Legal Implications for Companies and their Directors

Commonwealth Climate and Law Initiative

Author: Jennifer Ramos and Zaneta Sedilekova

The January, 2023 edition of “the Hub” is sharing an analytical piece from “Commonwealth Climate and Law Initiative” authored by “Jennifer Ramos and Zaneta Sedilekova” on bio diversity risks to companies and their directors. The piece covers spotlights on multiple jurisdictions and specifically India with due references from regulatory framework in practise.

  
This paper analyses the relevance of biodiversity risks to companies and economies in the discharge of directors’ legal duties globally. The functioning of the global economy and the actors within it depend upon the services supplied by healthy ecosystems, which depend on rich biodiversity. The value of ecosystem services themselves is estimated at US$125-140 trillion per year which remains generally unaccounted for in mainstream economic and accounting practices.  However accelerating rate of biodiversity loss can constitute a risk to economic activities and financial assets that may arise from modest tipping points and reverberate through entire sectors and financial systems. 

Many companies have direct or indirect dependencies on biodiversity through the critical (and often hidden) value of ecosystem services. Companies can be responsible for significant direct or indirect impacts on biodiversity. This 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, all scientifically described as direct drivers of biodiversity loss. 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.

While there are many industries with material biodiversity impacts and dependencies, much of the focus has been on agriculture, construction and food and beverages. These sectors have value chain links to many other industries. 

Generally, fiduciary obligations require directors to act with care and loyalty to their companies. These duties are exercised in strategic planning, oversight of foreseeable and material risks, and attesting to disclosure and financial reports. The law commonly assesses the standard of directors’ care and loyalty by reference to market, social and regulatory context, which may raise the standards applicable to directors of certain companies. Recent developments such as push of Task Force on Nature-related Financial Disclosures (TNFD), International Sustainability Standards Board (ISSB) and International Accounting Standards Board (IASB) for biodiversity & environmental risks disclosure may help directors to understand their duties in current environment. 

The world’s biggest Investors are also realising the associated risks of biodiversity issues. Developments in natural assets, impact investing and natural capital accounting are bringing biodiversity into the financial mainstream. The prudent directors will embed proactive risk governance to identify, manage and disclose biodiversity dependencies, impacts, risks and opportunities and may identify opportunities arising from biodiversity that increase the company’s long-term viability. Obligations to disclose biodiversity dependencies, impacts, risks and opportunities may further influence the standards of care and loyalty that directors must apply.

In order to discharge their duties and disclosure obligations, directors can ensure that risk management processes assess foreseeable biodiversity dependencies and impacts of the company for materiality and measure those that are material. Directors can then include material dependencies, impacts, risk and opportunities within strategy, disclosure and decision-making. While courts are seeing an increase in climate litigation and some biodiversity claims, this does not suggest that there is currently a high level of legal risk for directors who do not consider biodiversity. However, avoidance of liability is a low bar. Directors will want to avoid or mitigate reputational issues and aim for prudent governance and best practice to perform their role successfully with integrity.

A failure to identify and exploit opportunities presented by the transition to a nature-positive economy is a potential cost to a company that competent directors may not want to ignore. Legal obligations for some companies to disclose material financial risks reinforce the probability that directors of those companies will have duties to govern those risks. Directors 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.

Decision-useful questions for directors: how biodiversity risks and opportunities might affect corporate governance practices:

• Do I have the appropriate skills and information about how biodiversity issues could affect my company to discharge my governance and disclosure roles?
• What training or information would help me and my colleagues to build our capacity?
• Is the management team assessing the company’s foreseeable biodiversity dependencies and impacts?
• 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?
• 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?

Click here to access the original paper-
(IICA duly acknowledge the ownership/authorship of the Paper and sharing this content only for educational purpose.)