Landmark legal opinion highlights UK directors’ obligations on nature-related risks

Directors need to consider their company’s nature-related risks as part of their legal duties under English company law, according to a landmark independent legal opinion commissioned by Pollination Law and the Commonwealth Climate and Law Initiative (CCLI). Board directors could potentially breach their duties by failing to consider or act on relevant nature-related risks (which encompass, but are broader than, climate risks), which could lead to personal liability, according to the opinion, which was authored by a team of corporate and financial law barristers. Pollination Law said the opinion provides clarity, for the first time, on directors’ obligations with respect to nature-related risks in the UK. Martijn Wilder, CEO of Pollination, said: “This landmark opinion reiterates the need for boards to put relevant nature-related risks on their agendas and be able to demonstrate that they have given those risks proper weight and consideration in decision-making.” The CCLI said it marks a turning point in understanding the corporate governance implications that arise from nature-related physical, transition and systemic risks. The opinion warns that failure to identify and assess latent financial risks arising from a company’s unaddressed nature-related impacts and dependencies could expose directors to increased shareholder scrutiny and legal consequences under the Companies Act 2006. It notes that nature-related risks fall within existing financial risk categories and are not new. The Taskforce on Nature-related Financial Disclosures (TNFD) defines these as “potential threats (effects of uncertainty) posed to an organisation that arise from its and wider society’s dependencies and impacts on nature”. This includes physical risks, such as a decline or collapse of ecosystems that underpin a company’s operating model, and transition risks, including shifting consumer preferences and legal requirements. The opinion clarifies the legal basis for the financial relevance of nature in decision-making by boards subject to the law of England and Wales at a time when critical action is needed to protect and restore nature and the ecosystem services on which companies depend, said Pollination Law. The opinion recommends that directors identify and consider the extent to which the company faces nature-related risks, ensuring these are appropriately assessed and evaluated. They should also take steps to manage and mitigate these risks (where appropriate), which may include designing and implementing a framework for systematic risk management. The opinion also emphasises that directors should consider the extent to which their company’s nature-related risks should be disclosed. “At a minimum this should be in line with regulatory requirements, but in some circumstances directors may decide that compliance with their duties may be better achieved by giving voluntary disclosure where there is an emerging market standard or investor expectation to do so. Under some financial regulations, certain companies already have legal duties to report on material nature-related risks and their impacts on nature,” said Pollination Law. The opinion establishes that a director can face significant consequences for breaches of these duties, including potential claims for damages or compensation. Even in cases where it is difficult to quantify the loss the company has suffered, a director can face adverse consequences for the breach, such as termination of employment or a challenge to any remuneration or exit package. The opinion notes the recent extra-judicial commentary from retired Supreme Court judge Lord Carnwath on the courts’ refusal to permit ClientEarth’s claim against the directors of Shell regarding their management of climate risks. The opinion cites this as a reminder that another judge could have decided the case differently and suggests that the decision is not necessarily a bar to similar claims regarding nature-related risks. It concludes that a director who has identified and considered the company’s nature-related risks is much better protected from such claims. The opinion also notes that a director who ‘greenwashes’ the company is likely to expose the company to: (i) latent financial risks arising from unaddressed nature-related impacts and dependencies, (ii) the risk of shareholder and investor claims (including for deceit), and (iii) reputational risk. Professor Thom Wetzer, associate professor of law and finance at the University of Oxford, and trustee of the CCLI, said: “We increasingly understand the potential severity of nature-related risks for companies. Yet directors commonly fail to appreciate the severity of these risks and thereby needlessly put their company at risk. This important report highlights what should have been obvious long ago: nature-related risks are not distinct from other financial risks, and should therefore be considered by directors in furtherance of their legal duties.” Jenni Ramos, corporate/finance and biodiversity lawyer, CCLI said: “This opinion is not a radical interpretation of UK company law, but a logical, authoritative and diligent elucidation of established legal principles, supported by comprehensive evidence. It confirms that nature-related risks are relevant to a company’s financial success and therefore to directors’ legal duties. This signals an opportunity for directors to steer their company on a competitive path through the nature-positive transition.” ---------------------------------------------------------------------------------------------------- The inaugural ESG Insight and Intelligence Conference will take place in London on 26 June. This event will examine the European regulatory demands associated with ESG, look at the impact on the corporate risk profile and consider how these risks can be managed more effectively. It will also drill down on the increasing demands and disclosures requirements placed upon insurance buyers by insurance carriers. For more information, please visit https://events.commercialriskonline.com/ESG-24

Landmark legal opinion highlights UK directors’ obligations on nature-related risks

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