The legal threat from biodiversity risk

Some corporate directors may have breathed a sigh of relief in July after a UK judge threw out a case, brought by the non-profit group ClientEarth, that sought to hold board members at Shell personally accountable for the oil major’s alleged failure to address climate risks.

But a whole new can of worms is opening up for board directors, according to a noteworthy legal opinion published yesterday in Australia — this time around nature and biodiversity.

The 20-page opinion — which finds that directors could be held personally liable for breaching their duty of care and diligence if they fail to consider nature-related risks — should be of interest to company directors and lawyers far beyond Australia.

Australian law around directors’ duties is broadly similar to that of other “common law” nations such as Canada, India, South Africa and the UK. The parties that commissioned this legal opinion — investment and advisory firm Pollination and the non-profit Commonwealth Climate and Law Initiative — are planning to seek opinions from prominent lawyers in each of those four countries, with the one from the UK expected to come in the next few months.

One might fairly point out that yesterday’s publication reflects the professional view of just two of Australia’s many lawyers. But as the first in-depth legal opinion on this subject, it’s a valuable indicator of where this conversation is heading.

The lead author, Sebastian Hartford-Davis, co-wrote the influential 2016 “Hutley Opinion”, which asserted directors’ potential liability for climate-related risks and helped pave the way for lawsuits like ClientEarth vs Shell. (It’s worth noting that, while the court spurned that case in part due to ClientEarth’s small shareholding, it did not reject the principle of directors’ liability for climate-related risks. Law firms such as Dentons and Stephenson Harwood have said more cases targeting directors could follow.)

In the new document, Hartford-Davis and his co-author Zoe Bush write that nature-related risk has become more of a threat to directors thanks to a series of developments over the past year.

They highlight last December’s UN biodiversity summit in Montreal, where countries committed to “encourage and enable” greater corporate disclosure of nature-related risks and impacts. A further important move, they added, was the Taskforce on Nature-related Financial Disclosures’s recent guidelines for such disclosures. Central banks and financial supervisors, they note, have also started linking nature-related risks to financial stability.

All of this, the lawyers write, means that the nature-related expectations for businesses — and their directors — are moving fast. That in turn comes with “transition risk”, as companies are confronted with new pressures and requirements from their regulators, investors and customers.

So even without any fundamental change to corporate law, they argue, board directors will face a raft of new responsibilities to study, identify and report on biodiversity-related risks. Directors, whether in Australia or anywhere else, would be wise not to relax any time soon.

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