Jenni Ramos, Alex Cooper and Zaneta Sedilekova explore how the interconnection between climate, biodiversity and just transition impacts on the performance of director’s duties.
Last month the World Biodiversity Summit (part of New York Climate Week) convened to explore joint solutions to the biodiversity and climate crises. With COP27 in November (featuring a day on biodiversity) and the international biodiversity COP15 in December, media attention, the increasing recognition of biodiversity loss as a material financial risk and growing discussion of related social issues may put pressure on company directors considering how to assess and manage material environmental and social risks. Directors may also be evaluating investor expectations, proposed legislation, disclosure frameworks and reputational or liability risk. What might directors consider when managing these various and often competing environmental and social elements?
Why not address climate, biodiversity and social issues separately?
To achieve effective governance, fulfilment of their legal duties to the company (see our Primer on Climate Change: Directors’ Duties and Disclosure Obligations) and mitigation of liability risk, directors should be prepared to think expansively about potential trade-offs between material sustainability risks (e.g. climate mitigation activity driving biodiversity loss or biodiversity protection impacting human rights) when planning sustainability measures. It is possible that, in addressing one identified material risk, an unforeseen impact may subsequently turn into a risk to the company that is, or becomes, material in terms of reputation and long-term value creation.
It is often said that climate or nature-based solutions that do not consider a ‘just transition’ pose systemic economic and financial risks and potentially delay or increase the cost of shifting to net zero. Examples include failing to consult or take account of land rights when creating conservation areas or planting biofuel crops, job losses arising from the energy or agricultural transitions, labour rights infringements in the renewables supply chain and lack of equitable access to resources.
Similar tensions exist between solutions to the climate and biodiversity crises. Climate change is one of five drivers of biodiversity loss, while biodiversity loss and ecosystem destruction contribute to greenhouse gas (GHG) emissions and reduce climate adaptation capabilities. For example, protecting mangroves (natural sinks of GHGs that protect against storm surges and flooding) may be both a climate and biodiversity solution. However, significant divergences exist between the two crises and addressing one in isolation may lead to exacerbating the other or both. Examples are the use of monoculture bioenergy crops (that erode biodiversity) as a climate mitigation measure, destruction of endangered species’ habitats to build a hydroelectric dam or the threat to species of clearing a forest for an electric car battery plant. A recent report recommends nature positive offshore wind strategies to avoid biodiversity loss when expanding renewables capacity.
A recent paper advises investors to take a “holistic approach to the climate–biodiversity–society nexus”, giventhe interrelated impacts and dependencies between the ‘socioenvironmental’ conditions of nature, people and climate, and their interaction with the economy and finance. The nexus between climate and biodiversity has similarly been noted by the NGFS. Investor pledges, frameworks and benchmarks such as the Finance for Biodiversity Pledge (representing €14.7 trillion in assets), Statement of Investor Commitment to Support a Just Transition (representing US $10.2 trillion in assets), Principles for Responsible Investment, Climate Action 100+ and Nature Action 100+ indicate growing appetite by the world’s biggest investors to manage environmental risk. The National Capital Finance Alliance guides financial institutions to assess their natural capital risk and exposure. Investee companies should be prepared for biodiversity-related queries.
The proposed EU Corporate Due Diligence Directive will require EU companies and those with a certain EU turnover to conduct entire value chain due diligence (thus creating a degree of extraterritorial effect) on human rights and biodiversity impacts, and adopt a climate transition plan. Under the directive EU Member States will require directors to consider human rights, climate and biodiversity when acting in the best interests of the company.
Disclosure – regulatory and contractual obligations
The International Sustainability Standards Board’s proposed global framework for sustainability reporting will cover climate-related and sustainability-related disclosures and non-mandatory guidance for biodiversity-related disclosures. There have been calls for it to consider a just transition.
Companies are likely to be required by investors (and in some jurisdictions by law) to make climate risk disclosures aligned with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). Hot on its heels, the Task Force on Nature-related Financial Disclosures (TNFD) (endorsed by the G7 finance ministers, funded and supported by governments) has released beta versions of nature risk disclosure recommendations and is expected to follow a similar trajectory to the TCFD. The ISSB framework (with which the TNFD aligns) will form part of the UK’s planned sustainability reporting standards.
Liability and reputational risk
In addition to climate-related litigation, courts are starting to consider broader issues. For example there have been cases filed against:
- the French supermarket chain Casino alleging due diligence failings on human rights and environmental protection in the Amazon stemming from deforestation;
- Woodside Energy’s Scarborough gas project in Australia, requiring assessment of its impact on the Great Barrier Reef;
- the U.S. Environmental Protection Agency’s renewable fuel standards, alleging failure to assess impacts to endangered species from land conversion and pesticide and fertiliser use;
- the Mexican government alleging that its energy programme fails to consider a just transition; and
- the Chilean Ministry of Energy alleging that a failure to consult union workers in energy decarbonisation agreements violated their constitutional guarantees.
These types of cases sometimes have joint climate, biodiversity and social causes of action. Cases may be brought against companies by a widening group of complainants, including on behalf of a company against directors for alleged failure to manage material risks. Liability risk may also encompass regulatory investigations, penalties and arbitration. Adverse publicity and reputational risk may result from a company’s failure to manage or accurately represent its climate, biodiversity or social impacts.
A joined-up approach
If companies can at the outset factor just transition considerations into their climate and biodiversity risk strategies and ensure that those strategies complement rather than conflict with each other, they may achieve a faster, more effective and cost-efficient net zero and nature-positive transition. Such an approach could also help protect them from potential reputational or liability risk and help them to manage material risks for long-term value creation.