Nature risk – the next climate risk

Tony DowdingSeptember 18, 2023
Macro of a honey bee (apis mellifera) on a mint (menta piperita) blossom with blurred bokeh background; pesticide free environmental protection save the bees biodiversity concept;
Credit: Shutterstock/cherryyblossom

There are many that believe that nature risk looks set to become the next climate risk. Nature and bio-diversity loss is increasing at an alarming rate and is moving up the governmental and corporate agenda. Tony Dowding talks to Laura Waterford, a director at Pollination and Geoff Summerhayes, a senior advisor at Pollination, and former executive board member of the Australian Prudential Regulation Authority (APRA).

Nature risk looks set to become the next climate risk – what risks are we talking about?

Laura Waterford: It has been said that nature will follow the climate ‘playbook’ but at a fast-forward rate. Similarly to climate risk, the broad categories of nature risk and physical and transition risks dovetail. One is driven by an organisation’s dependencies on ecosystem services provided by nature, like pollination by bees or the provision of water, and the second is contributions to the drivers of nature loss like pollution and land use change. The commercial implications of these risks arise because of things like possible supply chain and operations disruption, reduced productivity, increased litigation risk, increased costs of regulatory compliance, stranded asset risk, loss of customers or challenges accessing capital.

Which sectors are most impacted by this focus on nature risk and biodiversity loss?

Laura Waterford: Almost half the world’s GDP is moderately or highly dependent on nature and natural capital. Sectors like agriculture, food and fibre, construction, mining and extractive industries all simultaneously rely on and impact nature. As a result, those sectors that directly contribute to land use change – such as agriculture, the built environment and mining and extractives are likely to be scrutinised closely. Others that are driving pollution, like plastics and fertilizer manufacturing, are also likely to come under the microscope too.

Risk managers may be aware of the Taskforce on Climate-related Financial Disclosures (TCFD) but less aware of the Taskforce on Nature-related Financial Disclosures (TNFD). Can you briefly explain what it is and what it hopes to achieve?

Geoff Summerhayes: The TNFD is a framework for the assessment and disclosure of nature-related financial risks and it is built on the same four pillars as the TCFD (governance, strategy, risk management and metrics and targets). Like the TCFD, it is likely to have an impact in increasing investor scrutiny and informing decisions relating to the allocation of capital in the transition to a nature positive future. The TCFD was first released in 2017 and is now being embedded in corporate disclosures. The TNFD is likely to be embedded in a much shorter time frame, as a result of following the TCFD framework.

Can you explain its relevance for risk managers? What do they need to know?

Geoff Summerhayes: Risk managers will have an important role to play in setting expectations for what good disclosure and management of nature-related risks look like. In the short term, understanding and helping to set expectations regarding levels of engagement with the TNFD should be a priority. A key area to be aware of is the double materiality of nature risk. Unlike climate, risk managers will need to establish and disclose both their impacts and dependencies on nature, and associated risks.

Do you expect to see a rise in nature-related litigation? Will this be aimed at corporates as well as governments?

Laura Waterford: We expect to see a rise in nature-related litigation aimed at corporates. There is a high correlation between scientific research on societal harms and litigation. This has proven to be the case over time. Research on nature harm, cause and effect is expanding rapidly and there is an expectation that liability will follow this trajectory.

We expect this to move quickly. Companies need to consider their impacts and think about what types of litigation they could be faced with considering their impacts – including in relation to areas such as causing pollution by releasing chemicals or plastics into the environment, or development consents being challenged in court by community groups concerned about the environmental impacts of land clearing.

There are far more hooks for nature-related litigation than there were for climate litigation. This is primarily because in the time when climate litigation was evolving, we didn’t have a great deal of regulation in the space, so there weren’t many options for bringing actions in relation to non-compliance with existing legislative obligations and processes. However, there is already a lot of environmental regulation in place in relation to activities that have negative impacts on nature – like land clearing, waste dumping, pollution standards.

At the UN and governmental level, we have a recognised “right to a clean, healthy, and sustainable environment”. This has a compelling intersection with the recent climate change and human rights litigation in Australia, meaning we could have similar cases for nature. For example, in 2022, the UN Human Rights Committee found Australia violated Torres Strait Islanders’ “rights to enjoy culture and family life” by failing to address climate change impacts. On a similar basis, it may be arguable a country has violated a citizen’s “right to a clean, healthy, and sustainable environment” by failing to address other impacts on nature such as pollution, deforestation and overextraction.

What could all this mean for directors’ liability?

Laura Waterford: It is arguable that the factors that informed the seminal opinion by Noel Hutley SC and Sebastian Hartford-Davis on Australian directors’ duties and climate risk in 2016 are now also true for nature-related risk. (https://assets.nationbuilder.com/auscon/pages/20826/attachments/original/1665019942/2208_Nature_NatureDependencyReport_FINAL-2.pdf?1665019942)

In the context of nature-related risk, the key factors are:

  1. Physical risks – Nature is known to be in decline globally and in Australia, and nature loss gives rise to physical risks with financial implications for companies; and
  2. Transition risks – In response, there is an increasing likelihood of tightening regulations in Australia to address negative impacts on nature, as well as of litigation and changing consumer preferences, which may also have financial implications for companies.

As a result, nature-related risks may already be relevant to a director’s duty of care and diligence under section 180(1) of the Corporations Act 2001 (Cth) (the Act), to the extent that those risks are foreseeable and intersect with the interests of the company. This is because, for some Australian companies, nature-related physical and transition risks are clearly capable of representing risks of harm to the interests of the company and could also be regarded by a court as being foreseeable at the present time. It follows that a director who fails to properly consider these risks could be held personally liable for breaching their duty of care and diligence to the company under the Corporations Act.

What basic measures can companies take to mitigate the risk?

Geoff Summerhayes: Understanding their nature-related risk by carrying out a TNFD-aligned nature risk assessment is the first step towards developing a nature-positive aligned strategy. This will enable companies to demonstrate they are appropriately managing and mitigating their exposure to nature-related risks to their stakeholders.

Is this also a supply chain issue and how can this be mitigated?

Geoff Summerhayes: There are multiple ways businesses can mitigate these risks. Companies should focus on increasing supply chain transparency and deepening relationships with suppliers to provide an opportunity to upskill them on nature-related risks. Implementing procurement standards that take nature-related risks into consideration are also key mitigation measures that companies should be focused on today. Diversification of supply chains or an increased focus on integrated supply chains are mitigation actions that may also be appropriate in some circumstances.

For background: example areas of litigation

Torres Strait islanders:

Plastics:

Chemicals:

Development:

Tony DowdingSeptember 18, 2023
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