Company financial statements may have to include biodiversity issues as part of their sustainability coverage, following the publication of an opinion encouraging directors to address the environment, a UK lawyer has said.

Biodiversity-related issues could appear on the statements if directors consider their detail is necessary to provide a ‘true and fair’ view of a company’s financial position, said Jenni Ramos, lawyer at the Commonwealth Climate and Law Initiative (CCLI).

“That could include how consideration of biodiversity issues have affected significant judgments, and estimates that management have made when they’re preparing accounts, and where assumptions about the future give rise to risk of material adjustments … in the next financial year,” Ramos said during a ShareAction webinar.

Financial statements could also include whether compliance with accounting standards had enabled an understanding of the impact of biodiversity on a company’s financial position, she said.

On Wednesday, Social Value International published a legal opinion it had commissioned by corporate law barrister George Bompas saying that directors of UK companies must consider whether to reflect relevant sustainability issues in their financial statements, to provide a true and fair view of their company’s position.

Companies have to give a true and fair view of their assets, liabilities, financial position, performance, and cash flows in their financial statements, Bompas said.

Although the legal opinion confronts climate rather than biodiversity, it is “groundbreaking” in proposing taking environmental issues out of sustainability reporting into financial statements, Ramos said.

“Biodiversity risks and opportunities have the capability to be financially material to companies to different extents depending on their interface with nature,” she said.

Directors’ duties require them to act with care and diligence to promote the success of their company, meaning they risk lawsuits if they fail to address biodiversity-related concerns adequately, she said.

Although Ramos did not know when lawsuits against directors on the grounds of biodiversity might happen, they are “in the pipeline”, she said in response to a question from Carbon Pulse.

Companies in sectors with the highest legal biodiversity-related risks included those with direct links to nature such as beef, soy, leather, and plastics, she said.

The CCLI, whose major funder for its legal research is the Foundation for International Law for the Environment, published a report in 2022 on the legal implications for companies and their directors of biodiversity risks in the UK, Australia, Canada, India, and South Africa.

“The risk of biodiversity loss can present foreseeable and material financial risks and opportunities to individual companies and the wider economic and financial systems,” it said.

By Thomas Cox – t.cox@carbon-pulse.com

*** Click here to sign up to our twice-weekly biodiversity newsletter ***