Corporate Directors Must Address Nature and Climate Risks, New Legal Opinion Asserts
Corporate directors are required to address nature and climate risks to their companies, and could face legal action if they don’t, concludes a recent legal opinion.
“Directors don’t need to be expert scientists or activists, but they are required to consider nature-related risks like any other foreseeable risk to their business,” stated Lisa DeMarco, senior partner and CEO of Resilient LLP and the opinion’s lead author.
“Ignoring nature risks is no longer legally defensible as proper corporate governance.”
Canadian corporations operate in a national economy that relies on nature and natural assets like land, minerals, and fossil fuels. The mining, agriculture, energy, and real estate sectors are all especially affected by changes to climate and natural ecosystems, and those companies are particularly dependent on natural ecosystems for their profitability.
The opinion, commissioned by the Commonwealth Climate & Law Initiative, argues that corporations face a two-pronged threat from nature-related risks (NRRs): directly, through physical and systemic risks like natural disaster impacts on business assets and operations, and indirectly, through regulatory changes or legal challenges arising from a company’s impacts on nature.
Canadian laws requiring company directors to address nature risks to their businesses are found both in provincial statutes and in the Canada Business Corporations Act (CBCA), which stipulates that Canadian corporation directors have a fiduciary duty to “act honestly and in good faith with a view to the best interests of the corporation.” While that duty “does not require directors to elevate NRR above all other interests,” explains the legal opinion, it is likely to require that they “at a minimum identify the corporation’s nature-related dependencies and impacts on nature” and address material NRRs to meet the corporation’s best interests.
The CBCA also charges directors with a duty of care to “exercise the care, diligence, and skill that a reasonably prudent person would exercise in comparable circumstances,” including a legal obligation to identify and manage foreseeable material risks.
The legal opinion argues that, because NRRs to corporations are by now “known, well-documented, and foreseeable,” they are considered material financial risks to companies, such as by influencing investor or stakeholder decisions.
Recent court rulings support this argument in light of climate-linked natural disasters in the past few years, including a 2008 Supreme Court of Canada decision, Mustapha v. Culligan of Canada Ltd., that described a harm as reasonably foreseeable if it is probable and carries a “real risk” that it would occur to a reasonable person, and wouldn’t be brushed aside as far-fetched. Similarly-supportive rulings and legal opinions have been published in countries like New Zealand, Australia, and the United Kingdom.
Whether a company is obliged to address any specific NRR will be determined by the specific facts of the case. But at a minimum, the opinion says directors are required by law to at least identify and assess NRRs to a company’s operations, value chains, strategy, and stakeholder relationships. Company directors should also consider those risks alongside other business and stakeholder interests—and the rights of Indigenous peoples—and factor them into board-level decision-making, the opinion adds.
While Canada doesn’t have a standalone legal framework that mandates NRR disclosures, the legal opinion concludes that NRRs are considered as material risks that already need to be disclosed under existing securities laws and disclosure frameworks. Directors should also take a precautionary approach towards disclosing NRRs, and err on the side of disclosing a risk when its materiality is uncertain.
Failing to appropriately address NRRs could result in various legal consequences for directors, the legal opinion asserts. Shareholders or creditors might file lawsuits, and failing to meet disclosure obligations or avoid greenwashing could result in other claims. Third parties might pursue legal action for negligence or nuisance, while Indigenous peoples might seek to hold directors liable for failing to consider Indigenous rights.
To avoid legal action, corporate directors should make an effort to understand NRRs that could affect their companies, for example by actively seeking information about nature-related dependencies and impacts, using “external experts to identify nature-related risks and inform materiality assessments,” and consulting with Indigenous peoples and other rights holders. Directors can use existing frameworks, like the Taskforce on Nature-related Financial Disclosures, to help implement governance, risk management, and disclosure policies, and boards and committees should be trained to address nature risks and emerging legal expectations.