Directors’ Duty to Consider Nature
A recent legal opinion commissioned by Pollination and Commonwealth Climate and Law Initiative on the nature-related risks and directors’ duties could indicate a changing tide in the environmental risks faced by financial institutions and their board of directors. (Commonwealth Climate and Law Initiative, 2024).
In the opinion, Sharif A. Shivji KC suggested that a company’s board of directors ought to consider nature-related risks to ensure they fulfil their fiduciary duties. Directors of publicly listed companies have fiduciary duties to their shareholders, which include the duty of promoting the success of the company, the duty to act with reasonable care, skill and diligence, and the obligation to disclose information about the company in reports (Commonwealth Climate and Law Initiative, 2024; Investopedia, 2023). If found to have failed to uphold their fiduciary duties, directors can be held personally liable, threatening companies and their directors with lawsuits and resulting reputational and financial damage.
This opinion was the first time that nature-related risks have been explicitly described as within the remit of directors’ duties in England and Wales (Commonwealth Climate and Law Initiative, 2024).
These risks are defined as “the potential threats posed to an organization that arise from its dependencies and impacts on nature, [which include] but are not limited to climate related risks”. Based on this legal view, publicly listed companies ought to be considering nature-related risks in their decision-making and strategic planning or risk breaching their duty and face legal consequences (Commonwealth Climate and Law Initiative, 2024). This builds on recent Australian and New Zealand legal opinions describing nature-related considerations for corporate governance as well as similar legal opinions illustrating climate-related related considerations for corporates in many other countries (Commonwealth Climate and Law Initiative, 2024).
This article is very timely as it follows the English’s court May 2023 dismissal of ClientEarth’s case against 11 of Shell’s Directors for mismanaging climate risk and the January 2024 appeal rejection (ClientEarth, n.d., 2024). The High Court of England and Wales dismissed the case on the grounds that ClientEarth, an environmental NGO, could not be acting in the best interests of the company, hence, the case did not pass procedural hurdles (ClientEarth, n.d., 2024).
Nevertheless, globally, climate litigation is on the rise with recent landmark victories for climate suits in Switzerland, where the government now has a legal duty to take greater action on reducing emissions, and in India, where citizens’ now have the right to be free from the adverse effects of climate change (Dickie et al., 2024). There are further climate litigation cases pending in Australia, Brazil, South Korea, and Norway, among others.
Climate litigation experts suggest that risks posed to corporates by climate litigation are material, increasing and currently unmanaged (Wetzer et al., 2024). Since 2015, over 100 climate litigation cases have been filed annually. Despite this, in a survey of central banks, 93% did not quantify the potential impact posed by these cases (Wetzer et al., 2024). Furthermore, biodiversity or nature-related litigation is lagging behind climate-related legal action, despite mounting evidence of the severe societal and economic harm caused by damage to the biosphere (Ranger et al., 2024).
Now, nature-related risks to corporates, financial institutions and Central Banks are coming to the forefront. In late 2023, the Network for Greening the Financial System (NGFS) published their Green Scorpion Occasion paper on nature-related risks to financial stability and the Taskforce for Nature-related Financial Disclosures (TNFD) released their final recommendations (Ranger et al., 2023; TNFD, 2023). In 2024, the EU Corporate Sustainability Reporting Directive (CSRD), which is the first legally-binding common reporting framework for environmental disclosures and includes nature-related considerations, will release the first reports following the newly laid out requirements (Climate Disclosure Standards Board, n.d., 2020).
Legal scholars posit that biodiversity litigation, specifically rights-based biodiversity litigation, is primed to soon accelerate as climate litigation did in the 2010s (Rodríguez-Garavito & Boyd, 2023). The 2022 Kunming-Montreal Global Biodiversity Framework, having been lauded as nature’s answer to the 2016 Paris Agreement for climate change, provides potential framing for litigation with its quantitative targets for global biodiversity action and rights-based language (Andrea Willige, 2021; Rodríguez-Garavito & Boyd, 2023).
It remains to be seen whether directors will be successfully held personally responsible for environmental-related strategic decision-making, as personal liability can be challenging to establish. However, this opinion piece is important as it adds to a growing body of legal literature on nature-related litigation and makes a strong case that it is time for companies to start seriously considering nature-related financial risks in their strategic decision-making or face the consequences (Commonwealth Climate and Law Initiative, 2024).
Author: Emma O’Donnell
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