On the 11th March 2024, the Commonwealth Climate and Law Initiative, together with Pollination, published a new legal opinion entitled 'Nature-related risks and directors' duties under the law of England and Wales'.
James Burton of 39 Essex Chambers said:
'As a public document, underpinned by comprehensive evidence and authoritative explanation of the legal principles, the legal opinion is likely to become a key reference for both directors and their legal representatives.'
This opinion concludes that nature-related risks are relevant to the discharge of directors’ duties under sections 172 and 174 of the Companies Act 2006.
Secondly, it states that a company’s nature-related risks can cause harm to its financial health in both the short and long term.
Thirdly,
'Directors who fail to give consideration to 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.'
Finally,
'Even in cases where it is difficult to quantify the loss the company has suffered, a director can face adverse consequences for the breach, such as termination of employment, or a challenge to any remuneration or exit package.'
A few years ago in Raithatha v Baig [2017] EWHC 2059 (Ch), the court noted that the “standards required of a director to discharge the duties are higher perhaps than at any time in the past.”
This opinion comes at a time when investors, NGOs, and minority shareholders, are all placing new levels of scrutiny on the impact of companies on climate and nature, and they are directing their questions straight to the Board.
'The risk that directors will be challenged in respect of alleged failures to identify and manage nature-related risks (which encompass but are broader than climate-related risks) has never been higher.'
1. Potential threats
A company’s dependencies and impacts on nature can have significant effects on a company’s ability to operate successfully. Nature-related risks include but are not limited to climate related risks. The potential threats posed to a company from its dependencies and impacts on nature may include:
Supply chain disruptions or failures,
Reputational damage,
Higher operating costs,
Lower share price,
Direct consequences of its own damage to the ecosystems from which it sources its products; and,
Civil and criminal proceedings.
In ClientEarth v Shell plc [2024] Env LR 1, the claimant, a shareholder in Shell, sought permission to continue derivative claims against its directors for, amongst other things, breach of s. 172 in relation to the company’s climate change risk management strategy.
The Court refused permission at the first stage to continue a derivative claim against the directors of Shell. However, the case is still hugely significant. Lord Carnwath, writing extra-judicially, has criticised a few elements of the decision in much detail, demonstrating that a different judge could have come to a different decision.
In R. (on the application of ClientEarth) v Financial Conduct Authority [2023] EWHC 3301 (Admin), ClientEarth sought permission to apply for judicial review of the FCA’s decision to approve the prospectus of Ithaca Energy plc
'on the basis that Ithaca had failed adequately to disclose or describe its assessment of the materiality of its climate-related financial risks'.
Although they were not successful, it is noteworthy that ClientEarth had standing to pursue its application on a public interest basis.
Even when litigation is not successful, the mere existence of a claim may have an adverse reputational impact on a defendant company and directors themselves.
Richard v IP Solutions [2016] EWHC 1835 (QB) is one example where the court decided that two director shareholders had not breached their duties to the company, but later the company decided that they still constituted what's known as “bad leavers” under the terms of its articles of association. The directors were obliged to sell all their shares for a nominal sum.
2. Potential actions
The opinion states that it would be prudent for directors to:
Identify the nature-related risks facing their company,
Assess which of those risks are relevant and non-trivial,
Take expert advice where appropriate,
Decide in good faith whether a course of action is appropriate to mitigate those risks and take such steps accordingly; and
Record their decision making process in writing.
'A director who can show that due consideration has been given to whether the director’s actions are likely to promote the success of the company, taking into account all the relevant factors, has significantly more protection from a claim under s. 172 than one who cannot.'
However, it's important to avoid simply going through the motions, and all forms of greenwashing.
Toolkits provided by the Taskforce on Nature-related Financial Disclosures (TNFD) Recommendations can aid a company in doing this properly, and will be of further help once the Recommendations have become more established in the business and regulatory landscape.
3. Small companies
Disclosure requirements vary dramatically depending on the size, character, and complexity of the business, but this opinion is clear that as nature-related impacts are not limited to large businesses, the directors of small companies are still urged to acquire and maintain knowledge on the subject.
'A director of, for instance, a small company that runs a single restaurant could hardly be expected to hire consultants and risk modellers to advise on nature-related risks.
However, such a director would be subject to certain nature-related risks, such as a lack of access to key ingredients due to a decline in ecosystem services or outbreaks of an invasive species.
It is reasonable to expect those directors to take steps to inform themselves of those risks and how to mitigate them.'
Conclusion
We are all highly dependent on nature: the air we breathe, the food we eat, the water we drink.
There have been multiple studies done to prove that companies depend on nature too. Analysis by PwC and the Swiss Re Institute, for example, concluded that 55% of global GDP is highly or moderately dependent on biodiversity and ecosystem services.[1]
Now we have the most comprehensive analysis to date of Board Directors' position when it comes to nature-related risks - they are urged to be not just aware of them but to factor them into their decision-making process.
I highly recommend that Board Directors read this Opinion in full as it contains a thorough examination of Director's Duties in general (which is very useful) and the evolution of duty of reasonable care since the 19th century (which is very interesting). Also, if disclosure frameworks have any significance to your life, this landmark opinion is for you!
Private Goodness offers Boards of Directors a 90-minute bespoke course about Climate Change impacts, risks, and solutions. We also also a 4-hour 1:1 Climate Change session for individual Directors. More info here.
Our Climate Change courses for lawyers can be found here.
[1] PwC, Managing Nature Risks: From Understanding to Action (19 April 2023), p.3. Swiss Re Institute, Biodiversity and Ecosystem Services: A business case for reinsurance (28 August 2020), p. 32.