A lack of legal clarity is adding to the challenge for directors facing nature-related risks. In-House Perspective assesses how general counsel can help out.

A new legal opinion (the ‘Opinion’) has concluded that directors in England and Wales could be exposed to liability for failing to have regard to nature-related risks. The opinion was commissioned by Pollination Law and the Commonwealth Climate and Law Initiative (CCLI) following the publication of similar opinions in Australia, New Zealand and Singapore.

Collectively, these opinions reflect the higher standards directors across jurisdictions are being held to as society and regulators place greater emphasis on addressing long-term risks such as biodiversity loss and the climate crisis. According to the Opinion’s authors, ‘the fact that directors’ duties have developed and continue to develop organically by reference to changes in societal, industry and regulatory standards is relevant to the relationship between those duties and nature-related risks,’ because greater scrutiny of the latter means more is expected of directors when managing those risks.

The Opinion assesses the relevance of nature-related risks to three areas of directors’ duties under the UK Companies Act 2006 (Companies Act). Firstly, the duty to promote the success of the company for the benefit of the members as a whole (section 172). Secondly, the duty to act with reasonable care, skill and diligence (section 174). And finally, directors’ disclosure duties. The authors state, ‘we consider that nature-related risks fall within the category of risks to which a director ought to have regard when discharging their duties under s.172 and 174.’ They add that directors who don’t consider nature-related risks nor take action to mitigate them ‘may be exposed to claims that they have acted in breach of duty.’

Thea Philip, an associate director at Pollination, says her organisation’s clients increasingly wanted to understand which nature-related risks affect their business. They also felt they didn’t have legal clarity on the extent to which directors should consider nature-related risks and opportunities. She says that by commissioning the Opinion, Pollination Law intended ‘to provide the UK market with clarity around what the obligations are on directors when considering nature-related risks’ and ‘to make it clear that nature-related risks should be considered as financial risks like any others facing the business and that they are therefore relevant in decision-making processes’.

Emma Newnham, a senior associate at King & Wood Mallesons in Melbourne, explains that in Australia there have been three legal opinions on climate risk. In that context, looking at nature-related risk is the logical next step. For her, the international response to nature-related risks is following a similar trajectory to the response to those related to climate. For example, following the International Sustainability Standards Board’s issuance of new standards on climate and sustainability, nature and biodiversity are next on its agenda.

Paul Benson is a senior lawyer at ClientEarth. He’s concerned that nature-related risks are currently undervalued in risk management processes. Benson says companies underestimate the extent to which national economies and global systems rely on natural ecosystems and the environment. ‘I don’t think that very many boards at all have woken up to the risks that are posed by nature-related breakdown and the climate crisis,’ he says.

Abhijit Mukhopadhyay, former Secretary of the IBA Corporate Counsel Forum and President (Legal) & General Counsel at Hinduja Group, says risk assessment is a pre-requisite for any company and ‘such risks must include any nature-related risks’.

Lacking climate clarity

Many perceive a lack of clarity in English law regarding its expectations of directors when it comes to managing climate and nature-related risks. The Opinion’s authors say that ‘given both the speed and the extent of national and international developments in this area, there remains uncertainty as to what exactly, as a matter of law, is expected of directors in relation to their management of the relationship between their companies and nature’.

In 2023, ClientEarth brought a case alleging that Shell’s Board had breached its legal obligations under company law by failing to properly manage the climate risk facing the oil and gas multinational, jeopardising its long-term viability. The High Court of England and Wales dismissed the lawsuit without considering the merits.

Lord Carnwath, a former Justice of the UK Supreme Court, has described the dismissal of ClientEarth’s case against Shell’s directors as a ‘missed opportunity.’ He argues that ‘the challenge by ClientEarth to the climate change policies adopted by [Shell’s] Board could have been a valuable chance to examine the operation of the relevant Companies Act provisions’.

Benson, who led on the case, says the judgment provides very little guidance for directors when they’re faced with climate and nature-related risks. ‘They are left struggling by the terms of this judgment,’ he says, adding, ‘it’s a missed opportunity for our courts to grapple with the enormity of the climate crisis and what that means for directors’ legal duties.’

Commenting on the case, a Shell spokesperson told In-House Perspective that, ‘from the start, this claim was a misuse of the court’s time and resources, and not an effective way to tackle climate change. The court’s ruling on costs underscores how our response to this matter was justified given the seriousness of the allegations, which we have always refuted in the strongest terms’. They added that ‘the world needs wide-ranging solutions – not judgments against one company – to make an impact on climate change and transform the world’s energy system’.

Those who feel English law is ambiguous on directors’ duties often focus on Section 172 of the Companies Act. This section says, ‘A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole.’ It adds that in doing so, directors should have regard to a range of factors, including ‘the likely consequences of any decision in the long term’ and ‘the impact of the company's operations on the community and the environment’.

As the Opinion’s authors state, ‘it is important to bear in mind that the factors listed in s. 172(1)(a)-(f) are subordinate to the requirement to promote the success of the company for the benefit of the members: their interests are primary’. The prioritisation of members or shareholders in this section of the law could make it difficult for directors to properly weigh all the additional factors the law says they should have regard to when making a decision.

The legal requirement to put shareholders first could also risk short-term thinking in the pursuit of profit and dividends. It seems at odds with many of the other considerations listed in this section of the law and leaves directors in a difficult position. According to Chris Turner, Campaign Director at the Better Business Act, ‘it’s not just about prioritising shareholder returns but it’s also about prioritising them in the short term, which is incredibly problematic’.

Benson says the judgment in the ClientEarth v Shell case has brought some clarity to the law because the judge accepted in his decision ‘that climate change issues do present material risks to the company to which directors must have regard.’ He says what hasn’t been clarified is what that means in practice.  

In Australia, there’s been a push to provide extra guidance for directors through the Australian Institute of Company Directors, which has produced a guide on climate and directors’ duties. Newnham expects similar guidance to be produced on nature-related risks. She argues against focusing too heavily on certain new and emerging risks at the expense of others both in guidance and in regulation.

Rethinking company law

The Better Business Act proposes revising UK company law – specifically section 172 of the Companies Act – to ensure UK businesses align their interests with those of the environment and society. Turner, as Campaign Director of the initiative, argues that directors’ duties as set out in this section are out of date. He believes they’re ambiguous and leave directors confused. This in turn is exacerbated by a wide range of factors including litigation and increasing regulation, disclosure and compliance requirements, all of which seem to run counter to the idea of putting shareholders first. ‘The job of a director is getting harder,’ he says, ‘and their duties in Section 172 are not helping at all with that; they’re adding to the confusion.’

Turner believes the Better Business Act’s proposed revisions to the Companies Act would lead to a ‘reconnection […] with what is a very intuitive way for directors to run businesses’. He adds that ‘the importance of directors thinking in the longer term naturally brings those risks [such as nature risks] into view’ and ensures they’re front and centre in decision-making.

For Bernadette Young, a director at advisers Indigo Independent Governance, establishing additional liability for directors could have unintended consequences. ‘We’ve got a risk,’ she says, ‘that directors start to feel so vulnerable to all these potential claims they find themselves in a situation where they feel whatever they do, someone else will still be unhappy; it’s not enough for them.’ This could make directors hesitant to step up and they may expect higher levels of remuneration.

Turner says the Better Business Act’s proposed revisions to the Companies Act wouldn’t create any new liabilities for directors. They would still be responsible for furthering the purpose of the company; however, that purpose would be responsible to a wider set of stakeholders. ‘A director’s job is hard,’ he says, ‘but what it needs to be is hard in the right ways. It needs to be hard because it’s answering the right questions and […] delivering the right kind of success […] and not hard because it’s being pulled in lots of different directions and [the law is] confusing and ambiguous.’

The lack of legal clarity means further litigation will probably ensue, as nature-related risks rise up the agenda. Turner says litigation tests existing legislation to ensure it’s fit for purpose. ‘The law is having perverse incentives,’ he says, noting that ‘in that scenario, it would be hard to imagine why you wouldn’t get some of this action.’  

Newnham says the avenues for litigation are only going to increase as people become more creative in the sorts of actions they bring. She says greenwashing, for example, isn’t a new legal action, but parties will increasingly turn to existing legal redress as nature and climate risks become more pressing both for the public and for regulators. 

The Opinion’s authors say the dismissal of ClientEarth’s case against Shell ‘should not be read as a general bar to derivative claims in relation to nature-related risks being brought in the future’.

Philip echoes this sentiment and says that ‘there is a perception in the market that it’s probably a matter of time before there is further litigation against directors’, alleging that they have failed to consider these sorts of risks. She highlights that increasing disclosure requirements will lead to more publicly available data that potential litigants and claimants could draw on to make their case and that companies should therefore be careful to ensure the accuracy of that information.  

Focusing on material risks

Young is cautious about adding additional disclosure to annual reports, many of which have become voluminous. ‘We need to be selective,’ she says, ‘and understand that the more we report on […] the less easy it is to pick out the really important nuggets that are the key issues that tell the story.’ She argues that selective reporting, both in the annual report and in the reports management compiles for the Board, is a discipline that could be more widely adopted.

The Taskforce on Nature-related Financial Disclosures (TNFD) has developed a set of disclosure recommendations and guidance that encourage and enable businesses and financial organisations to assess, report and act on their nature-related dependencies, impacts, risks and opportunities. It aims to enable businesses to integrate nature into decision-making and support a shift of global financial flows towards nature-positive outcomes that are aligned with the Global Biodiversity Framework, which aims to halt and reverse nature loss.

Philip says materiality is a central component of TNFD assessments. She explains that some companies carry out an initial nature-related materiality assessment to help them prioritise hot spots for their business, looking at the issue by commodity, sector, industry and jurisdiction. ‘There are definitely ways to narrow the scope as you’re going through the process,’ she says, ‘and that process of understanding materiality is absolutely essential’ to determining which information is included in nature-related disclosures.  

Newnham highlights the ‘LEAP approach’, which has been developed by TNFD as a method for identifying and assessing nature-related issues. LEAP stands for Locate, Evaluate, Assess and Prepare. Newnham says the approach is a helpful guide for companies and their directors if they feel unsure as to where to start.

Bridging knowledge gaps

General counsel and their legal teams have a critical role to play in ensuring their directors have the necessary information to be able to assess and mitigate nature-related risks the business faces. This would include advising on any legal risks associated with specific nature-related issues, including those arising as the result of the transition to new policies or regulations. General counsel can also help directors identify gaps in their understanding and source relevant expert advice to bridge them. Fundamentally, directors need to have sufficient understanding of the issues and the risks to be able to ask the right questions and hold management to account. Young says it’s particularly important to support non-executive directors on these issues because they can experience an information gap between what they know about the business and what their executive colleagues know, see, or are exposed to.

Philip highlights that there are some aspects of nature-related risk that fall within in-house legal’s remit and expertise, or that of their external legal counsel, such as changes in regulation. However, other more technical or commercial aspects of understanding nature-related impacts and dependencies could be more challenging for lawyers to advise on, such as risk assessments or strategy. This is one area where external advice is beneficial.

Philip says it’s worth considering whether the current composition of board members is well suited to digesting and acting on external advice about nature-related risks and opportunities, which can sometimes be very technical. General counsel could prompt a conversation about refreshing board composition if it isn’t well suited to this task.

The Opinion’s authors say, ‘where a director takes expert advice on an issue the director will often be held to have “gone a long way” to discharging the duty under s174.’ In addition, they say, ‘in our view a director who gives genuine consideration to relevant nature-related risks in reaching a decision for the company will likely be protected if that decision is later challenged under s172. That will be the case irrespective of the weight given to those risks in reaching that decision […] directors who record in minutes of any decisions that relevant nature-related risks had been taken into consideration, can rely on this as evidence of their compliance with their duties’.

However, directors must ensure they’re not simply going through the motions to ensure compliance. Keeping a paper trail is not sufficient; directors should be able to demonstrate they have properly considered nature-related risks, rather than just being aware of them.

In-house lawyers need to be cognisant of the greenwashing risk. They should ensure the business lives up to its commitments and that there’s transparency around the action it’s taking to address nature-related risks. Newnham says in-house lawyers should keep on top of developing greenwashing case law by looking at the sort of language that’s being challenged and reviewing the company’s key disclosures in light of this. There are ongoing greenwashing cases in Australia and the country’s Securities & Investments Commission and other regulators have prepared guidance on the issue to assist companies in this regard.

Philip says it’s important to acknowledge the opportunities associated with nature as well as the risks. In-house lawyers should help directors understand the risks but ensure they aren’t left in a position of fear or feel overwhelmed and therefore unable to act. Directors and their legal advisers should look to reposition the risks as also presenting opportunities for the business, using their risk assessments and understanding of global ecosystem decline to consider opportunities to act to halt that decline and put nature on the road to recovery. Philip says there are significant opportunities for the private sector to participate in that process and see commercial upside on the way. They can create more resilient supply chains and see price premiums on products that have demonstrable and evidence-based green credentials. They can even create and take advantage of more nature-positive markets that don’t currently exist.