Companies face growing exposure to biodiversity liability as regulations line up for 2024, warns Clyde & Co

Businesses that do not address wide-ranging exposures to biodiversity risk will start coming under real pressure within a couple of years as new rules and regulations come into force, warns law firm Clyde & Co.

Publishing a new report with the Global Resilience Partnership, Clyde & Co said planned new disclosure and regulatory requirements in Europe and other parts of the world from 2024 will significantly increase firms’ liability for biodiversity loss.

“Businesses will see new physical, regulatory, market and reputational risks – all of which are compounded by the hyperconnectivity of global value chains,” said Nigel Brook, partner at Clyde & Co. “The consequences of not managing these risks will play out in terms of inability to attract finance, do deals and ultimately in damage to market value,” he warned.

In addition, insurance buyers could see premiums spike for covers most impacted by biodiversity risk, Clyde & Co said.

“Insurers will face scrutiny of the biodiversity risks and impacts of their underwriting and investments,” Brook said. “Biodiversity loss will lead to write-downs and write-offs in impacted business lines, increasing claims and rising premiums,” he added.

Companies face a growing list of biodiversity obligations, regulations and disclosures, with many converging in 2024. Commitments from COP15 countries on biodiversity to protect 30% of land and sea by 2030 are expected later this year. This will tighten regulations and translate to more litigation risk for companies, said Clyde & Co.

The Taskforce on Nature-related Financial Disclosures is trialling a global framework to make nature-related disclosures part of mainstream corporate reporting. Following the blueprint for climate disclosure, Clyde & Co said mandatory reporting regimes are likely to follow.

The EU is expected to adopt a new directive on corporate sustainability due diligence later this year, which will require larger companies in Europe to identify the biodiversity impact of their own business activities and their supply chains by 2024. European companies will be required to take action to prevent, mitigate, or end adverse biodiversity impacts, Clyde & Co explained. Companies risk regulatory fines for any breaches.

“These duties will extend to any part of a value chain where there is an ‘established business relationship’, not just direct suppliers,” Clyde & Co said.

Brook said the first legal cases have already been seen under existing due diligence standards on biodiversity in France, where action is mandatory. “Due diligence failures will be the trigger” for further liability risks, Clyde & Co warned.

Wynne Lawrence, senior associate at Clyde & Co, said: “There are ever-rising standards of care for biodiversity risk assessment, monitoring and disclosure. At the same time, courts are increasingly willing to look beyond corporate structure at group companies and value-chain partners.”

Biodiversity requirements on companies and associated compliance with reporting standards are lined up to become “the next ESG challenge for global businesses, raising significant liability and litigation risks”, Clyde & Co said.

The law firm believes that almost all sectors will be affected by either the physical risks of biodiversity loss or regulatory and reputational risks, which Clyde & Co said can spread to diverse industries and in every value chain from real estate to electronics.