Company directors must act now and consider nature-related risks, according to new legal opinion

Claire Smith, Nick Thomas, Stephanie Daveson and Alice Brennan
06 Nov 2023
Time to read: 5 minutes

Company directors could be found liable for breaching their duty of care and diligence under the Corporations Act if they fail to identify the company's nature-related "dependencies" and "impacts" and consider the "potential risks" this may pose to the company.

A new legal opinion, commissioned by Pollination Law and the Commonwealth Climate and Law Initiative (CCLI) and given by Sebastian Hartford-Davis and Zoe Bush (HDB Opinion), states that the point has now been reached where company directors must identify nature-related dependencies and impacts and consider potential risks arising from their company's operations as part of their duty of care and diligence under the Corporations Act 2001.

The opinion, released by Pollination and CCLI on 2 November 2023, follows three highly influential opinions between 2016-2021 given by Noel Hutley SC and Sebastian Hartford-Davis on the extent to which directors' duties requires Boards to consider climate-related risks. These opinions were an important catalyst for economy-wide corporate responses to climate change, and the HDB Opinion is likely to have a similar effect for responses to nature-related risks.

What should directors do?

The sobering message from the HDB Opinion for all directors is that:

"Directors who fail to consider nature-related risks could be found liable for breaching their duty of care and diligence."

Directors should start taking several steps to discharge their duty of care and diligence in respect of nature-related risks (if they haven't already done so), including:

  1. identifying their company's dependencies and impacts on nature – both direct and indirect (and, for impacts, cumulative, which include the impacts of other organisations);
  2. considering the risks and opportunities of these dependencies and impacts for the company – including in relation to resource availability, disruption of supply chains, regulatory compliance and reputational damage;
  3. weighing the risks of harm (including reputational harm) to the company from its nature related dependencies and impacts against potential benefits;
  4. determining what actions (if any) should be taken to manage those risks, and then taking appropriate steps; and
  5. ensuring that nature-related risks are appropriately disclosed e.g. in the operating and financial review in directors' reports, continuous disclosures to the ASX and, if required, by the European Union regulated market.

What this looks like for each company and its directors will depend on the circumstances of the company, and so targeted assessment and advice will be essential.

What is the duty of care and diligence?

Section 180 of the Corporations Act imposes a duty of care and diligence on company directors and officers.

While the HDB Opinion focuses on directors, it is worth noting that the statutory duty of care applies to company "officers" as well. Section 9 defines the term "officer of a corporation" essentially to include "a person who makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the corporation".

What are nature-related risks?

The HDB Opinion adopts the definition of "nature-related risks" endorsed by the Taskforce on Nature-related Financial Disclosures (TNFD):

"potential threats (effects of uncertainty) posed to an organisation that arise from its and wider society’s dependencies and impacts on nature".

The dual nature of the definition captures both threats to a company arising from its dependencies on nature and threats to a company from its impacts on nature:

  • nature-related dependencies – these are aspects of the "ecosystem services" on which an organisation relies to function, such as:
    • benefits extracted directly from nature (eg. fresh water, timber, food and fibre);
    • benefits derived from nature's role in regulating environmental conditions to enable organisations to operate (eg. the role which species and ecosystems play in the delivery of fresh water, soil conditions which promote growth, and pollination which enables regeneration); and
    • intangible and experiential benefits derived from nature, such as the role of the Great Barrier Reef for the tourism industry; and
  • nature-related impacts – these are effects which the organisation's operations have on nature which, in turn, affect nature's capacity to provide ecosystem services on which the organisation or others depend, such as those outlined above.

Nature-related impacts can be direct (ie. immediately linked to an organisation's actions, such as land clearing), indirect (ie. consequential, such as greenhouse gas emissions contributing to climate change) and cumulative (ie. occurring due to the interaction of the activities of different actors or multiple activities of the same actor).

Various reports prepared in the last few years, including those prepared by the insurance industry, the Australian Government and environmental groups, identify Australia as particularly exposed to both types of nature-related risks.

A director's responsibility to balance the risk of a company's impacts on nature against the benefits that may arise from it undertaking a relevant business activity is particularly challenging because evolving societal and market expectations increasing means it is difficult to maintain a position that there is no risk associated with a company's dependencies or impacts on nature. This is because "harm" must be considered in a broader context than immediate financial interests, to include other harm to a company's other interests, such as reputational harm.

Why does the duty now require a response to nature-related risks?

The HDB Opinion notes that, "in determining whether a director has breached their duty of due care and diligence, a court will balance the foreseeable risk of harm against the potential benefits that could reasonably have been expected to accrue to the company from the conduct in question”.

It then presents evidence to indicate that nature-related risks could be regarded by a court as being foreseeable. It quotes from Government, finance and insurance industry, and NGO commissioned reports and scientific research to support this, including:

  • the most recent Australian State of the Environment Report in 2021 which graded Australia's biodiversity as "poor" and concluded that more than 1,900 Australian species and ecological communities are known to be threatened or at risk of extinction;
  • the Swiss Re Institute report in 2022 in which Australia is listed as one of 39 countries as having ecosystems in a fragile state for more than 30% of the entire country area;
  • the Biosecurity (Varroa Mite) Emergency Order (no 7) 2023 as an example of a dependency-related risk with the varroa mite spreading in NSW. This mite is the most serious pest to honey bees who in turn are the pollinators of a range of horticultural, broadacre crop and pastoral plants. Consequently, the incursion of the mite will not just impact honey production but also potentially a range of other agricultural, food and beverage products that are dependent on the role of bees, as pollinators; and
  • an Australian Conservation Foundation report dated September 2022 on the nature based economy which concluded approximately half of Australia's gross domestic product had a moderate to very high direct dependence on "ecosystem services".

Two key global framework developments in the last 12 months are also emphasised as shifting market expectations and potentially future regulatory requirements:

As the HDB Opinion notes, while neither of these developments creates legally binding obligations at this stage, "they are relevant as recognitions and drivers of the type of market expectations which informs analysis of risk", and they also provide useful guidance as to how organisations can start to discharge the duty of care in respect of nature-related risks.

The HDB Opinion also cites examples of shifting investor and consumer behaviour including the formation of a new global initiative "Nature Action 100" at the UN Biodiversity Conference (COP15) and changing risks posed by regulatory changes that could lead to increased costs of business and/or the potential prohibition of certain activities presently important to profit-generation in Australia.

How can directors satisfy their duties?

The duty of care and diligence is subject to the "business judgment rule" in section 180(2) of the Corporations Act, which essentially provides that a director (or other officer) of a corporation who makes a "business judgment" (ie. decision to take or not take action in respect of a matter relevant to the business operations of the corporation) is taken to meet the requirements of the duty in respect of that judgment if they:

  • make the judgment in good faith for a proper purpose; and
  • do not have a material personal interest in the subject matter of the judgment; and
  • inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate; and
  • rationally believe that the judgment is in the best interests of the corporation.

It seems likely that the availability of the business judgment rule for a director in respect of nature-related risks will depend on the extent to which the director has taken the steps outlined above.

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.