evidence that it was heightening market expectations in relation to nature-related impacts….There is also evidence that the focus on nature-related impacts in the GBF and the TNFD is influencing regulatory requirements in international jurisdictions'. 

How does nature-related risk fit into directors' duty to exercise care and diligence?

Importantly, in light of these and other developments, the authors opine that:

'At a general level, and subject to the circumstances of the company in question, there are risks arising from dependencies and impacts on nature that would be regarded by a court as being foreseeable at the present time'.

This underpins the author's conclusion that directors in Australia already have an obligation under s180 of the Corporations Act 2001 (Cth) to: 

'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'.

What does this entail in practice (as a minimum)? 

The authors make clear that: 

'It is not feasible to provide any guidance in this opinion on the circumstances of a particular director, company or sector. That is in part because, in determining whether a director has exercised reasonable care and diligence, it is necessary to consider a company’s particular circumstances and the position and responsibilities of the director within the company.'

However, at a general level the authors point to the guidance provided by the TNFD – the LEAP approach – as a source of assistance in identifying and assessing nature-related risk issues.  

For context, the TNFD's four-phase LEAP risk and opportunity assessment approach. is intended to assist 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.  

Disclosure of nature-related risks 

In addition, the authors write that directors should be: 

'taking steps to ensure that nature-related risks and impacts are disclosed in accordance with [periodic reporting and continuous disclosure obligations under the Corporations Act 2001 (Cth)]'. 

That is, where nature-related dependencies and impacts post a material risk of harm to the company.  

Additional disclosures may also be required in some circumstances.  The authors write:

'[companies] may also be required to disclose nature-related impacts that do not pose a material risk of harm to a company where:

• those impacts “would, or would be likely to, influence persons who commonly invest in securities in deciding whether to acquire or dispose” of the company’s securities; and/or
• the company is subject to the European Union’s Corporate Sustainability Reporting Directive (CSRD), which requires the disclosure of nature-related impacts regardless of their materiality.'

Additional action may be required?

The authors make clear that having formed a view on whether a company's dependencies and impacts on nature pose a material risk of harm to the company, directors are also obligated to undertake their own assessment of whether further action is required –  to 'balance the foreseeable risk of harm against the potential benefits that could reasonably have been expected to accrue to the company from the conduct in question'.

The authors opine that: 

'Directors who conduct the balancing exercise themselves, and who act (or decline to act) based upon a rational and informed assessment of the company’s best interests, will minimise the risk of being found to have failed to exercise due care and diligence.  They may also have the protection of the “business judgment rule”….However, the defence will not protect directors who are uninformed, who make no conscious decision, or who exercise no judgment'.'

[Source: Hartford Davis, S., & Bush, Z. (2023). Nature-related risks and directors’ duties. Pollination Law and Commonwealth Climate and Law Initiative. Retrieved from: Joint Memorandum of Opinion Nature related risks and directors duties.pdf (commonwealthclimatelaw.org)]

Interested in this (and similar) topics?

Subscribe to alerts and our weekly wrap up of key financial services, risk, regulatory and ESG developments.