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Company directors ‘could be liable for nature risk’
By Clancy Yeates
Directors could be personally liable for failing to consider risks caused by a company’s impact on the natural environment amid a push for corporations to focus on a wider range of green issues beyond climate change.
While it is widely accepted that climate change could be a major financial risk, backers of responsible investment are pushing for a wider discussion of “nature-related risk” in the corporate world. This is broader than climate risk, and refers to risks that could arise from a company’s impact on the environment, or its dependence on the environment.
Agriculture has previously been identified as an industry that is highly dependent on nature.Credit: Bloomberg
In new legal advice that was commissioned by climate change advisory firm Pollination, barrister Sebastian Hartford-Davis argues directors need to consider how their companies affect nature or depend on nature, and failing to do so could be a breach of directors’ duties.
“Directors of companies should at least identify the company’s nature-related dependencies and impacts, and consider the potential risks this may pose to the company. Directors who fail to consider nature-related risks could be found liable for breaching their duty of care and diligence,” says the commentary, to be published on Thursday.
Hartford-Davis said there was a growing push internationally for more action on nature-related risks, pointing to Australia being one of 200 countries that signed up to a global biodiversity framework last year.
In Europe, large and listed companies must report on the risks they face from social and environmental issues, under a policy aimed at giving investors, customers and other groups more information about companies’ environmental performance.
He also pointed to the Taskforce on Nature-Related Financial Disclosures, a group made up of 40 executives from global financial institutions and companies, which in September finalised a framework for nature-related risk. The taskforce includes representatives from financial giants including BlackRock, Macquarie Group, HSBC, AXA and UBS.
Hartford-Davis also worked on an influential 2016 legal opinion with barrister Noel Hutley, SC, which said directors not thinking about climate change risks could be found liable for breaching their duty of care in the future. That opinion has since been cited by the Australian Securities and Investments Commission, and was seen as an important step in bringing about more action on climate change from major corporations and investors.
Pollination chief executive Martijn Wilder said: “The original Hutley opinion has been hugely influential in convincing corporate leaders, both executive and at board level, to take climate risk seriously. We fully anticipate this new opinion will have a similar impact when it comes to risks associated with nature.”
Dr Arjuna Dibley, head of the Sustainable Finance Hub at the University of Melbourne, said the new legal opinion came amid a global discussion about how businesses approached the environmental costs of economic activity.
“This is just one piece of process, and this piece is really about directors of companies and whether they have an obligation to consider the financial implications of environmental damage,” he said.
Hartford-Davis also argued that key parts of Australia’s economy were highly exposed to environmental risk, citing figures from the Australian Conversation Foundation, which said industries with a “very high direct dependence on nature,” such as agriculture, forestry, fisheries, construction and waste and water services accounted for almost 16 per cent of the economy.
Some Australian businesses have already started to consider nature-related risk. Westpac’s 2022 annual report, for example, said early analysis of its loan portfolios showed agriculture, electricity and gas, and food and beverages were all sectors that were “highly dependent” on nature.
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