Directors face expanding ESG duties to consider and disclose nature-related risks

By Meg Lee

• Australian directors face an expanding and increasingly complex ESG regulatory environment. In the first of a series of articles in our Beyond ESG Compliance series, we look at the emerging duty directors have to consider nature-related risks and impacts of their company operations.
• In a similar vein to the earlier seminal opinion by Noel Hutley SC and Sebastian Hartford-Davis^[1] on the duty of directors to consider climate risks, Sebastian Hartford-Davis and Zoe Bush were instructed by Pollination Law, in collaboration with the Commonwealth Climate and Law Initiative, to advise on the duties of Australian directors to consider nature-related risks and impacts under Australian Corporate Law. Similar opinions and reports have been released in New Zealand^[2] and in the United Kingdom^[3].
• The Bush and Hartford-Davis opinion^[4] (Nature Opinion) considers whether a director’s duty of care and diligence under section 180 of the Corporations Act 2001 (Cth) requires company directors to consider, disclose and manage nature-related risks arising from dependencies and impacts on nature by their companies’ operations and concludes that:
  • at a minimum, directors should identify the company’s nature-related dependencies and impacts and consider the potential risks this may pose to a company; and
  • directors who fail to do so could be liable for breaching their duty of care and diligence.

Background

The Nature Opinion follows two key international developments that reflect increasing investor and stakeholder focus on nature-related risks in economic decision-making. These are:

• the signing of the Kunming-Montreal Global Biodiversity Framework by 200 countries, including Australia. Specifically, Target 15 requires signatories to take legal measures to encourage business to monitor, assess and transparently disclose their risks, dependencies and impacts on biodiversity; and
• the finalisation of a framework for nature-related risk and opportunity management and disclosure by the Taskforce on Nature-related Financial Disclosures, which includes representatives from significant financial institutions such as Macquarie Group, HSBC and UBS.

Director’s duties

Under section 180 of the Corporations Act 2001 (Cth), directors and officers of Australian companies have a duty to exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:

• were a director or officer of a corporation in the corporation’s circumstances; and
• occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.

At a broad level, this duty requires a director to obtain the knowledge to be able to place themselves in a position to guide and monitor the management of the company. In considering whether a director has breached this duty, courts will balance the foreseeable risk of harm against the potential benefits that could have been expected to accrue from the relevant conduct.^[5] 

The Nature Opinion considers whether risks that must be considered by directors includes ‘nature-related risks.’

What is a nature-related risk?

Nature-related risks are defined in the Taskforce on Nature-related Financial Disclosures (TNFD) as ‘potential threats (effects of uncertainty) posed to an organisation that arise from its and wider society’s dependencies and impacts on nature.’

The Nature Opinion sets out that the definition has two aspects that directors need to consider; namely, it includes both threats to an organisation from:

• a company’s dependencies on nature; and
• a company’s impacts on nature.

While nature-related impacts of a company’s operations are perhaps obvious, a company’s dependencies upon nature are perhaps less obvious. There are several aspects to nature-related dependences. Firstly, they include where a company relies on ecosystem services to function, including direct raw materials from nature (eg timber, minerals, water). Secondly, it includes benefits derived from nature’s role in regulating environmental conditions (eg. agricultural industry reliance on pollination by bees or good conditions in soil). Thirdly, it includes the social / cultural benefits of nature upon which a company may rely (eg. tourism reliance on natural wonders such as the Great Barrier Reef).

Directors will need to consider their supply chain to fully understand their dependencies. This is obviously a complex task and advice should be sought to inform any conclusions about the extent of dependencies and consequent risk.

In some cases, a company’s impact on nature may in turn impact the nature that it depends upon to function, which therefore increases the impact on the company by a further multiplier effect.

In order for the risks to be something that a director must consider, these risks must be foreseeable at the present time. While a company’s nature-related risks will depend on the sector it operates in, Bush and Hartford-Davis suggest that the nature-related dependencies and impacts of many Australian companies could be considered foreseeable at this time. The opinion finds this is particularly so given various reports^[6] over recent times prepared by the insurance industry and the Australian Government that identifies the vulnerability of Australian companies to nature-related impacts. The opinion argues that these reports are relevant as recognition and drivers of the type of ‘market expectations’ that should form the context for the analysis of risk by directors.

Nature-related risks and disclosure

Notably, mandatory reporting of nature-related risks has already been introduced in France for financial institutions and it is likely that other countries will follow suit. In the meantime, directors are already subject to the duty to disclose material risks.

Bush and Hartford-Davis suggest that, at a minimum level, directors should at least identify a company’s dependencies and impacts on nature and consider what potential risks this may pose to the company.

Directors should then also take steps to ensure that nature-related risks and impacts are adequately disclosed if they constitute a ‘material risk’ to the company in line with ASIC Regulatory Guide 247.^[7] Additionally, directors of listed entities should disclose material exposures to environmental risks and outline how those risks are managed.^[8]

The Nature Opinion argues that disclosure in itself forms part of a director’s duties, as directors owe a duty to prevent the harm that a contravention of the law may cause to a company. As best practice, directors should also disclose nature-related impacts that may not pose a material risk of harm to the company where those impacts:

• would likely influence investors’ decisions to decide whether to acquire or dispose of that company’s securities; and/or
• the company is subject to the European Union’s Corporate Sustainability Reporting Directive, which already requires the disclosure of nature-related impacts regardless of their impact.

Of course, the specific risks for a particular company will depend upon the company and sector. Generally speaking, the courts will consider the size and type of a company, the size and nature of the business it carries on, the terms of its constitution and the composition of its board in determining the specific content of the duty owed that arises from the foreseeable risks.^[9]

A contravention of the duty will not necessarily constitute a breach. However, a director may be liable where they have failed to exercise reasonable care and diligence or allowed the company to contravene disclosure requirements, where that breach was reasonably foreseeable.