Landmark legal opinion paves way for nature to enter the boardroom
The world’s biodiversity is declining faster than at any other time in human history, largely due to human activity. Recent analysis highlights the scale of the crisis, with wildlife populations
declining by almost 70% since 1970 and global extinction rates now up to
hundreds of times higher than over the past 10 million years.
By 2050, if we do not achieve the international commitments to tackle the five main drivers of nature loss, critical natural systems could break down just as the human population is projected to peak. This degradation not only threatens biodiversity and undermines nature’s irreplaceable ability to combat climate change, but also jeopardises the stability of the global economy.
An estimated
55% of global GDP is moderately or highly dependent on nature, and preliminary analysis by the Bank of England found that 52% of UK GDP and 72% of the stock of UK lending is dependent on ecosystem services. Despite this, when decisions are made in the commercial world, nature’s fundamental role is ignored. However, we now know that nature is evidence on which to base governance decisions in a corporate context.
Commissioned by Pollination Law and the Commonwealth Climate and Law Initiative, a team of barristers, led by corporate and financial law silks Sharif Shivji KC and Rebecca Stubbs KC, recently
published a landmark legal opinion which recognises that nature-related risks are relevant considerations for directors when discharging their company law duties.
To mitigate exposure to shareholder and legal consequences for failure to consider nature risks, the opinion recommends that directors take a five-step approach: identify and consider; assess and evaluate; manage and mitigate (where appropriate); disclose; and document decision-making.
Nature-related risks are potential threats that arise from the company’s and wider society’s dependencies and impacts on nature. The current decline of nature and the ecosystem services it provides leaves companies and the global economy
vulnerable to shocks caused by nature’s loss of functionality. Think supply chain disruption, price volatility, collateral and asset depreciation, increases in defaults and greater insured losses.
This new legal opinion follows another
published in January which concluded that directors must consider whether and how to reflect sustainability issues in their financial statements to present a “true and fair view” of the company’s assets, liabilities and financial position.
The global awareness of ecosystem decline and biodiversity loss is growing in political and commercial circles. In late 2022, 188 governments agreed on the Global Biodiversity Framework (GBF) with an overarching goal of halting and reversing biodiversity loss. One of the GBF’s
23 targets for 2030is to introduce legal or policy measures to ensure large and transnational companies and financial institutions regularly monitor, assess and disclose their biodiversity risks in order to reduce negative impacts and increase positive impacts.
Individual firms are also beginning to take steps to assess and mitigate their exposure to nature-related risks, which we now understand can pose material financial risks to their operations and supply chains. The Taskforce on Nature-related Financial Disclosures (TNFD) has formalised how businesses should assess, report, and act on their nature-related dependencies, impacts, risks and opportunities. UK companies have joined the 320 global TNFD early adopters, who hold a
$4 trillion combined market capitalisation and will publicly report on their nature risk between now and 2025.
Directors will be familiar with the recommendations of the Taskforce on Climate-related Financial Disclosures, which preceded the TNFD, and are now mandatory for many UK companies. Boards should expect similar requirements for nature, particularly after the Environmental Audit Committee recommended the UK government introduce compulsory TNFD disclosures over the next three to five years.
The legal and regulatory trajectory is likely to go beyond requiring assessment and disclosure of nature-related risks. Both legal opinions make clear that company directors should themselves take steps to avoid personal liability by keeping pace with these rapidly evolving market dynamics. This will require becoming familiar with, and managing exposure to, nature risk as part of ordinary company management.
To date, financial models have been the primary decision-making tool in the boardroom. However, governance bodies need to understand the limitations of the methods they have historically relied upon and where there are opportunities to do things better. Boards have generally not adopted this wider lens when assessing and managing business risk. Meanwhile, the global risk profile has changed.
There are three takeaway questions. Does your board include people who know about these issues? Is your board capable of seeking and taking on the advice required to respond? Is your board actively taking steps to understand and mitigate these risks, while also looking to seize upside opportunities?
Time is running out if we are to safeguard the natural world in a way that enables humanity to flourish. The expectations on businesses in responding to these global challenges are changing, and directors should be prepared.
This article was first published in Reuters.
