Date: 13 March 2024
Directors should consider their company’s nature-related risks as part of their duties to promote the success of the company and act with reasonable care, skill and diligence, according to an independent legal opinion dated 11 March 2024, commissioned by the CCLI and Pollination.
A team of corporate and financial law barristers (high-ranking silks Sharif Shivji KC and Rebecca Stubbs KC leading Karl Anderson and Hossein Sharafi) authored the opinion, with contributions on environmental law from James Burton.
Professor Thom Wetzer, Associate Professor of Law and Finance at the University of Oxford, Founding Director of the Oxford Sustainable Law Programme and Trustee of the CCLI, said: “We increasingly understand the potential severity of nature-related risks for companies. Yet, directors commonly fail to appreciate the severity of these risks and thereby needlessly put their company at risk. This important report highlights what should have been obvious long ago: nature-related risks are not distinct from other financial risks, and should therefore be considered by directors in furtherance of their legal duties.”
The opinion clarifies the legal basis for the financial relevance of nature in decision-making by boards subject to the law of England and Wales. Nature-related risks arise from dependencies and impacts on nature. They fall within existing financial risk categories and are not new. They include 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. Climate change is one of five drivers of biodiversity loss and the opinion’s conclusions encompass climate-related risks.
Jenni Ramos, Corporate/Finance and Biodiversity Lawyer, CCLI said: “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.”
The opinion explains how board directors could breach their duties under sections 172 and 174 of the Companies Act 2006 if they fail to identify and (where appropriate) mitigate latent financial risks arising from a company’s unaddressed nature-related impacts and dependencies. That in turn could expose directors to increased shareholder scrutiny and legal consequences. Directors should document their careful consideration of relevant risks to protect themselves from litigation like the recent ClientEarth v Shell case.
Expert legal opinions clarifying the status of nature in a corporate governance context have also been issued in Australia and New Zealand. The CCLI’s 2022 report suggested that similar findings could be applicable under many company law frameworks around the world, including Canada, India and South Africa. The CCLI has published a series of opinions and papers related to climate risk around the world.
Cynthia Williams, Executive Director of the CCLI and Roscoe C. O’Byrne Chair in Law, Indiana University said: “This legal opinion from eminent barristers gives directors in the UK clarity about their duties to understand and mitigate their company’s exposure to nature-related risk. It marks a turning point in understanding the corporate governance implications that arise from nature-related physical, transition and systemic risks, as part of existing financial risk categories.”