A new legal opinion by barrister Sebastian Hartford Davis and lawyer Zoe Bush has highlighted company directors’ obligations for nature-related risks and dependencies. The opinion was commissioned by Pollination Law in collaboration with the Commonwealth Climate and Law Initiative (CCLI) and was released earlier this month (November 2023). It should be on the must-read list of every Australian company director.
Under the Corporations Act 2001 (Cth) (CA), directors have a duty to disclose financial risk. Section 295 of the CA requires directors to state that they believe the company’s financial statements provide a true and fair view and are in accordance with accounting standards. Section 299A requires directors to prepare an operating and financial review that includes any information shareholders would reasonably be expected to need to make informed assessments of the company’s prospects for the foreseeable future.
It’s now recognised that failure to reasonably consider and disclose foreseeable climate-related risks to the company’s business constitutes a breach of a director’s duty of care, skill and diligence. In Australia, Australian Treasury recognises the duty and is progressing with requiring companies to disclose climate-related risks and opportunities, with around 23,000 entities in Australia expected to be required to report climate-related disclosures by around 2027. Case law around directors’ obligations to understand, consider and disclose climate-related risk is also growing. ASX’s 4th edition of the Corporate Governance Principles and Recommendations states that listed entities should disclose material exposures to climate-related environmental risks, and how it manages those risks. Similar developments are occurring or have occurred overseas, particularly in places like the EU and US.
The new legal opinion states that prudent directors and companies should identify, assess and manage nature-related risks. It follows from similar legal opinions being made overseas, including in New Zealand earlier this year for The Aotearoa Circle. In the context of the Corporations Act, the opinion reflects that directors:
- Must take reasonable steps to consider whether nature-related dependencies and impacts pose material risks of harm to their company, now or in the foreseeable future. Based on this assessment they must decide what action to take if risks are material. If risks are material, directors also need to disclose this in periodic reporting requirements under CA (and as part of continuous disclosure requirements if you’re a listed company).
- In considering impacts, directors should consider how a company’s detrimental environmental impacts long-term shareholder value as societal expectations and values shift.
- Could be liable for failure to consider physical, reputational, financial and other risks where their companies are materially directly or indirectly dependent on nature for current and foreseeable future performance. When considering whether nature-related risks are foreseeable and material, directors should consider, among other things, domestic and international regulatory change that prioritises protection of nature, how well the risk is understood, and evolving stakeholder (i.e. beyond shareholder) expectations. In short, directors may be liable for failure to consider so-called ‘transition risks’ as society shifts towards more ‘nature positive’ economies.
- Could be liable for failure to consider physical risks where their companies are not materially dependent on nature but do create material impacts on nature and where failure to disclose this would be “likely to influence persons who commonly invest in securities in deciding whether or to acquire or dispose of” the company’s securities. This last point could be far-reaching in terms of impacts for companies.
Considering this new legal opinion, what can directors do now?
Be aware of the Hartford-Davis/Bush opinion and how it may impact on your duties under the Corporations Act 2001 (Cth).
Consider implications including, but not limited to:
- whether your organisation strategy, statement of risk appetite and/or risk register needs to be updated, along with any relevant policies or procedures
- whether your current governance structures are suited for identifying and managing positive and negative nature-related risks and dependencies
- the board and executive’s level of nature-related competency and whether upskilling and/or external guidance is needed
- whether you are making, or should make, nature-related representations and disclosures, including disclosures required under continuous disclosure requirements for listed companies
- data and systems needed for monitoring, managing and reporting nature-related risks and impacts, including reporting to the board
- where gaps are identified, work with the executive team to upskill, make investments and seek external support as required.
The Australian Institute for Company Directors’ guide for climate-related board considerations is also useful when thinking about how to progress with nature-related risk and disclosures – substitute the word “climate” for “nature” throughout.
Read the legal opinion at: https://pollinationgroup.com/global-perspectives/australian-company-directors-and-nature-related-risk-a-new-legal-opinion/
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