Managing nature-related risk

There are frequently calls for New Zealand to follow Australian legislation, so a new legal opinion from Australia warning directors about their potential nature-related liabilities is one to pay attention to.

Consistent with overseas trends, directors in New Zealand face a continually evolving liability landscape with increases in climate change litigation and liability. Australia is leading the pack internationally in climate litigation (on a per capita basis) with greenwashing, ESG and climate-related litigation on the rise. Litigants are adopting a diverse range of legal strategies, with a particular focus on companies and financial institutions.

While the financial and legal risks that climate change present are increasingly acknowledged, the environmental impacts and dependencies of companies are broader than climate risk and present an increasing challenge (and potential liability) for directors.

Roughly half of the world’s GDP – US$44 trillion of economic value generation – is highly or moderately dependent on nature. The Taskforce on Nature-related Financial Disclosures (TNFD), defines nature in terms of four realms – land, ocean, freshwater and atmosphere.

For businesses, the term ‘nature capital’ recognises that every element of nature has a value – from our national identity as a clean green country, through to the reliance businesses have on everything from building materials, water, minerals and fibre to pollination of crops, waste decomposition and climate regulation.

Earlier this year Chapman Tripp released a groundbreaking legal opinion for The Aotearoa Circle outlining the emerging expectations on directors to manage nature-related risks. Now, a new legal opinion written by Australian barrister Sebastian Hartford Davis and solicitor Zoe Bush commissioned by Pollination Law and the Commonwealth Climate and Law Initiative, is warning Australian directors about their potential liabilities.

Australia’s Corporations Act 2001 (Cth) includes director’s duty of care and diligence (s 180). While nature presents opportunities for directors, it also poses risk and liability, which may be the focus of litigation.

Nature-related risks, as defined by the TNFD, refers to “potential threats (effects of uncertainty) posed to an organisation that arise from its and wider society’s dependencies and impacts on nature”. Nature-related risks go beyond those typically classified as climate-related risks (and were highlighted in an Australia legal opinion in 2016 by Noel Hutley SC and Sebastian Hartford-Davies and Chapman Tripp’s 2019 legal opinion for The Aotearoa Circle).

The Global Climate Litigation Report: 2023 Status Review released by the United Nations Development Programme highlights that climate litigation is on the rise globally. In the report, climate change litigation is used as an umbrella term that encompasses a range of cases including those indirectly linked due to the interconnectedness of climate change issues. As of December 2022, 2,180 climate-related cases were filed in 65 jurisdictions, up from 1,550 in 2020 and 884 in 2017. Australia had the highest number of climate-related litigation cases per capita.

Greenwashing has been a prominent feature of Australian ESG litigation, and looks set to continue. The Australian Securities and Investment Commission (ASIC) has identified greenwashing as a key focus area, including emissions reductions, green investments, product labels and corporate branding, with filings against Mercer Superannuation (Aust) Pty Ltd, Vanguard Investments Australia and LGSS Pty Ltd (ActiveSuper).

The challenge this raises for directors is to identify those threats, such as the threats posed to the organisation due to its dependencies on nature, but also the threats to an organisation from its impacts on nature.

From a court’s perspective, if those threats are foreseeable (not far-fetched or fanciful), and directors have failed to consider them, then they could be found liable for breaching their duty of care and diligence. In addition to identifying, managing and determining the materiality of nature-related (and climate-related) risks, the Australian legal opinion notes the requirement under ASIC Regulatory Guide 247 to disclose material risks that could adversely affect the achievement of the financial performance or financial outcomes in its directors’ report and corporate governance statement.

The NZX Corporate Governance Code was amended earlier this year along with the inclusion of an ESG Guidance Note and Diversity Guidance Note. The Corporate Governance Code (which applies to all listed issuers) provides that non-financial disclosures should be provided at least annually, including consideration of material ESG factors. The amendments updated commentary to reflect the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Act (CRD regime) that requires mandatory reporting by climate reporting entities including NZX issuers (other than small listed issuers). While the ESG note was issued prior to the TNFD releasing their recommendations for reporting on nature-related risks, it clarified that directors are expected (albeit non-binding) to be able to explain the material ESG risks faced by their business, and how they identify, monitor and manage those risks, including explaining how ESG issues may affect their business.

Our companies, our economy and our future prosperity depend on nature, so directors have a responsibility, both ethically and legally, to consider their organisation’s exposure to nature-related risks along with the ways in which they are dependent on nature and how they are directly and indirectly impacting on nature and the financial implications of those dependencies and impacts.

• Understand director duties, obligations and legal risks
• Include environmental risks – encompassing climate and nature – in your risk register
• Build board- and organisation-level awareness and understanding of nature-related dependencies and impacts including in your supply chain
• Consider value creation opportunities such as brand positioning, strengthening supply chain resilience and accessing new markets
• Build nature capital into risk management and strategic planning processes