Should nature be a part of corporate legal duties?

The legal opinion, commissioned by Pollination Law and CCLI, and delivered by a team of five barristers, is the latest in a series of work analysing the necessity for legal systems and UK companies to focus on nature-related risks.

The barristers believe that there is a legal basis for the financial relevance of nature to be considered in decision-making processes by boards. The letter notes that directors have a duty to promote the success of a business under the Companies Act 2006, but that nature remains an oversight.

Recent analysis found that 52% of UK GDP and 72% of UK lending are dependent on ecosystem services, while three-quarters of sectors listed under the UK FTSE All-Share Index are estimated to be highly dependent on natural capital. However, research states that wildlife populations have fallen by an average of 69% since 1970 and some species have suffered declines of as much as 95%.

Nature loss poses risks to more than half of the world’s total GDP, which amounts to $44trn. Nonetheless, the annual undisclosed cost associated with the global economy’s exploitation of nature, including aspects such as greenhouse gas emissions (GHG), water and land use, exploitation of wild species, pollution, and waste, is estimated to be roughly 13% of the global GDP.

The new legal opinion states that directors should identify and map the extent that nature would impact the resiliency of the company moving forward.

Professor Thom Wetzer, Associate Professor of Law and Finance at the University of Oxford, Founding Director of the Oxford Sustainable Law Programme and Trustee of the CCLI, said: “We increasingly understand the potential severity of nature-related risks for companies. Yet, directors commonly fail to appreciate the severity of these risks and thereby needlessly put their company at risk.

“This important report highlights what should have been obvious long ago: nature-related risks are not distinct from other financial risks, and should therefore be considered by directors in furtherance of their legal duties.”

Exploring risk

The opinion states that failure to identify and assess financial risks based on unaddressed nature-related impacts could expose directors to more shareholder scrutiny and could see companies face consequences under the Companies Act 2006.

Some environmental groups are already trying to challenge firms that are failing to incorporate nature and climate into their board practices. ClientEarth is notably challenging the High Court’s decision to dismiss its lawsuit against Shell’s board on the grounds that the oil company’s existing climate targets are not aligned with the ambitions of the Paris Agreement.

ClientEarth filed a lawsuit against 11 Shell directors at England’s High Court. The charity argued Shell’s existing plans to reduce emissions were not aligned with the Paris Agreement. This will either leave it exposed to physical risks from a warming world or transition risks, as investors and policy move more rapidly than Shell, risking stranded assets.

The legal opinion makes specific reference to this case, noting that refusal to permit the claim isn’t necessarily an outcome that would be delivered under all challenges. It states that another judge could have decided the case differently and that more companies could face challenges on the grounds of nature if they fail to act.

The barristers also outlined a set of recommendations as to the type of risks to explore. These include physical risks, such as how depleted nature sources would impact operating models in sectors like agriculture, which in turn would create economic and competitive risks.

Additionally, the Taskforce on Nature-related Financial Disclosures (TNFD), which entered into force in 2023, intends to mitigate the industrial impact on nature by encouraging comprehensive reporting on businesses’ environmental footprint and properly integrating nature-related considerations in their strategies.

The legal opinion implores businesses to start exploring the recommendations of the TNFD in order to uncover any nature-related risks and act accordingly.

Beauty product brand Faith In Nature is a rare example of a company that has placed nature into the heart of boardroom decisions. In 2022, the company made nature, under the representation of environmental lawyers, a director on its board.

Better Business

The Companies Act has been a key focus for certain businesses looking to enshrine better approaches to corporate stewardship into law.

The Better Business Act, for example, calls for an amendment to Section 172 of the Companies Act, which places directors under a fiduciary duty to benefit shareholders through the company’s performance. The Act does pertain some “regard” to “the impact of the company’s operations on the community and environment”, but the campaign is calling for this to be rewritten.

Specifically, campaigners are calling for the Act to “empower directors to exercise their judgment in weighing up and advancing the interests of all stakeholders”, other than just shareholders, which places environmental and social considerations into the heart of the business. MPs including Caroline Lucas, as well as thousands of businesses, have publicly backed the Act.