The rarified atmosphere of the boardroom conjures up many images but nature is not one that immediately springs to mind. Indeed, it might be said that in many areas, the corporate world and the natural world are poles apart.

However, a new legal opinion written by the commercial barrister authors of this article, along with environmental law input from James Burton, explains that many types of businesses face risk on nature-related matters – including climate change – and that such matters should firmly be on the agenda for directors. The Opinion was commissioned by the Commonwealth Climate and Law Initiative (a UK charity) and Pollination Law.

In this context, nature-related risks encompass both a company’s dependencies on nature and also its impact on nature. Such risks may manifest themselves directly to a business or indirectly, such as through a supply chain.

Directors’ duties

Directors’ duties under English law are now codified in ss 171 to 177 of the Companies Act 2006.

Section 172 requires a director to act in the way they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. The section lists expressly certain factors to which the director must have regard, including ‘the impact of the company’s operations on the community and the environment’. The duty is a subjective one, and a director is given a wide discretion to decide how to promote the success of the company.

Section 174 requires a director to exercise reasonable care, skill and diligence. This duty is an objective one, albeit that a higher standard may apply if the director in question has better knowledge and skill than another reasonable director would have in their shoes.

The Opinion, which is an exposition of the current state of English law, analyses in considerable detail the evolution of English law on directors’ duties in relation to risks and explains that nature-related risks and climate change are conceptually no different to other types of risk which the law has long established must be considered by directors. The Opinion also considers the current reporting regime which implements recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD) and for the largest UK companies involves reporting on climate related risks and also encompasses, in some areas, reporting on nature-related risks too.

In September 2023, a Task Force on Nature-Related Financial Disclosures (TNFD) made recommendations in respect of reporting on both a financial materiality and impact materiality basis. The UK government has been a significant funder of the TNFD, and indicated prior to the publication of the TNFD recommendations that it intended to formally adopt them. No legislation has yet been enacted. However, there is already a body of businesses who, on a voluntary basis, are early adopters of the TNFD recommendations including, in the UK, AstraZeneca, the London Stock Exchange Group, Clyde & Co, PwC and Standard Chartered Bank.

Increasing public scrutiny and risk of litigation

The consideration of nature and climate related risks for directors is particularly pertinent because there is increasing public scrutiny of the relationships between companies and nature. It is common to see media coverage about companies whose activities have significant adverse impacts on nature, such as in the form of pollution or depletion of natural resources. Putting aside questions of liability for regulatory breaches or in tort, such activities can be extremely damaging to a company in terms of its reputation and ultimately revenues. Further, there has been a push amongst certain investors for greater transparency as to how dependent companies are on natural resources and what damage their operations may be doing to the environment and the natural world.

It is not only public scrutiny that directors face. In addition, there is the increased risk of litigation from unhappy shareholders accusing directors of failing to discharge their duties by not properly considering and acting upon their company’s dependencies and impacts on nature. There have recently been two high profile attempts by shareholders to bring ‘derivative claims’ under the Companies Act 2006 against directors in relation to their handling of climate change risks: ClientEarth v Shell [2024] Env LR 1 and McGaughey v Universities Superannuation Scheme Ltd [2022] Bus LR 797. In the former case, it was alleged that Shell’s directors had breached their duties to the company under ss 172 and 174 by failing to set appropriate emissions targets. In the latter, the directors of the corporate trustee of a pension scheme were alleged to have breached s 172 by continuing to invest in fossil fuels.

The derivative claim procedure allows a shareholder to commence proceedings in the name of the company against a director, albeit that the permission of the court is required under a two stage procedure. Under the first stage, the applicant must show a prima face case on its own evidence and the company is not required to file any evidence. If the first stage is passed, the application moves to a second stage where the court may require evidence to be provided by the company before deciding whether the case should be permitted to continue.

While neither of the above two cases was given permission to continue, each required significant engagement from the respondent companies in seeking to justify their position. These decisions underscore the importance for directors of being able to demonstrate that they have acted properly and have fully discharged their duties, including in relation to nature-related and climate risks insofar as they arise for their particular business.

Aside from the prospect of a derivative claim, directors will also be conscious of the potential impact on their pay packet from allegations of breach of duty. Employees with good and bad leaver provisions in their contracts may find that their remuneration is heavily impacted if they are pushed out for breach of duty.

Practical guide for directors

In the face of these challenges, the Opinion contains a practical guide for directors in relation to nature-related and climate change risks and recommends the following: (1) the identification and active consideration of the extent to which a company faces nature-related risks; (2) the assessment and evaluation of those risks and the potential they have to cause harm to the company: toolkits such as the TNFD Recommendations may help on this and expert advice might be required; (3) once the extent to which nature-related risks pose potential harm to the company is known, a director ought then to consider how best to manage and/or mitigate those risks, and may wish to design and implement a framework for systematically managing those risks; (4) a director should consider the extent to which those risks should be disclosed which will at a minimum involve compliance with the legislative and regulatory rules which govern such disclosure; and (5) whichever steps a director decides to take in identifying, assessing and (where appropriate) mitigating nature-related risks, such steps should always be properly documented in (for example) board minutes, agendas, memorandums and/or reports. 

The Legal Opinion, Nature-related risks and directors’ duties under the law of England and Wales was commissioned by the Commonwealth Climate and Law Institute and Pollination Law and published on 11 March 2024.