Is Your Company Addressing Nature-Related Risks in Board Meetings?

Nature-Related Risks: A New Focus for Boardrooms

Nature and nature-related risks are becoming crucial topics to consider in board meetings. Traditionally, these risks have not been a regular part of boardroom discussions. However, a significant shift is underway. For the first time in the UK, an independent legal opinion commissioned by Pollination and the Commonwealth Climate and Law Initiative (CCLI) has confirmed that nature-related risks are relevant to directors' duties under the Companies Act 2006. This confirmation means directors who neglect to consider these risks could face shareholder actions and legal liabilities.

Legal Opinion Highlights Directors' Duties

A legal opinion was commissioned by Pollination Law and CCLI and this was published on 11^th March 2024. The legal opinion outlines the duties of directors concerning nature-related risks under the laws of England and Wales. This legal opinion is critical in understanding how directors should approach these risks in the context of their roles. A summary of the key findings can be found here and the full opinion can be found here.

The legal opinion examines three main duties of directors under current company law:

1. Promoting the success of the company: Directors must consider nature-related risks as part of their duty to promote the company’s success for the benefit of its members as a whole (s.172 of the Companies Act 2006); 

2. Duty of care, skill, and diligence: Directors are required to act with reasonable care, skill, and diligence (s.174 of the Companies Act 2006); and 

3. Disclosure obligations: Directors must disclose relevant information about the company, including nature-related risks, in its narrative reports.

Why Directors Must Consider Nature-Related Risks

The legal opinion emphasises that nature-related risks are within the scope of risks directors should consider. The relevance of these risks varies from business to business depending on the company profile however, the Bank of England's internal analysis shows that 52% of UK GDP and 72% of UK lending depend on ecosystem services. This significant dependency means directors must assess their company’s reliance on natural capital and ecosystem services and understand the current and future state of these assets and how they impact the company.

Promoting Company Success

The duty to promote the company's success (s.172 CA 2006) is typically a subjective duty, focusing on whether directors believe their actions benefit the company. However, if directors fail to consider whether their actions or omissions promote the company's success, they will be judged by a higher objective standard. Ignoring nature-related dependencies, risks, and impacts for relevant companies, can lead to regulatory investigations, increased dispute risks, reputational damage, and civil liability.

Steps for Directors to Fulfil Their Duties

The legal opinion advises directors to:

1. Identify nature-related risks: Determine the nature-related risks facing the company; 

2. Assess risks: Evaluate which risks are relevant and not trivial, consulting experts when necessary;

3. Mitigate risks: Decide in good faith whether to take action to mitigate these risks and implement relevant steps; and

4. Document decisions: Record all decision-making processes in writing.

The legal opinion also refers to the Taskforce on Nature-related Financial Disclosures (TNFD) as a point of reference and can provide useful guidance for companies to identify dependencies, risks, and opportunities and integrate nature-related considerations into their decision-making processes.

If you have any queries about the impact of nature-related risks on directors' duties, please do not hesitate to get in touch with our Corporate Team by telephone on 0207 052 3545 or by email info@kaurmaxwell.com

This article is for general information only. Its content is not a statement of the law on any subject and does not constitute advice.

Please contact KaurMaxwell for advice before taking any action in reliance on it. 

By: Hiten Patel