Nature-related risks and directors’ duties

Introduction

A recent legal opinion by Sebastian Hartford-Davis and Zoe Bush, released in October 2023, has been heralded as an important landmark in Australia’s pathway to a nature-positive future. The legal opinion on the interaction of a director’s duty of care and diligence under section 180 of the Corporations Act 2001 (Cth) (Corporations Act) with nature-related risks arising from dependencies and impacts on nature (Opinion) concludes that:

• directors should be identifying a company’s nature-related dependencies and impacts, and considering the potential risks this may pose to the company;
• companies are required to disclose nature-related dependencies and impacts that pose a material risk of harm to the company in the directors’ report and corporate governance statement; and
• directors who fail to consider nature-related risks could be found liable for breaching their duty of care and diligence.

In 2016, one of the Opinion authors, Sebastian Hartford-Davis also wrote an opinion advising that companies had a duty under section 180 of the Corporations Act to consider the impact of climate change risks on their business. Noel Hutley SC and Sebastian Hartford-Davis subsequently provided two supplementary opinions on climate change and director’s duties in 2019 and 2021. These opinions were influential in highlighting the importance of the impacts of climate change risks on businesses and making the link between those impacts and a director’s duty of care and diligence under section 180 of the Corporations Act. In the 2021 opinion, Noel Hutley SC and Sebastian Hartford-Davis concluded that the standard of care to be exercised by directors with respect to climate change has risen and continues to rise.¹

The duty of care and diligence

Section 180(1) of the Corporations Act requires directors or other officers of a company to exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise in the same circumstances.

‘Officers’ has a broad definition in the Corporations Act and applies to a range of persons, including directors, company secretaries, and a person who makes, or participates in making, decisions that affect the whole or a substantial part of the business of the company.

Accordingly, both directors and officers of companies must be mindful of the conclusion in the Opinion that:

“Directors of companies should… identify the company’s nature-related dependencies and impacts, and consider the potential risks this may pose to the company. Directors who fail to consider nature-related risks could be found liable for breaching their duty of care and diligence.”²

What are nature-related risks?

Nature-related risks are defined in the Opinion as “potential threats (effects of uncertainty) posed to an organisation that arise from its and wider society’s dependencies and impacts on nature.”³

The Opinion describes the concept of nature-related risk as a useful organising principle through which directors can assess the implications for a company arising from dependencies and impacts on nature.

Nature-related dependencies are the aspects of ecosystem services that a company relies on to function.⁴ For example:

• benefits that are extracted directly from nature;
• benefits arising from nature’s ability to influence biological processes, climate, and hydrological processes; and
• experiential or intangible benefits from nature, such as the recreational value of coral reef tourism.

Nature-related impacts are changes in the state of nature, which may result in changes to the capacity of nature to provide social and economic functions, including ecosystem services.⁵ They can be positive or negative, and direct or indirect. Nature-related impacts can also create or exacerbate dependency-related risks where those impacts are on the same set of ecosystem services on which a company depends.⁶

The Opinion concludes that for some companies, there are risks arising from dependencies and impacts on nature that are capable of posing a risk of harm to the interests of Australian companies, and which could be regarded by a court as being foreseeable today.⁷

Current Australian landscape

While assessment and disclosure of nature-related risks has not previously been linked to the duty of care and diligence under section 180 of the Corporations Act, the Opinion points to two important international developments that have occurred in the last 12 months which are closely related to the topic of nature-related risks:

1. the Kunming-Montreal Global Biodiversity Framework (GBF), which was agreed between a number of countries, including Australia, on 19 December 2022 [refer to our previous legal update on this]. The GBF is made up of 4 global 2050 goals and 23 global 2030 targets, broken up into four broad topics in alignment with the goals, being biodiversity conservation and restoration, nature’s contribution to people, access and benefit sharing and tools, and solutions for mainstreaming and implementation. The Opinion notes that Target 15 of the GBF requires signatories to take legal, administrative, or policy measures to encourage and enable business to monitor, assess and transparently disclose their risks, dependencies, and impacts on biodiversity; and
2. on 18 September 2023, the Taskforce on Nature-related Financial Disclosures (TNFD) finalised its framework for nature-related risk and opportunity management and disclosure, which will support corporate reporting in line with Target 15 of the GBF [refer to our previous legal update on this].

Although these international developments do not create binding obligations under Australian law, they are an indication of the shift in market expectations for the analysis of corporate risk. The GBF and TNFD also provide useful guidance to help companies understand the requirements for disclosure of nature-related risks, and provide insight into possible future regulation in Australia.

It is useful to consider the recommendations of the TNFD and the potential impact of those recommendations alongside the trajectory of the recommendations made by the Taskforce on Climate-related Financial Disclosures (TCFD). When the TCFD recommendations were released in 2017, 10.5% of the ASX 200 indexed companies reported against or committed to reporting against those recommendations.⁸ As at 31 March 2023, 75% of the ASX 200 (around 150 companies) had committed to or were already reporting against the TCFD framework. This was an increase of 66% from 2022.⁹

It is possible that the adoption of the TNFD recommendations will follow a similar trajectory to the adoption of the TCFD recommendations. The Opinion refers to research by the Swiss Finance Institute and the European Corporate Governance Institute which suggests that companies’ nature-related impacts are already beginning to be priced by investors.¹⁰  This may fast-track the adoption of the TNFD recommendations in Australia and around the world.

Nature is the new climate

The conclusions in the Opinion and the growing awareness of biodiversity issues internationally are strong indications that nature is ‘the new climate’ in terms of reporting and regulation.

Australia has seen an uptick in environmental policy and regulation with the release of the Federal Government’s Nature Positive Plan and the development of the National Environmental Standards following the Independent Review of the Environment Protection and Biodiversity Conservation Act 1999 (Cth) (EPBC Act).

The nexus between nature-related risks and economic interests is also becoming more tangible, with the Opinion referring to the spread of varroa mite (a pest of honey bees) in New South Wales as a recent example of dependency-related risk. Further, following the Independent Review of the EPBC Act, decision-makers are under increasing pressure to strike the right balance between the long-term environmental, economic, cultural and social impacts and benefits of their decisions.

The demand for regulators to take action to curb biodiversity loss has created an increased emphasis on delivering nature-positive outcomes. For example, where project activities may impact on threatened and endangered species, regulators are seeking more information from proponents and requiring them to do more to demonstrate that the impacts can be sufficiently avoided or mitigated.

What does this means for directors and corporations more broadly?

We expect that the release of the TNFD recommendations combined with the Opinion will have an impact on the requirements for disclosure and reporting, both in terms of a company’s social licence to operate, and in terms of the future regulatory space for nature in Australia.

The Opinion notes that there has been litigation associated with nature-related impacts already, both domestically and internationally.¹¹ It is likely that these types of actions will continue to increase in number, particularly if the TNFD recommendations follow a similar trajectory to the recommendations from the TCFD.

Directors and officers of companies must ensure that they are adequately discharging the duty of care and diligence. For nature-related risks, this includes:¹²

• identifying the company’s dependencies and impacts on nature;
• considering what potential risks those dependencies may pose to the company. The Opinion notes that nature-related impacts and financial interests are not necessarily conceptually distinct, and risks to the company may extend to any of the interests of the company, including reputational risk;
• if there is a foreseeable risk of harm to the interests of the company, weighing up the foreseeable risk of harm against the potential benefits and deciding whether further action is required; and
• taking steps to ensure that nature-related risks and impacts are disclosed appropriately.

Conclusion

The nature-related risks affecting different companies will vary significantly depending on the sector in which the company operates and the unique circumstances of the particular company.

The global and domestic trend towards a greater focus on the preservation of nature is a strong indicator that companies will increasingly be expected to be aware of and respond to nature-related risks which are impacting, or have the potential to impact, their business.

We expect that the Opinion will have a significant influence on the disclosure requirements and expectations for directors and officers under the Corporations Act, particularly after the mandatory climate-related disclosures are legislated under this Act [refer to our previous legal update]. It seems inevitable that requirements for disclosure of nature-related risks will follow a similar trajectory to requirements for climate disclosure in Australia. Directors and management are therefore strongly encouraged to start considering how they can evaluate their dependencies and impacts on nature, whilst there is still the opportunity to undertake this assessment on a voluntary basis.

This article was co-authored with Hannah Duke.