Improving corporate governance on nature

Our key takeaway: Companies can have a significant impact on nature and ecosystems, and will be impacted themselves when these systems break down. Yet benchmarking by the World Benchmarking Alliance has found that many companies are not yet seeing the link. The report points to seven specific ways that board directors can help steer the ship towards more robust management of nature risks: (1) Use existing methodologies like the Taskforce on Nature-Related Financial Disclosure’s (TNFD) LEAP approach to assess nature-related issues; (2) Assess the business’s current biodiversity dependencies and impacts; (3) Ensure that the board, executive leadership and management teams are all trained in sustainability topics; (4) Give executives the responsibility to apply guidance from the TNFD and Science Based Targets for Nature; (5) Engage with the World Benchmarking Alliance to disclose practices on nature, climate change and human rights; (6) Apply the World Economic Forum’s Principles for Effective Climate Governance to nature-related topics; and (7) Use the Cambridge Institute for Sustainability Leadership’s diagnostic tool, Decisionmaking in a nature positive world.

The Climate Governance Initiative, the Commonwealth Climate and Law Initiative and the World Benchmarking Alliance published Improving Governance on Nature-related Risks and Opportunities: Board Briefing (March 2024). The briefing build on the World Benchmarking Alliance’s Nature Benchmark — and delves into 6 of the Nature Benchmark’s 43 indicators in the context of relevant duties in company law:

• Setting a nature-focused sustainability strategy and embedding accountability: Companies should create “deeper, holistic” sustainability strategies that address their impacts on nature and can “more reliably address risks to the company’s overall success.” Having an effective sustainability strategy to address material risks related to nature is a fundamental component of a director’s duty of care. According to the report’s benchmarking, a holistic sustainability strategy should cover the most significant environmental and social impacts facing the company and its industry more broadly — though not many of the companies benchmarked meet this practice. And it’s not enough just to have a nature-focused sustainability strategy. Companies also need the governance structures and knowledge to implement the strategy effectively. This means that the company’s sustainability strategy is governed at the highest level of the company and that leadership has accountability for sustainability objectives and targets. Senior executives should have “incentives to reward the effective delivery of relevant company strategies and initiatives.” Companies without these structures in place “may inhibit thorough board oversight of nature risks and inhibit leadership from achieving a positive transition mindset.”
  

• Engaging with stakeholders: The report underscores that the “stakeholder perspective is crucial in helping the company to discover novel solutions, capture value and navigate through a rapidly changing environment.” In practice, benchmarking has found that the majority of companies disclose issues raised during stakeholder engagement and/or describe their stakeholder engagement processes. However, very few companies are transparent about the way they strategically identify stakeholders and embed the outcomes of engagement in their practices: 19% of companies disclose their processes for identifying relevant stakeholders; 7% of companies describe how they integrate stakeholder feedback into their sustainability strategy (“a critical step in the evolution from disclosure to constructive feedback loops”); and 18% of companies engage with stakeholders on both nature and social issues. According to the report’s authors, “[t]his indicates a likely gap in company knowledge regarding stakeholder interests, as social aspects are fundamentally intertwined with nature.” Boards can help their companies to become more responsive to stakeholder feedback by integrating these findings into company target-setting and risk management.
  

• Assessing impacts and dependencies on nature, including ecosystem conversion: By conducting robust assessments on the ways they impact and benefit from nature, companies can more effectively prevent and mitigate risks to the business, planet and people alike. Impacts on nature “can give rise to risks and opportunities that are both foreseeable and financially material, falling under the purview of directors' governance and disclosure practices.” Even where there are no direct risks or opportunities for the business, they can still create legal, reputational and transition risks that are relevant for boards. Likewise, ecosystem services are fundamental to business regardless of sector. For example, “[i]ncreasing environmental degradation and biodiversity loss can impact the integrity of ecosystem services, leading to supply chain disruptions, with the risk of wider financial and systemic consequences.” Board directors should maintain oversight of both the company’s impacts on nature and impacts from nature, in order to better equip the company “to anticipate and address emerging risks and opportunities.” This extends especially to high-impact issues like deforestation and ecosystem conversion, which propel climate change. Both legislation (including in the EU and UK) and public attention on deforestation means that companies are at higher risk of legal claims related to impacts on nature, including in the supply chain. Boards and their companies can look to guidance from the Accountability Framework and the EU Deforestation Regulation to address these risks systematically.