Navigating your company through nature related risks

Why Directors Should Consider Nature-Related Risks

In the rapidly evolving business landscape, one aspect that company directors cannot afford to overlook is nature-related risks, including climate risks.

Understanding Nature-Related Risks

Nature-related risks arise from a company’s dependencies and impacts on nature. These risks fall within existing financial risk categories. They include physical risks, such as a decline or collapse of ecosystems, transition risks, including shifting consumer preferences and legal requirements. Climate change, one of the five drivers of biodiversity loss, is a significant part of these risks.

The Legal Perspective

Failure to identify and mitigate latent financial risks arising from a company’s unaddressed nature-related impacts and dependencies could potentially breach directors’ duties under sections 172 and 174 of the UK Companies Act 2006. This includes promoting the success of the company considering any decision in the long term. This could expose directors to increased shareholder backlash and legal consequences.

Legal experts commissioned by the climate advisory firm Pollination Group and the Commonwealth Climate and Law Initiative said failure to assess financial risks from a company’s unaddressed nature-related impacts and dependencies could expose directors to increased shareholder scrutiny under the UK Companies Act.

The Importance of Considering Nature-Related Risks

The consideration of nature-related risks is not just about legal compliance. It’s about future-proofing businesses and promoting sustainable business practices. By considering these risks, companies can better manage potential threats to their operations and financial stability contributing to environmental conservation and sustainability, which is increasingly important to consumers, investors, and regulators.

These risks, and associated opportunities are baked in to the recently released Nature Related Financial Disclosures (TNFD) Framework, which will likely become mandatory, standing alongside the Climate Related Financial Disclosures (TCFD) framework that has been in existence since 2017, and became mandatory for larger organisations in 2021.

What are the consequences?

Although the answer to their question is still being determined, the analysis said directors of UK firms faced serious personal consequences for breaching these duties, potentially including claims for damages or compensation by their shareholders. Even in cases where it was difficult to work out exactly how much money the company had lost, directors could lose their jobs or have their remuneration or exit packages cut.

A Global Trend

The issuance of similar legal opinions in Australia and New Zealand, indicates a global trend towards greater recognition of nature-related risks in corporate governance.

What does this mean for Jersey

For regulated UK entities based in Jersey, these will fall under the remit for this decision and should therefore be abreast of this ruling and taking requisite action. Jersey could follow these guidelines, given the importance of a well regulated and governed industry that operates on-Island and the relationship that we have with the TNFD framework.

Therefore, we would recommend that organisations review the decision, and work out the extent to which it applies to them, and whether nature related risks have been considered, since this is the direction of travel for various jurisdictions.

How we can help

1. Risk Assessment: Our expertise in environmental and climate risks can help you understand your company’s nature-related risks. We can provide insights into how these risks could impact your company’s operations and financial stability.
2. Legal Compliance: We are familiar with environmental regulations such as the TCFD and TNFD frameworks which can guide you in understanding their legal obligations related to nature-related risks. They can help ensure that the company is compliant (if it needs to be) or in line (if it chooses to be) with relevant laws and regulations.
3. Strategy Development: We can assist you in developing strategies to manage nature-related risks. This could include changes to business operations to reduce environmental impact, or investment in sustainable technologies.
4. Training and Development: We can provide training for directors and other company staff on understanding and managing nature-related risks. This can help build the company’s internal capacity to deal with these issues.
5. Scenario Planning: We can help you develop scenario plans to prepare for potential future outcomes related to nature-related risks. This could involve creating different strategies based on future environmental conditions and regulations.
6. Sustainability Reporting: We can assist you in developing sustainability reports that detail your environmental impact and how you are managing nature-related risks. These reports can help communicate with stakeholders, including investors, customers, and regulators. We can also carry out TCFD and TNFD reports to help you to remain compliant.
7. Policy Advocacy: We can help develop policies that support sustainable business practices. This could involve engaging with policymakers to promote regulations that incentivise businesses to reduce their environmental impact.