Biodiversity risk and directors’ duties (CCLI)

Our key takeaway: Life as we know it depends on diverse and balanced ecosystems. The food that we eat and the raw materials that companies use to produce goods and services to enable life to take place depends on diverse and balanced ecosystems. The value of ecosystem services is US$125-140 trillion per year. Yet companies’ production, and our consumption, of goods and services are causing biodiversity loss at an alarming rate - 100 to 1,000 times higher compared to the last million years! We are willingly destroying the very fabric of life we, and the planet, depend on. Not only will this lead to human catastrophe on a scale we’ve never seen before, but companies will also face unprecedented challenges to remain viable if they do not transition their operations and business models to be nature-positive. Directors need to make it their mission to reorient the business to respect and protect nature. Failure to do so will pose significant legal, financial and reputational risks that will be difficult to survive given the direction of travel; directors will increasingly be called on to disclose biodiversity-related risks and opportunities, as well as pivot their business strategies and processes to factor biodiversity risks in all decisions going forward. Directors - if you want your company to stay ahead of the game, the time to consider biodiversity is now.

Commonwealth Climate and Law Initiative (CCLI) published its report Biodiversity Risk: Legal Implications for Companies and their Directors (December 2022):

• Biodiversity loss presents “foreseeable and material financial risks” to companies: The report highlights how companies are both dependent on, and impact, biodiversity, which is defined as the “variability among living organisms.” Indeed, “[m]any companies have direct or indirect dependencies on biodiversity through the critical (and often hidden) value of ecosystem services” which is “estimated at US$125-140 trillion per year.” According to the report, companies do not seem to recognise the critical value of vibrant and healthy ecosystems because their activities directly drive biodiversity loss, which includes “habitat loss and degradation due to land use; over-exploitation of natural resources; water, land and air pollution; contributions to human-induced climate change; and introduction of invasive alien species.” This in turn poses material risks to companies: “Companies’ dependencies and impacts on biodiversity can lead to financial risks, conceptualised as physical, transition and legal risks. These risks may affect a company’s business and financial performance.” However, companies can utilise their connection to biodiversity to protect nature and future-proof their businesses: “Corporate dependencies and impacts on biodiversity can lead to opportunities to manage transition risks and improve a company’s business prospects. For example, through ‘natural capital’ value, improving brand value or by finding new business models.”
  

• The risk of biodiversity loss impacts directors’ duties: The report highlights how directors will increasingly be required to factor the risk of biodiversity loss into their duties and disclosure obligations. The drivers for this development are social, regulatory, legal and financial. For example, the setting of global biodiversity targets at COP15 may exacerbate consumers’ calls for companies to respect and protect nature in their value chain activities and the services and products they provide. Regulatory developments have also put pressure on companies to disclose environmental risks and, foreseeably quite soon, biodiversity risks. Several regulatory standards such as the Task Force on Nature-related Financial Disclosures (TNFD), the International Sustainability Standards Board (ISSB) and the International Accounting Standards Board (ISAB) are moving towards mandating companies to make biodiversity risk disclosures. From a litigation perspective, “[c]ourts are considering biodiversity-related cases against companies. Some relate to subsidiaries or value chain partners across the world. Litigants could also bring biodiversity-related cases against directors.” Financial systems are also taking note of these developments: “Developments in natural assets, impact investing and natural capital accounting are bringing biodiversity into the financial mainstream.” In short, “[d]irectors that allow the company to misrepresent its position in relation to biodiversity, causing reputational damage, legal risk or costs, may be failing to fulfil their duties.”
  

• Questions directors can consider to assess whether existing corporate governance practices address biodiversity risks and opportunities: The report provides questions for directors to consider when assessing their companies’ ability to report on, and address, biodiversity risk and opportunities: “(i) Do I have the appropriate skills and information about how biodiversity issues could affect my company to discharge my governance and disclosure roles?; (ii) What training or information would help me and my colleagues to build our capacity?; (iii) Is the management team assessing the company’s foreseeable biodiversity dependencies and impacts?; (iv) Is the management team measuring the company’s material dependencies and impacts on biodiversity and disclosing them in corporate reports? If not, do we have a plan for them to do this?; and (v) Who is responsible in my company for following the development of TNFD and ISSB guidance and building the company’s expertise and readiness to implement it?”