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What does the new UK legal opinion on nature-related risks and directors’ duties mean for directors?

The CCLI’s biodiversity project officer Eniye Igbanibo talks to the CCLI’s biodiversity lawyers about the new independent legal opinion commissioned by the CCLI and Pollination (the Opinion).

Eniye: What is so significant about the Opinion?

Jenni: This is the first expert legal opinion to confirm that, under the law of England and Wales, company directors should consider nature-related risks in exercise of their governance and disclosure duties.

The Opinion is very thorough and robust in terms of the complex details that it considers and the evidence it presents. It lays out very clearly what the duties and potential disclosure obligations are and is very transparent about the scope for liability. It explains that we may see future claims against directors if they have mismanaged nature-related risks to the detriment of the company’s financial position. The Opinion is very commercial in that it presents simple, proactive steps for directors to protect against the risks described and emphasises the success of the company, which acknowledges opportunities as well as risks.

The Opinion’s conclusions also apply to climate risks, since climate change is one of the five drivers of biodiversity loss and therefore nature-related risks encompass climate risks.

Eniye: What are nature-related risks and why are they important? Can you give examples?

Zaneta: Nature-related risks fall within existing financial risk categories and are not new. They arise from a company’s impacts and dependencies on nature.

This includes physical risks, such as a decline or collapse of ecosystems that underpin a company’s operating model and supply chain. For example risks posed by degraded soil affects all companies dependent on agricultural production, which can include producers, manufacturers, retailers and financiers in the food and beverages, as well as textiles supply chains.

It also covers transition risks, including shifting consumer and investor preferences and new technology or regulations. Legal risks lie within transition risks and include complaints, regulatory actions or litigation against companies. Finally, nature-related risks are capable of becoming systemic risks that can affect the whole financial system including by way of supply chain disruption, price volatility, asset depreciation, increases in defaults, and greater insured losses.

One example I like to give is how aircraft manufacturing companies are heavily dependent on sourcing conductive rubber. This special type of rubber is common in aircraft tyres to neutralise electricity from friction on landings and take-offs. Being predominantly sourced from rubber tree monocultures in tropical Asia it is vulnerable to a catastrophic threat, such as an invasive parasitic species. This is quite possible, since the rubber tree was artificially introduced to Asia to avoid parasites in its native Amazon rainforest. If these parasites were to be introduced to Asia (by, for example, being flown there as part of regular airline traffic) then the entire global production of conductive rubber could be wiped out within a decade and all aircraft manufacturers, the aviation industry and their investors could be significantly affected.

Eniye: Is the Opinion really independent and why are the authors important?

Jenni:  A legal opinion of this type is given to explain and clarify a point of existing law. It does not advocate for a change in the law or attempt to make new law, it is simply an expert analysis by senior lawyers, in this case a team of barristers, two of whom are King’s Counsel. They are mainly company and financial law specialists and one environmental lawyer, which is very important when being asked to assess the scope of company law in relation to these type of financial and commercial risks.

When barristers produce a legal opinion of this type, they are not acting for their clients in the same way as representing clients in court. In the present case, our barristers were given questions to answer, along with a pack of evidence, and asked to provide an objective analysis, which we would have published whatever they had concluded. If it wasn’t objective it would not have the same value.

The Opinion is not radical, it is very careful in not going outside what is provided for in the legislation and case law. It authoritatively confirms the legal basis for the financial relevance of nature in decision-making by UK boards.

Eniye: The Opinion only applies to directors of companies in England and Wales. What is the position with regard to the rest of the world?

Zaneta: The Opinion follows similar expert opinions in Australia and New Zealand. At the CCLI we have written a couple of reports on biodiversity risk in the global context. Our findings were broadly similar to that of the Opinion and we believe that this is applicable to many company law frameworks around the world.

This is not surprising, since the CCLI has conducted in depth analysis on directors’ duties and climate risk in eleven countries and co-authored a primer covering 32 countries and the EU, all of which is reviewed by lawyers in those countries. The general conclusion is that the laws of many countries impose duties of care and diligence, and loyalty, owed by directors to their companies and that these duties require them to consider material risks such as climate risks. The scope of directors’ duties is affected by the factual context in which a company operates, constantly evolving with changes in scientific, technological, economic and financial understanding and shifts in market and societal attitudes.

This means that the conclusions of the Opinion (and the Australia and New Zealand opinions), are quite likely to be applicable to companies in other countries around the world, where nature-related risks foreseeably pose material risks to companies and investors.

Not only that, but the UK is an important financial centre and a source of common law that has influenced many other legal systems. The nature of multinational business and global supply chains means that many companies are affected by UK developments. Therefore the Opinion has a real potential to have a ripple effect on the way directors around the world consider nature-related risks.