Directors urged to take advice as natural risks turn into liabilities

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Over the past year, the Australian Government has signed up to global initiatives to protect nature, which authorities need to consider. There is also increasing pressure from investor groups such as the Finance for Biodiversity Pledge and Nature Action 100, with potential obligations regarding ongoing disclosure.

The advice says regulators and wider public awareness has made it more foreseeable that nature destruction can result in significant economic costs for businesses.

The economy “is clearly dependent on Australia’s ecosystems”, the barristers wrote. “The threats to ecosystems posed by and related to climate change are clear. In our opinion, risks arising from nature-related dependencies have the potential to harm the interests of Australian businesses and are not within the scope of directors’ duties. It follows logically that there is.”

This opinion will be scrutinized by domestic banks.

According to EY, 80% of banks have not yet set nature-related targets and only 20% have publicly announced their plans. Tighter credit policies could reduce the availability of capital for nature-intensive industries, as well as for large carbon emitters.

In some cases, the duty of care and diligence may require directors to do more than simply consider risks.

Sebastian Hartford-Davis and Zoe Bush

Banks lend 22% of all business loans, or $261 billion, to the agriculture, real estate, resources and energy sectors, which have the greatest impact on the natural environment. For example, dairy production uses an estimated 1,000 liters of water for every liter of milk produced throughout the supply chain.

The expansion of director duties is influenced by global trends. The Task Force on Nature-Related Financial Disclosures made its final recommendations in September, setting out a framework for nature assessments. Australia signed the Global Biodiversity Framework in December last year, committing to protect and conserve 30 per cent of its land and oceans by 2030.

The legal opinion said that while none of these developments would create binding force as a matter of national law, they were “relevant as a recognition of and driver of the type of market expectations that inform risk analysis.” .

The lawyers argued that the directors believed that the increased focus on nature “could change the costs and availability of financing for companies with significant nature-related impacts and reduce consumer demand for their products and services.” “We need to adapt to what we are doing,” he said. In extreme scenarios, “these developments could lead to investor and consumer activity and even abandonment.”

The Greening the Financial System network of 125 central banks and financial regulators, including the Reserve Bank, links nature-related risks to financial stability.

The opinion states that directors should take steps to ensure that nature-related risks and impacts are disclosed. Depending on the nature of a company’s business, “in some cases, the duty of care and diligence will require directors to do more than simply consider risk,” he said.

Lawyers encouraged directors to follow advice to protect themselves from personal risk and liability.



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