Directors’ Duties: Nature in the Spotlight

Directors’ Duties: Nature in the Spotlight

The global economy is embedded in and dependent on the Earth’s broader ecosystems. This has been demonstrated by several reports, most prominently the World Economic Forum and PwC 2020 report (with figures updated by PwC in a 2023 report) which found that more than half of the world’s total GDP is moderately or highly dependent on nature and its services. As such, the world is greatly exposed to the loss of nature; the World Economic Forum’s Global Risks Report 2024 identified biodiversity loss and ecosystem collapse as the third most severe global risk over the next 10 years.

Concerningly, the UK is one of the most nature-depleted countries in the world. A recent report by the Green Finance Institute found that damage to the natural environment is slowing the UK economy, and could lead to an estimated 12% reduction in GDP in the years ahead. This figure is a preliminary but conservative estimate, but still larger than the hit to GDP from the global financial crisis (5%) or Covid-19 (11%).

But what role do companies play in addressing nature-related risks, and could directors be liable for failing to consider such risks?

In March this year, a legal opinion authored by high-ranking company and financial law barristers and co-commissioned by the Commonwealth Climate and Law Initiative (CCLI) and Pollination (the Opinion), shed light on how directors' duties under the law of England and Wales encompass naturerelated risks. This Opinion emphasises the legal obligations of directors to consider nature in their decision-making processes, highlighting the evolving landscape of corporate responsibility. This article explores the key insights from the Opinion and the implications for directors in managing naturerelated risks.

Directors’ duties: applicability to nature

Under the Companies Act 2006, the duties of directors in England and Wales include:

• The duty to promote the success of the company for the benefit of the members as a whole (section 172). This duty is one of loyalty which is broad and flexible. Section 172 contains a non-exhaustive list of factors to which directors should have regard and includes “the impact of the company’s operations on … the environment”. The authors of the Opinion consider this factor to encompass nature-related risk.

• The duty to act with reasonable care, skill and diligence (section 174). Whilst the law has not changed, directors’ duties are constantly evolving. The scope of directors’ duties is affected by the factual context in which a company operates, changes in scientific, technological, economic and financial understanding and shifts in market and societal attitudes. The Opinion states that nature-related risks fall within the category of risks to which a director ought to have regard when discharging their duties under sections 172 and 174. Directors who fail to consider relevant non-trivial nature-related risks, and take appropriate steps to mitigate them, may be exposed to claims that they have acted in breach of duty. Consequences for breach of duty may include claims for damages, director termination, adverse reputational consequences and a challenge to executive directors’ remuneration and ‘bad leaver’ provisions. The findings of this opinion reflect a 2022 report by the CCLI which concluded that nature-related risks are likely to be relevant to directors’ duties under many company law frameworks around the world.

Understanding your dependencies and impacts on nature

Nature-related risks are “potential threats (effects of uncertainty) posed to an organisation that arise from its and wider society’s dependencies and impacts on nature.” They can arise in myriad factual scenarios with a wide range of direct and indirect effects on a company. Risks can present themselves as:

• Physical risks: these will depend on the characteristics of a company's dependencies and encompass location-specific chronic or acute risks to an organisation that result from the degradation of nature and consequential loss of ecosystem services. For example, soil degradation

or water shortages can impact food producers, retailers and other companies in the supply chain.

• Transition risks: these can result from shifting consumer and investor sentiment and new technology or regulations. For example, the introduction of the UK Environment Act 2021 prohibits businesses operating in the UK from using key forest-risk commodities, such as soy, cocoa, palm oil and cattle products, produced on illegally occupied or used land.

• Legal risks: these include the potential for complaints, regulatory action or litigation against companies for the impacts of their activities on ecosystems or misrepresentation of nature-related risks and impacts. For example, Drax Group Plc is under scrutiny for greenwashing and a legal challenge under the Financial Services and Markets Act 2000 following a significant drop in share price partly arising from claims that its woody biomass is low carbon or carbon neutral where much of the biomass is sourced from primary old-growth forests in Canada.

• Systemic risks: these are risks to an organisation from the breakdown of the entire system, including risks from the breakdown of natural systems (e.g., triggering tipping points) and risks from the destabilisation of the financial system (e.g., supply chain disruption, price volatility, and greater insured losses).

Implications for directors

Shell for mismanagement of climate risks (the case is discussed further here) might provide directors with some comfort. However, the Opinion acts as a reminder that another judge could have decided the Shell case differently by referencing extra-judicial commentary from retired Supreme Court judge Lord Carnwath on the Shell case as a “missed opportunity”. The Shell decision is not necessarily a bar to similar claims regarding directors’ management of nature-related risks.

Directors can promote the success of their company using the Opinion’s five-step roadmap to address nature-related risks and steer their company competitively through the nature-positive transition.

1. Identification: Directors who actively consider the extent to which their company faces nature-related risks will find it easier to make commercial decisions and justify action or inaction.

2. Assessment/evaluation: Directors can assess which risks are relevant and non-trivial and evaluate their potential to cause harm to the company, aided by TNFD guidance and materiality assessments.

3. Risk management/mitigation: Consider how best to manage and/or mitigate relevant and non-trivial risks where appropriate, for example through a risk management framework.

4. Disclosure: Decide i) what needs disclosing under applicable laws and ii) whether to voluntarily disclose (in response to market or investor expectations) material nature-related risks or impacts.

5. Documentation: By properly recording how they have taken the above four steps (in board minutes, agendas, memorandums and reports) directors can protect themselves from legal risks.

Conclusion

Nature-related risks fall within existing financial risk categories and are not new. The focus on nature is only becoming more pronounced, with the International Sustainability Standards Board commencing work on naturerelated issues drawing on the recommendations of the TNFD. The Opinion provides a compelling reminder that directors cannot afford to ignore nature-related risks. As the legal and regulatory landscape evolves, directors must integrate nature considerations into their decision-making processes to fulfil their statutory duties. By proactively following the steps above, directors can mitigate risks and position their company for long-term success in a sustainable economy. 

Jasmine Fraser

Corporate/Finance and Climate Lawyer