Context

Generally, directors’ duties require acting with care and loyalty toward their companies. Though expressed differently across jurisdictions, these duties are exercised in strategic planning, oversight of foreseeable and material risks, and attesting to the accuracy of disclosure and financial reporting. The law commonly assesses the standard of directors’ care and loyalty by reference to the evolving market, social, regulatory and legal context. The term ‘nature positive’ is gaining traction. Recent developments indicate that discharging directors’ duties may entail consideration of biodiversity:

• Proposed and enacted environmental due diligence legislation around the world is likely to cascade information requests through value chains. This has major implications not just for directly affected companies incorporated or operating in the territories where such legislation is passed but through its cascading effect, for companies outside those territories. It may also influence global best practice. See Quarterly Update 3: Value Chain Due Diligence.
• Courts are considering biodiversity-related cases against companies. See page 7 below.
• The Global Biodiversity Framework (sometimes referred to as the ‘Paris Agreement for Nature’) adopted at the fifteenth conference of the parties to the UN Convention on Biological Diversity in December 2022 (COP15) includes indicative targets relevant to companies, which could, if translated into government policy or legislation, create risks for companies. In Target 15 governments committed to implement measures to ensure that large and transnational businesses and financial institutions assess and disclose their risks, dependencies and impacts on biodiversity along value chains and portfolios.
• The anticipated frameworks of the Taskforce on Nature-related Financial Disclosures (TNFD) and the International Sustainability Standards Board (ISSB) may lead to companies being obliged to make biodiversity risk disclosures in non-financial statements. The International Accounting Standards Board (IASB) has indicated companies should also disclose material emerging environmental risks (e.g. biodiversity risks) in financial statements. 
• Existing law requires the disclosure of ‘material’ information (i.e. information which would affect an investor’s decision to invest); therefore, investors’ attention to biodiversity may affect duties of disclosing companies. Investor frameworks indicate a growing appetite by the world’s biggest investors for managing biodiversity risk, which signals that investors deem biodiversity issues to be material. For example, the UN Principles for Responsible Investment, the Finance for Biodiversity Pledge and Nature Action 100. If disclosure of biodiversity risk becomes market practice, it could raise the general standards of care and loyalty not only for directors of disclosing companies but for directors of companies in jurisdictions or sectors where their peers are reporting, by broadening the scope of what is considered ‘reasonable’ for a director in similar positions. 
• In addition to biodiversity risk disclosure requirements, investors may request companies to set science-based targets for nature or disclose biodiversity-related lobbying activities. 
• Developments in natural assets, impact investing and natural capital accounting are bringing biodiversity into the financial mainstream, recognising its intrinsic value. This indicates a general direction of travel rather than any imminent new requirements for companies.
• Legal recognition of the ‘rights of nature’, in which natural entities are granted legal status similar to a company or person, presents an emerging legal risk with future potential to accelerate biodiversity litigation against companies. This risk is limited to companies operating (including through value chains or subsidiaries) in specific areas where such rights are relevant (areas within over 30 countries defined through local constitutions, statutes or court decisions), who will need to assess whether company activities might breach such rights.

Potential breach

Directors could face the risk of liability for failures to consider biodiversity risks, opportunities and impacts, where this breaches the duties of care and loyalty.

Biodiversity risk does not just include physical risks and opportunities (e.g. in raw materials supply chain) and legal risks (e.g. liability for the company’s impacts) but also includes transition risks posed by policy, regulatory, investor and customer responses to biodiversity loss (e.g. import bans or anti-deforestation laws).

The standard to be met by directors will depend on their company’s jurisdiction and operational context. Biodiversity risks and opportunities may be of higher relevance in jurisdictions with:

• robust frameworks for directors’ duties;
• nature-related disclosure obligations soon to be introduced;
• high awareness of wholesale and retail buyers who may elect to avoid products known to be associated with negative biodiversity impacts;
• significant biodiversity or climate-related litigation; or
• regulators or national banks actively considering biodiversity risks. For example, studies by central banks in the Netherlands, Malaysia, France and Brazil have found their national financial sectors to have high levels of exposure to dependence on biodiversity.

Illustrative examples of developments in Australia, Canada, India, South Africa and the UK can be found in the CCLI report. These type of developments can be found in many jurisdictions globally.

In industries with higher biodiversity risk and opportunity exposure, consideration of biodiversity may already be included within directors’ legal duties. Companies in, or linked by value chain to, the agricultural, construction or food sectors may have higher risk and opportunity exposure. 

It is possible that a director may breach their duties by failing to act in good faith or with reasonable prudence in considering biodiversity risks and opportunities, including by failing to: 

• consider and govern for foreseeable and material biodiversity risks, for example in strategy and oversight, or in the approval of specific projects or acquisitions, especially where the company operates in a high-risk sector;
• consider in good faith, or by wilfully disregarding, a material biodiversity risk in strategic decision-making where that risk was evident; 
• adequately embed biodiversity risk into management processes, or failing to monitor operations, resulting in a failure to keep informed of risks or problems; 
  critically evaluate or obtain independent review of advice in relation to biodiversity risk; 
• consider opportunities for the company to adapt in a timely manner to the transition to a ‘nature-positive’ economy, including opportunities to create value from biodiversity or new business models; 
• act in accordance with their assessment of risk, if that decision was one which no reasonable director would have made; or
• prevent the company from making misleading disclosures in relation to dependencies, impacts, risks or opportunities. 

Litigation risk

There are multiple examples of cases around the world against governments that indicate increasing appetite of litigants for biodiversity claims. This includes the US, Turkey, France, Ecuador, Australia, Argentina, Colombia, China, Costa Rica, Tanzania and the Philippines.

Biodiversity-related litigation is being brought against companies. Claims brought to date generally relate to disclosure obligations, or duties to manage subsidiaries or value chain partners:

• In Australia a potential claim against ANZ Bank may soon be filed on the grounds that the Corporations Act requires its directors’ report to disclose that biodiversity loss represents a material risk.
• In the US, investors have filed a securities class action against wood pellet company Enviva and its directors, including allegations that Enviva misrepresented the environmental sustainability of its wood pellets and its sourcing practices are negatively impacting forest biodiversity.
• A 2021 case against the French supermarket chain Casino alleged that Casino’s yearly due diligence plans failed to detail the environmental and human rights harms caused by the supply of cattle from deforested areas to Casino’s Brazilian subsidiary. 
• Cases in the UK, the Netherlands and Canada indicate that courts will not preliminarily strike out claims against parent companies for conduct of foreign subsidiaries. In the UK this includes claims by victims of environmental harms located in Zambia, Nigeria and Brazil. Although substantive judgments in these cases are pending and some of these cases deal with alleged human rights abuses, the same legal principles could allow for lawsuits against parent companies for the impacts of their subsidiaries in biodiversity-rich regions. 

While no biodiversity-related cases have yet been filed alleging breaches of directors’ duties, cases filed against directors for mismanagement of climate risk indicate the potential for similar biodiversity claims. For example, a shareholder has brought a derivative action against Shell’s board of directors in the UK over alleged mismanagement of material and foreseeable climate risk.

While market context and evolving best practices suggest that the law permits or requires directors to contemplate biodiversity risks and opportunities in fulfilling their duties, failure may not often lead to liability. In certain jurisdictions, there may not be enough evidence to provide liability; in others, there may be difficulties for potential claimants to meet the bar to establish a claim. However, the increasing number of climate-related cases against companies and directors across the world suggest strong potential for similar cases to emerge in relation to biodiversity loss.

Avoidance of liability is a minimum bar, and directors will want to avoid or mitigate reputational issues by aiming for prudent governance informed by best practice. In order to discharge their duties, directors can ensure that risk management processes assess foreseeable biodiversity dependencies and impacts of the company for materiality and measure those that are material. Directors can then include material dependencies, impacts, risk and opportunities within strategy, disclosure and decision-making.