INSIGHT by Zaneta Sedilekova, Founding Director and CEO at Planet Law Lab and Eniye Igbanibo, Project Officer at the Commonwealth Climate and Law Initiative
Nature-related risks are within the scope of directors’ duties to act with care and diligence under the Australian Corporations Act, according to a new legal opinion. Authored by Sebastian Hartford-Davis and Zoe Bush, the opinion, ‘Nature-related risks and directors’ duties’ concluded that nature-related risks to a company should be regarded as foreseeable now, given the large amount of information already available about economic dependency on nature and the rate at which it is being degraded in Australia and globally.
The authors found that Australian directors have to identify, assess and disclose nature-related dependencies and impacts that pose a material risk of harm to the company. They also found that directors may be required to disclose those impacts that do not pose material risk of harm to the company.
This article focuses on the opinion’s analysis of corporate impacts on nature and disclosure obligations related to these impacts.
| Disclosure of nature-related impacts – a dispute without settlement?
Nature-related risks and opportunities arise from corporate dependencies and impacts on nature. Nature-related dependencies are the aspects of ecosystem services that a company relies on to function. Ecosystem services are the contributions of ecosystems to the benefits that are used in economic and other human activity and they fall under one or more of the categories of provisioning services, regulating and maintaining services, or cultural services. With regards to disclosure of nature-related dependencies, impacts, risks and opportunities by companies, there is consensus across the various reporting standards that where nature-related issues are material to the profitability of the company, the company should make disclosure of such issues.
Nature-related impacts on the other hand are changes in the state of nature, which may result in changes to the capacity of nature to provide social and economic functions, including ecosystem services. They can be positive or negative, and can occur directly as a result of corporate actions such as land clearing for agriculture; or as the indirect consequence of another factor such as man-made greenhouse gas emissions contributing to climate change; or cumulative as a result of the interaction of activities of different actors operating in a landscape. Nature-related impacts can exacerbate dependency-related risks where those impacts are on the same set of ecosystem services on which a company depends. They can also contribute to nature-related risks of other companies/ companies in other sectors.
Unlike disclosure of nature-related dependencies by companies, opinions on disclosure of nature-related impacts differ across various reporting standards.
〉The International Sustainability Standards Board (ISSB) requires companies to disclose only those risks to the company that could affect the company’s prospects (often referred to as ‘financial materiality’). These are exclusively risks that the company’s nature-related impacts or dependencies pose to the company, and not those risks that the company poses to nature that don’t materially affect the company.
〉The Global Reporting Initiative’s (GRI) Sustainability Reporting Standards have adopted ‘impact materiality’ which focuses on information about significant impacts of the company on the environment and people.
〉The European Sustainability Reporting Standards (applicable to disclosure under the European Union’s Corporate Sustainability Reporting Directive (CSRD)) require companies to disclose both financially material and impact material information.
〉The Taskforce on Nature-related Financial Disclosures (TNFD) allows companies to choose which approach to materiality they want to adopt in their nature-related financial disclosures, hence companies can decide whether or not to disclose those of their impacts that do not have a bearing on the company’s financial prospects.
| A case for disclosure of nature-related impacts under Australian corporate law
Australian directors are required to ensure the company complies with its periodic reporting obligations under Australian corporate and securities laws. Information that must be reported must allow shareholders and potential investors to make an informed assessment about the company’s operations, financial position, business strategies and prospects for future financial years. Where environmental, social and governance risks could affect the achievement of a company’s financial objectives, such risks should be discussed in the operating and financial review aspect of the directors’ reports.
This obligation to disclose material environmental and social risks that may affect the financial performance of the company encompasses disclosure of nature-related impacts that exacerbate dependency-related risks as covered by both Australian regulations and listing rules. Other corporate impacts may not necessarily exacerbate a company’s dependency-related risks, but may nevertheless create material transition risk to the company (stemming from, for example, government regulations aimed at addressing those impacts or litigation against the company), which needs to be disclosed.
In relation to nature-related impacts that do not create risks to the company itself but contribute to nature-related risk of other companies or companies in other sectors, a company’s continuous disclosure obligations may require the disclosure of that information even where the relevant impacts do not pose a material risk of harm to the company. This is because such disclosure, although not material to the company making it, may influence the decision of investors to invest in the securities of any company or otherwise.
| Reinforcing factors for the case for disclosure of nature-related impacts
A number of factors reinforce the case for the disclosure of nature-related impacts. These factors include international developments, market developments and national regulation with extraterritorial effect.
International developments like the Global Biodiversity Framework (GBF), Target 15 requires signatories to take measures that will catalyse and enable businesses to monitor, assess and disclose their risks, dependencies and impact on biodiversity. The Taskforce on Nature-related Financial Disclosures (TNFD), through its voluntary double materiality approach, strongly recommends that companies identify and assess their nature-related impacts and dependencies, in order to determine which of those impacts and dependencies pose a risk to the company. And although it allows companies to choose their own approach to materiality, it recommends that if a company seeks to align with Target 15 of the GBF, the company should disclose its most significant impacts on nature, regardless of whether those impacts pose a risk to the company. This focus on nature-related impacts by both the GBF and TNFD is likely to shift market expectations.
National regulatory requirements with extraterritorial effect are another reinforcing factor for the disclosure of nature-related impacts. For instance, the European Union’s CSRD will require a non-EU parent company whose group generates significant income in the EU and has an EU-based subsidiary or branch that meets certain criteria to disclose nature-related impacts regardless of their financial materiality to the entity. The CSRD has extraterritorial effect and many multinational Australian companies will be caught under it. Another example is the EU Regulation on deforestation-free supply chains which mandates companies that place specific commodities on the EU market to prove that such commodities were produced on land that was not subject to deforestation after 31 December 2020. Very much like the CSRD, this regulation has extraterritorial effect and is particularly significant for Australian companies given that eastern Australia has been identified as one of 24 global deforestation hotspots.
| Increasing liability risk in face of disclosure-based litigation
The trajectory of disclosure-based climate litigation in Australia is informative of what to expect in relation to nature-based disclosures, given that Australia has become a hotspot for disclosure-based climate litigation. In the context of litigation strategies, disclosure-based litigation can be viewed as a preliminary step towards an action against the company and its directors for breach of their duties. This is because if the disclosure of internal risk management documents is granted, shareholders may obtain access to evidence of mismanagement of nature-related risks which can then form the basis of their legal action for redress.
In McVeigh v. Retail Employees Superannuation Trust (now settled), the pension fund members sued Retail Employees Superannuation Trust (REST) alleging that the fund failed to disclose information related to climate change business risks and any plans to address those risks. The case eventually settled with REST acknowledging that: “Climate change is a material, direct and current financial risk to the superannuation fund across many risk categories, including investment, market, reputational, strategic, governance and third-party risks.”, and agreeing to implement a net-zero carbon footprint by 2050 goal, measure, monitor and report on climate progress, ensure investee climate disclosure, and publicly disclose portfolio holdings, among other commitments.
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In Australasian Centre for Corporate Responsibility v Santos Ltd, the Australasian Centre for Corporate Responsibility brought a claim against Santos for allegedly misleading claims in its annual reports and investor presentations regarding the sustainability of its gas production and its emission reduction strategy. In Abrahams v. Commonwealth Bank of Australia, a shareholder of Commonwealth Bank successfully obtained access to the bank’s board and management papers for the purpose of scrutinising the accuracy of the bank’s public-facing sustainability disclosures.
The recently published legal opinion indicates that a similar trend is likely in relation to disclosure of nature-related risks, opportunities, dependencies and impacts. Indeed in making their investment decisions, investors like Impax Asset Management have already started considering both the effect of nature-related risks to their investments and the potential negative nature-related impacts of their investments. In fact, only a week after the legal opinion was published, an application for preliminary discovery was filed with the Federal Court of Australia against Australian multinational bank, ANZ, by their shareholder seeking access to copies of ANZ’s internal risk management framework due to concerns that the bank has failed to properly manage the risk of climate change and biodiversity loss.
With investors’ increasing interest in how their investee companies manage nature-related risks, the Hartford-Davis & Bush opinion supports the witnessed reality that the liability risk for many corporate decision-makers is already materialising.
Zaneta Sedilekova is a Director of climate and biodiversity risk consultancy firm Planet Law Lab. She has also been appointed as a Biodiversity Risk Advisor for a global think tank Commonwealth Climate and Law Initiative, where she carries out research and provides strategic advice on how biodiversity loss can pose a material risk to financial institutions and corporations across multiple sectors. She is also a practising lawyer with a strong focus on climate and biodiversity liability risk in corporate sector. Zaneta has co-authored several reports on biodiversity risks, including Addressing biodiversity loss – revolution or evolution of English law? and Biodiversity Risk: Legal Implications for Companies and their Directors. She regularly speaks about climate and biodiversity risk and litigation at conferences, webinars and other events.
Eniye Igbanibo is an environmental sustainability lawyer. She is a Project Officer at the Commonwealth Climate and Law Initiative where she carries out research on the corporate and financial law implications of biodiversity loss and ecosystem risks particularly as it relates to the duties of directors and investors. Eniye is licensed to practice law in Nigeria and has experience working in climate change, energy transition and legal sectors.
| All opinions expressed are those of the author and/or quoted sources. investESG.eu is an independent and neutral platform dedicated to generating debate around ESG investing topics.