The CCLI’s Executive Director, Cynthia Williams, talks to the CCLI’s climate lawyers, Jasmin Fraser and Sarah Hill-Smith, about the new independent legal opinion on nature-related risks and directors’ duties in England and Wales commissioned by the CCLI and Pollination (the Opinion), and its significance for climate risks. To understand the importance of the Opinion with respect to nature, we would recommend reading our previous interview with our biodiversity lawyers. 

Cynthia: The Opinion related to nature-related risks. Does this mean that its conclusions do not apply to climate-related risks? 

Jasmin: In short, no. To answer this question we need to take a step back to understand the intricate relationship between climate change and nature. Climate change is one of the five drivers of nature loss and profoundly impacts ecosystems and species worldwide. The Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) has reported that climate-induced temperature increases may threaten as many as one in six species globally. 

However, this relationship is not unidirectional. As nature suffers, so does the climate. Natural habitats such as forests and wetlands serve as crucial carbon sinks, playing a pivotal role in realising the objectives outlined in the Paris Agreement. 

The Opinion aptly recognises this intersection by noting that nature-related risks are broader than, and encompass climate-related risks. Consequently, the conclusions drawn in the opinion are equally applicable to climate risks. 

Cynthia: What are climate-related risks and why are they important? How are they different to nature-related risks?  

Sarah: It is important to emphasise that, despite the relative novelty of their names, ‘climate-related risk’ and ‘nature-related risk’ are not new categories of risk, but are forms of financial risks that must be managed accordingly by companies. The Opinion makes this very clear. 

Nature-related risks arise from a company’s impacts and dependencies on nature, which affect the company’s ability to operate successfully and generate profit. Nature-related risks are a very broad category of risk, which include (but is not limited to) climate-related risks. 

Both climate and nature- risks include physical, transition and liability risk. In a climate context: 

1. Physical risk includes the direct and indirect impacts of climate-change induced weather events. Direct impacts encompass climate ‘shocks’ (such as physical damage to assets or infrastructure by extreme weather events such as wildfires) or slow onset shifts known as climate ‘stresses’ (such as sea level rise). Both shocks and stresses can have long-lasting effects on a company’s supply chains, asset value, insurability and profitability, which are examples of the indirect socioeconomic and financial impacts of climate change. 
2. Transition risk arises from the transition to a low-carbon economy. For example, the risk of changing consumer demand and subsequent loss of market share; stranded assets and depreciation of carbon-intensive assets (such as oil and gas wells); and financial risks (such as lack of insurability and access to finance). 
3. Liability risk is the risk of a company being held accountable by litigators, legislators, regulators, shareholders, and other stakeholders for the company’s actions or inactions in relation to climate change. This includes litigation risk (for example, being sued for historic GHG emissions or greenwashing) and regulatory risk (for example, regulatory sanctions for non-compliance with new requirements). 

Cynthia: What steps might directors consider taking to manage climate-related risks in light of this Opinion?

Jasmin: The Opinion recommends five steps that directors could take to demonstrate compliance with their statutory duties: 

1. identify the nature-related risks facing their company; 
2. assess which of those risks are relevant and non-trivial;
3. consider how to best manage and/or mitigate those risks and take such steps accordingly; 
4. consider to what extent such risks should be disclosed; and 
5. document their decision-making process in writing. 

Whilst there are some nuances between climate and nature-related risks, such as materiality (discussed further below) and the extent to which requirements to consider climate are already embedded within the UK’s legislative framework, we consider that directors can apply the fundamental principles outlined in the Opinion to effectively identify and manage climate risks that face their company. 

Cynthia: Recognising that CCLI has published a number of opinions specifically on climate-related risks and directors’ duties, how does this new opinion extend CCLI’s prior work?  Are the directors’ duties different in the two cases, climate and nature?

Sarah:  CCLI has been working on nature and biodiversity since 2022. The decision to broaden our focus beyond climate change and the climate-related risks facing directors reflects the wider fact that the climate (and climate change) is just one element of nature. Once it is established that directors and officers have a fiduciary duty to consider and take steps to mitigate climate-related risks when governing a company, the logical next step is to consider directors’ broader duties in relation to nature. This is what the CCLI has done. 

Since its inception in 2015, the CCLI has published legal papers and commissioned legal opinions on directors’ liability and climate risk in numerous jurisdictions (for more details, see our “Across the Globe” page). CCLI also publishes an annual global primer on directors’ duties and climate change covering 33 jurisdictions. We have demonstrated that, in those jurisdictions, directors have fiduciary duties under existing corporate laws to consider and take steps to mitigate climate-related risks. 

Despite the different subject matter, directors’ duties in relation to climate-related and nature-related risks are largely the same (indeed, some say that the division of nature from climate is artificial and ineffective). Directors should take steps to identify, assess, manage, disclose and document nature-related risks in the same way as climate-related risks. 

Cynthia: Does the legal construct “materiality” play a role in how climate and nature risks are assessed?

Jasmin: The concept of materiality is important as it will determine the approach businesses take to identify and disclose risks. Single materiality, also known as financial materiality, refers to the impacts on an organisation. Generally, entities are required to disclose material information. Information is material if its omission, misstatement or obscuration could reasonably be expected to influence the decisions of primary users of that information. 

In contrast, double materiality has two dimensions. It encompasses financial materiality and impact materiality. Impact materiality requires consideration of an organisation’s impact on the economy, environment and people. 

The question of ‘what’ needs to be disclosed will vary depending on the legislative framework (and whether it has been influenced by an international standard) in a jurisdiction. Companies which operate in a variety of jurisdictions will need to be prudent to ensure compliance with the disclosure requirements of which it is in scope.

Generally speaking, the Taskforce on Climate-Related Financial Disclosures (TCFD) takes a single materiality approach, and the Taskforce on Nature-Related Financial Disclosures introduces a double materiality perspective. At present, the International Sustainability Standards Board has also taken a single materiality approach. 

The EU is one of the few jurisdictions taking a double materiality approach to reporting as part of the Corporate Sustainability Reporting Directive. The UK, on the other hand, focuses on single materiality through the incorporation of the TCFD. However, materiality considerations in the UK may shift following the phase-in of the Financial Conduct Authority’s Sustainability Disclosure Requirements. These will require firms to consider disclosing their impact on the environment and society, thus introducing an element of double materiality. 

Cynthia: Substantial investment is required to transition the global economy to net-zero emissions. How might this focus on climate conflict with nature and biodiversity?

Sarah: Hopefully, by this point, we have sufficiently demonstrated that the climate is inextricably linked to and interdependent on nature and biodiversity. Climate change therefore cannot be addressed in isolation. It logically (and regrettably) follows that efforts aimed at solely mitigating climate change (by avoiding, reducing, or eliminating GHGs from the atmosphere) may come at an environmental and social cost to nature, biodiversity, and humans. A common example of such a ‘trade-off’ is the move towards electrification, particularly electric vehicles (EVs). EVs run on electricity stored in batteries. While EVs mitigate climate change by emitting substantially fewer GHGs than traditional internal combustion engine vehicles, which run on petrol or diesel, the critical raw materials used to make EV batteries (lithium, graphite, cobalt, nickel, and manganese) are often mined unsustainably and extracted at great social and environmental cost. For example, nickel mining for batteries in Indonesia has destroyed marine biodiversity and impacted fishing grounds and the livelihood of local fishermen; cobalt mining in the Democratic Republic of Congo has led to human and labour rights abuses; and lithium mining in Chile’s Atacama Desert is damaging the fragile desert ecosystem, leading to water shortages and impacting the lives of Indigenous people. Stay tuned for further CCLI coverage on this topic.