A landmark Australian legal opinion released Thursday has found that company directors who fail to adequately consider, disclose, and manage nature-related risks could be held personally liable.

The opinion was published by Sebastian Hartford-Davis, who wrote the 2016 opinion alongside Noel Hutley SC advising that companies had a duty under the Corporations Act to consider climate-related risks or face legal consequences, and Zoe Bush, a senior climate lawyer with the Environmental Defenders Office.

Commissioned by advisory firm Pollination, the opinion advises that nature-related risks to a company should be regarded as foreseeable now, given the large amount of information already available about economic dependency on nature and the rate at which it is being degraded, both in Australia and across the world.

“The original Hutley Opinion has been hugely influential in convincing corporate leaders, both executive and at board level, to take climate risk seriously,” Pollination CEO Martijn Wilder said.

“We fully anticipate this new opinion will have a similar impact when it comes to risks associated with nature. We are seeing the rapid emergence of nature positive alongside net zero as a critical part of the future corporate environment.”

DEPENDENCIES AND IMPACTS

The opinion summarises that “nature-related” risks are, by definition, risks of harm to the interest of Australian companies, and arise from dependencies and impacts on nature that would be regarded by a court as being foreseeable at the present time.

It said evolving societal and market expectations were likely reducing the number of nature-related impacts that could be said to pose no risk of harm to company, particularly when considering reputational risk.

“Companies could be exposed because their behaviour makes them vulnerable to shareholder activism or litigation,” Pollination’s Laura Waterford said.

“It could [also] be that their exposure is to supply chain or operations disruptions because of physical nature-related risks.”

While companies are required to disclose nature-related dependencies and impacts that pose a material risk of harm to the company in its corporate governance statement, the opinion posits they may also be required to disclose nature-related impacts that do not.

This circumstance could arise when those impacts could influence a person’s decision whether or not to invest or sell in a company’s securities, it said.

The opinion points to the international developments of Australia signing on to the Kunming-Montreal Global Biodiversity Framework last year, and the Taskforce Force for Nature-related Financial Disclosures (TNFD) publishing its disclosure framework.

While neither development is legally binding, the opinion said they were “relevant recognitions and drivers of the type of market expectations which informs analysis of risk”.

“These developments reflect increasing investor and stakeholder focus on ‘nature-related risk’ and underscore the utility of ‘nature-related risk’ as a framework for directors to assess threats,” it said.

OBVIOUS

It went on to say that companies’ nature-related risks would vary from sector to sector, but noted that the Australian economy was acutely exposed to risks arising from the deterioration of the natural environment, pointing to the findings of last year’s State of the Environment Report by the federal government.

“The Australian economy’s dependence on Australian ecosystems is obvious. The threat to those ecosystems from and associated with (for example) climate change is obvious,” it said.

“It follows logically, in our opinion, that risks arising from nature-related dependencies have the potential to cause harm to the interests of Australian companies and fall with the ambit of a director’s duty.”

Pollination noted that around half of Australia’s GDP has a moderate to very high direct dependence on ecosystem services.

“Companies are going to need to better understand their supply chains, the totality of their impacts and dependencies on nature, and have planning in place to mitigate risks associated with those impacts and dependencies,” Waterford said.

The release of the opinion was endorsed by WWF Australia, the Australian Conservation Foundation, the Responsible Investor Association of Australia, and the Centre for Policy Development – the organisation that commissioned the original Hutley opinion.

Jennifer Ramos, a finance and biodiversity lawyer with the Commonwealth Climate and Law Initiative, said the opinion would be globally relevant.

“This [opinion] will be particularly pertinent in jurisdictions similar to Australia where market responses or biodiversity loss are particularly advanced, or those jurisdictions that are linked by supply chains to areas of depleting biodiversity,” she said.

“This includes, for example, the UK, Canada, South Africa, and India.”

By Mark Tilly – mark@carbon-pulse.com

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