Company directors should consider nature-related risks as part of their legal duties under the Companies Act 2006 in of England and Wales, a recent report by corporate and financial law barristers has found.
The report, Nature related risks and directors’ duties under the law of England and Wales, produced by the Pollination Law and the Commonwealth Climate and Law Initiative (CCLI), warned companies that failing to identify and assess financial risks arising from nature-related risks could expose them to shareholder scrutiny and legal consequences under the Companies Act 2006. Further, it claimed company directors could face legal consequences for breaches of nature-related duties, including claims for damages or compensation, termination of employment or a challenge to any remuneration.
The report also examined directors’ duties to promote the success of the company and act with reasonable care, skill and diligence under sections 172 and 174 of the Act. It said directors must identify and consider the extent to which the company faces nature-related risks, ensuring these are assessed and evaluated, and disclose these nature-related risks where appropriate. Further, directors should take steps to manage and mitigate these risks, which may include designing and implementing a framework for systematic risk management, it added.
Nature-related risks are ‘potential threats posed to an organisation that arise from its and wider society’s dependencies and impacts on nature’, as defined by the Taskforce on Nature-related Financial Disclosures (TNFD). This includes physical risks, such as a decline or collapse of ecosystems that underpin a company’s operating model, and transition risks, including shifting consumer preferences and legal requirements.
Awareness of these risks have increased as the world reaches a greater understanding of nature decline. Research by the World Wildlife Fund (WWF) showed wildlife populations have declined by almost 70% since 1970, with global extinction rates up to hundreds of times higher than over the past 10 million years. In addition, the Bank of England found 52% of UK GDP and 72% of UK lending are dependent on ecosystem services, while the Natural Capital Finance Alliance (NCFA) revealed 74% of sectors covered by the UK FTSE All-Share Index are estimated to be dependent on natural capital.
The report pointed to recent examples of litigation as a warning to company directors, such as the ClientEarth v Shell case last year, which saw environmental law charity, ClientEarth, lodging a derivative action against Shell’s directors for not complying with their duties under the Companies Act 2006. It was alleged the company failed to adopt policies that would help it achieve its net-zero target by 2050. Although ClientEarth’s claim was refused by Supreme Court judge, Lord Carnwath, it reaffirms that a director who has identified and considered the company’s nature-related risks is much better protected from such claims, Pollination Law said.
Further, the report also warned a failure to comply with these duties can come with hefty financial consequences for companies and its supply chains.
Thea Philip, associate director at Pollination, said: “The natural systems upon which our societies depend are collapsing. The current state of nature means that countries like the UK no longer have intact natural systems to support the growing demand for clean water, climate regulation, air purification, and food production. This landmark legal [report] provides clarity, for the first time, on directors’ obligations with respect to nature-related risks in the UK. It’s time for directors to take action.”
Jenni Ramos, corporate/finance and biodiversity lawyer at CCLI, added: “This opinion is not a radical interpretation of UK company law, but a logical, authoritative and diligent elucidation of established legal principles, supported by comprehensive evidence.
“It confirms that nature-related risks are relevant to a company’s financial success and therefore to directors’ legal duties. This signals an opportunity for directors to steer their company on a competitive path through the nature-positive transition.”
