English and Welsh company board directors could be personally liable for breaching their duties by failing to consider relevant nature-related risks, leading to employment termination with financial consequences, lawyers said on Wednesday.

Directors must assess latent financial risks from a company’s unaddressed nature-related impacts and dependencies or “they may be exposed to claims they have acted in breach of duty”, a legal opinion has said.

The 117-page document, commissioned by the legal arm of climate investments and advisory firm Pollination and the Commonwealth Climate and Law Initiative (CCLI), was written by a team of high-ranking barristers including silks Sharif Shivji KC and Rebecca Stubbs KC.

Jenni Ramos, corporate finance and biodiversity lawyer at CCLI, said: “Even directors that did not previously realise there was a connection between their business and nature-related risks will now be on notice.”

Predicting the number of nature-related cases against directors that will be filed in England and Wales in the next year is not possible, Ramos told Carbon Pulse.

“However, it is entirely possible, where financial damage ensues from mismanagement of nature-related risks, that shareholders may wish to claim for the damage in relation to the company’s financial prospects that may reduce their share value.”

“Nature-related risks are not new or different from any other risks. Directors need to undertake five steps in order to promote the success of their company and protect themselves from potential personal liability:

1) Identify risks,

2) Evaluate them,

3) Mitigate and manage,

4) Disclose (where material), and

5) Document the steps taken and their consideration of these matters.”

Thea Philip, associate director at Pollination, said: “This landmark legal opinion 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.”

Activity from companies such as the Taskforce on Nature-related Financial Disclosures (TNFD), which released its final recommendations in September, have helped to bring biodiversity to the fore for businesses.

TNFD first defined nature-related risks as “potential threats (effects of uncertainty) posed to an organisation that arise from its and wider society’s dependencies and impacts on nature” in an interim report in 2021.

BAD LEAVER CLAUSE

A director could face significant consequences for breaching their duties, including claims for damages or compensation, CCLI said in a press release.

One of a range of possible consequences would be for a company to decide to follow through with a “bad leaver” clause for a director, with “significant financial consequences” on ending their employment following a breach of duty, the opinion said.

“A company may seek to rely on alleged breaches of duty by a director in relation to the company’s nature-related risks to contend that the director is a bad leaver, even where such breaches have not caused the company any financial loss,” it said.

The bad leaver clause aims to discourage the departure of executives by requiring actions such as the selling of shares below their market value.

Directors may face consequences even in cases where it has been difficult to quantify the losses a company has suffered due to nature risks, the opinion said.

Law cases on nature-related risks have been increasing worldwide due to increased awareness, regulation, and shareholder action.

No lawsuits have yet succeeded in holding directors personally liable in England or Wales for nature-related risks. Last year, a judge dismissed a complaint against Shell’s directors for not complying with their duties lodged by law charity ClientEarth.

The English opinion noted how another judge could have decided the case differently, suggesting the decision was not necessarily a bar to similar claims.

AUSTRALIAN LIABILITY

The opinion on directors in English and Wales follows a similar one on Australian company heads, also commissioned by Pollination, published in November.

Nature-related risks to a company should be regarded as foreseeable, given the large amount of information available about economic dependencies on nature, the Australian opinion said.

Company law in Australia, England, and Wales is quite similar in that directors in these nations have a duty of care, meaning they need to take nature-related risks into account, Ramos said.

“Nature-related risks are very similar for companies around the world, particularly when they manifest as ‘physical’ risks – for example through disruption to supply chains because of ecosystem services being interrupted (as a result of damage to nature),” Ramos said.

“However, when these risks manifest as ‘transition’ risks they can vary depending on the jurisdiction where the company is located, particularly in relation to rules around what risks the companies must disclose in their financial and non-financial statements.”

In Australia, shareholders have already relied on company law to apply to court to inspect their sustainability disclosures. However, English law does not have an equivalent provision, she said.

Last month, the European Parliament became the first international body to criminalise large-scale ecosystem destruction, introducing sentences of up to 10 years for CEOs.

It extended the list of environmental crimes in the EU to include illegal timber trade, depletion of water resources, breaches of the bloc’s chemicals legislation, and pollution caused by ships, while setting stricter sentences for the most serious cases of environmental damage.

Ramos noted how the EU ruling referred to a different legal framework on crimes under environmental legislation, rather than the breach of directors’ duties under company law frameworks in the English opinion.

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

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