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Nature Positive Business: Identifying and Managing Nature-related Risk
What area(s) of law does this episode consider? | Legal opinion on nature-related risk. |
Why is this topic relevant? | Section 180 of the Corporations Act is a mainstay of Australian corporate law. It provides for the requirement that directors and officers exercise their powers and discharge their duties with care and diligence. The section – and those words – capture a wealth of meaning, and today we’re covering a new and developing part of it. In October 2023, Sebastian Hartford-Davis and Zoe Bush – instructed by Pollination Law – issued a joint memorandum of opinion on the topic of nature-related risks and directors’ duties. The opinion discusses the extent to which the duty of care and diligence permits or requires consideration, disclosure, and management of nature-related risks arising from dependencies and impacts on nature. |
What legislation is considered in this episode? | Corporations Act 2001 (Cth), s 180 |
What are the main points? |
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What are the practical takeaways? |
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Show notes | Taskforce on Nature Related Financial Disclosures (TNFD) Taskforce on Climate Related Financial Disclosures (TCFD) Sebastian Hartford-Davis and Zoe Bush, Joint Memorandum of Opinion on Nature-related risks and directors’ duties, 2023 |
DT = David Turner; LW = Laura Waterford; OB = Olivia Back; RD = Ross Davis
00:00:14 | DT | Hello and welcome to Hearsay The Legal Podcast, a CPD podcast that allows Australian lawyers to earn their CPD points on the go and at a time that suits them. I’m your host David Turner. Hearsay The Legal Podcast is proudly supported by Lext Australia. Lext’s mission is to improve user experiences in the law and legal services and Hearsay The Legal Podcast is how we’re improving the experience of CPD. Section 180 of the Corporations Act is a provision that many Australian corporate lawyers will be familiar with. It provides for the requirement that directors and officers of a corporation exercise their powers and discharge their duties with care and diligence. Now this section and those words capture a wealth of meaning and today we’re covering a new and developing part of what that encompasses. In October of this year, Sebastian Hartford-Davis and Zoe Bush, instructed by Pollination Law, issued a joint memorandum of opinion on the topic of nature-related risks and directors’ duties. The opinion discusses the extent to which the duty of care and diligence permits or even requires consideration, disclosure and management of nature-related risks arising from the dependencies and impacts on nature. Now joining us today on Hearsay to discuss the reasons for the process and the findings of that legal opinion are Laura Waterford and Olivia Back. Laura is a director and Olivia is an associate at Pollination Law. They instructed the authors of that opinion and Pollination is a specialist climate change investment and advisory firm focused on bringing about a nature-positive net zero future. Laura and Olivia, thank you so much for joining me today on Hearsay. |
00:01:50 | LW | Thanks, David. |
00:01:51 | OB | Thanks, David. Glad to be here. |
00:01:53 | DT | Now before we jump into today’s topic, tell us a little bit about how you got into this area of practice. Have you always been interested in the kind of intersection of corporations law and environmental law or have you come at it from different angles? |
00:02:06 | LW | I would say that I have always been quite interested in ending up here and getting to work on these topics, but it was a bit of a long and winding journey. I’m not sure that this particular type of law existed when I started out. I studied science with a major in geography, doing as much conservation science as I could at uni as part of a double degree doing a bachelor of laws. And so I always thought I would go into environment law and I, at the time, aspired to work at the Environmental Defender’s Office. But I guess shortly after learning that you can’t just walk into the EDO as a grad, you have to go out and get some stripes somewhere else first. I ended up with a clerkship at one of the big corporate law firms in Sydney and got to rotate through the environment and planning practice area there, but mostly did compulsory land acquisitions work. And so I needed to pivot into all sorts of other things, I guess, before I ended up exactly where I am now, but I ended up doing work in electricity regulation, renewable energy power purchase agreements, carbon offtake agreements, environment and planning for large scale renewable energy projects. I did all sorts of things that I felt were aligned to the sustainability agenda. And it’s only really been in the last few years that I felt like I really got to start focusing on the real meat of the intersection between the economy and the environment. |
00:03:20 | DT | Amazing. That range of practice areas that you described there, everything from kind of competition to environment. If you described it another way, I think you’d say; “oh, wow, that’s a really broad, almost sort of portfolio career kind of approach to different areas of the law”. The way you have described them, they’re all part of that consistent theme, isn’t it, of working towards a net zero future. And what about yourself, Olivia? How did you come to work for Pollination? |
00:03:43 | OB | So mine’s a bit of a windy road as well. So I actually did a law and arts degree at the University of Queensland. I majored in my arts degree in art history and thought I’d become an art historian or a curator, but like many law students, I did a summer clerkship at one of the large corporate law firms in Brisbane and ended up staying there. Like Laura, I joined the environment and planning team, but the work I was doing was a little bit different to Laura in that a lot of my day to day work was actually litigation, some of it environmental litigation, some of it just discrete planning law litigation. I also did a lot of environmental law due diligence work and advised on some quite large infrastructure projects. Prior to Pollination, I also did a year working for the Honorable Justice Julie Ward. At the time, she was the chief judge in equity of the Court of Appeal in New South Wales, but she’s now the president of the Court of Appeal. And that was a really good opportunity to work in the litigation space. So I’ve always had a keen interest in litigation. And then when I came to Pollination, I started really working closely with clients around the nature risk area in the biodiversity crisis, which is something I hadn’t done in my previous roles. |
00:05:22 | DT | Amazing. And you’ve given us a little bit of insight already into what Pollination does, that cross-disciplinary or interdisciplinary approach to nature-related risk. But tell us a little bit more about Pollination Group and Pollination Law. Who’s the sort of typical client and what work are you doing for them? |
00:05:38 | LW | I guess it’s fair to say that there’s not one typical client. We actually work across the spectrum of corporates from large listed entities to start up, but anyone that’s really focused on alignment with the net zero nature positive transition, I guess is how I would describe our client base. And that includes government as well as private sector clients and occasionally NGOs. And in terms of the work that Liv and I are doing, she’s already given, I guess, a little bit of context for that. But in particular, we’re focused on the full spectrum of services that relate to nature and biodiversity. I mean, when I first started at Pollination, I was doing a lot of work on the net-zero transition and carbon markets. And there’s a huge proportion of the firm that still does that work. But we’ve just had so much nature work coming in the last couple of years that a few of us have started to, I suppose, organically specialise in nature and biodiversity. So I would say there’s three big tranches of work that we do in that space. The first is around TNFD-aligned nature risk and opportunity assessments, which Liv’s mentioned. TNFD is the task force and nature-related financial disclosures, kind of like the TCFD, but for nature. |
00:06:15 | TIP: As Laura has just mentioned, the TNFD – that is the Taskforce on Nature-Related Financial Disclosures is kind of like its earlier sister taskforce, the TCFD. The TCFD is the Taskforce on Climate-Related Financial Disclosures. Exactly what the difference is between a climate and nature risk as discussed is by the experts later in the podcast, but as always, we’ll leave a link to both in the show notes. | |
00:06:41 | LW | We use the insights from that type of analysis to help clients set up a nature-positive aligned strategy. And then we help them with the implementation for that, where we think it’ll help them mitigate risk exposure in the future or create competitive advantage. And then the third big bucket is around biodiversity credit markets, which I guess at this point are about 50% of my day job. So it’s looking at the possibility that a voluntary biodiversity credit market might spring up and work alongside voluntary carbon markets into the future where corporates or other investors or buyers want to be able to make a positive contribution to biodiversity outcomes through a market-based mechanism. And that’s getting a lot of traction as well. So we’re quite focused on the policy side of things around that. So we often advise governments on that, including how those sorts of markets might be able to pull through private sector investment into positive environmental outcomes. But we also advise other actors in that emerging market around how they can best position for competitive advantage, or just generally, I guess, are participating in a lot of international initiatives around making sure that those markets are set up with really strong governance and integrity principles from the outset. So with the World Economic Forum and nature finance and some of those guys. |
00:07:53 | DT | Would it be fair to say that policy is the larger role at the moment? What’s the split across the policy and legal practice parts of the business? |
00:08:02 | LW | I would say, and it’s different for everyone at Pollination, but for me, at least it’s probably 60, 40 private sector corporate work, 40% government and policy work. |
00:08:12 | DT | And I suppose the opinion that we’re talking about today is an example of that great policy work that you’re doing. We shouldn’t assume some of the more basic stuff before we dive into the opinion. Corporate lawyers like myself are very familiar with sections 180 through 183 of the Corporations Act. You guys are obviously familiar with it, but before we move on from those kinds of first principles, Olivia, do you want to explain to us what section 180 actually says, what it does? |
00:08:38 | OB | Yeah, happy to David. So I’ll first start with the relevant piece of legislation. It’s the Corporations Act, which is the principal legislation in Australia that regulates business entities, which includes companies. Section 180 is housed in the part of the act, which speaks to the general duties of directors and offices and other company employees. The relevant section and actually subsection, which the opinion focuses on is section 180, subsection one. And that’s the subsection which states that a company director must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if A, they were a director in the same company circumstances, and also B, if they occupied the office held by and had the same responsibilities within the company as the director. It’s a civil penalty provision, and also directors can be held personally liable for breaching this section. Something that we don’t touch on in the opinion, but is worth mentioning is section 180 subsection two, which is the business judgment rule. And it offers directors a protection in terms of discharging the duties under section one 180 subsection one. And so it says if a director who makes a decision to take action or not action in respect of a matter in relation to the business operations of the company does so in terms of exercising good faith and for a proper purpose and doesn’t have a material personal interest, for example, there’s other considerations, then they’re found to have discharged their duties under section 180. |
00:10:11 | DT | And there’s some other glosses on those sections that come from the common law as well, like the duties under that section are scaled, if you like, to the size and complexity of the organisation, a simple family business, the duty to exercise your powers under that section might be a standard less highly applied than, say, being the director of BHP. |
00:10:31 | OB | Yeah, correct, David. And there’s commentary in the case law around what a reasonable person would do and what can be reasonably expected in different circumstances. |
00:10:40 | DT | And so what the opinion is really about is whether that section permits or even requires directors to exercise their powers having regard to what the paper describes as nature-related risks. |
00:10:52 | LW | Yeah, I would say the emphasis in the opinion is on the latter part of that statement. It’s about whether or not there is a requirement to consider that type of risk. I think building on the Noel Hutley-Sebastian Hartford-Davis opinion on climate risk, that settled question of whether or not sustainability-related considerations can be considered for the purposes of 180(1), which of that is a given in terms of the way that we set up the brief and this opinion on nature-related risk. |
00:11:18 | DT | Yeah, absolutely. This sort of takes that position a little bit further from the earlier work. And to talk about that for our listeners, we have to define a nature-related risk. What is it? And can you give us a few examples? |
00:11:32 | OB | So the opinion endorses the definition of nature-related risk that is used by the TNFD. And that’s namely that nature-related risks are the potential threats posed to a company by its impacts and dependencies on nature. I think impacts and dependencies on nature is something we’re maybe going to talk about further on in this discussion, but essentially nature-related risks stem from a company’s interactions and touch points with nature. And then those interactions and touch points have commercial implications for the company. When I say interactions and touch points with nature, we’re talking about direct operations, but we’re also talking about the company supply chain. So it’s the entire value chain. Some examples I can actually skip probably to speak a little bit about impacts and dependencies, but the way the opinion’s framed is when we talk about nature-related risks, we talk about the risks that stem from a company’s dependencies on nature and the risks that stem from a company’s impacts on nature. When we’re talking about dependencies, what we’re referring to are the ecosystem services that a company relies on to function and to undertake some of its business activities and processes. So general examples that are useful are services like water purification and pollination services is an example that’s built out in the opinion. When we’re talking about impacts on nature, it’s twofold. We’re talking about the exploitation and use of natural resources by a company, but we’re also talking about the output of a company and its activities. So for example, a form of exploitation or use is something like land clearing, but then when we’re talking about something like an output from a company, we’re talking about water pollution, solid waste generation, soil pollution. |
00:13:15 | DT | Got it. So am I thinking about it right that if I were to say a manufacturer of plastic goods, they might have a dependency in the mining activities that produce the petroleum necessary to produce the plastic goods. And that has an impact on nature, that presents nature related risks, but then also washing those goods in your washing machine produces microplastics. And that’s an impact on nature at the other end. |
00:13:39 | LW | Yeah, I think that’s the kind of thing. I think plastics are generally derived from petrochemicals. So there would be an impact from mining activities around that part of the value chain, pulling through to the production process. There would be pollutants probably from the production process that are released into the environment. And then you’re right. There’s also a question about the end of life of the products that are produced. And there’s been actually a lot of litigation recently relating to potential tortious nuisance claims against manufacturers of plastics because of that issue around mounting pollution from a soil and oceans perspective. Even before we get to the point of needing to talk about microplastics, which is probably one of the types of impacts that’s further along the value chain. There’s also just the release of plastics into the ocean and soils, for example, which is quite a visible example of nature related impacts. |
00:14:27 | DT | And the October 2023 opinion speaks to nature related risks. As you’ve mentioned earlier, that advances some of the work that Noel Hutley and Sebastian Hartford-Davis have already done around climate related risks. How do you distinguish those two? |
00:14:43 | LW | I think it’s not so much a question of distinguishing between the two, but understanding that there’s an interrelationship there, or rather that on one view, climate related risks is an element of nature related risk. When we do nature risk assessment work for clients in line with the TNFD expectations, it’s important to think about the five key impact drivers or the things that are really causing biodiversity loss globally. Climate change is one of them. The others are things like pollution and deforestation and invasive species, for example. And so you can’t really get away with doing a nature risk assessment without considering climate risk as part of it. |
00:15:20 | DT | Kind of a subcategory of nature related risk. |
00:15:22 | LW | Yes, I think so. But obviously with so much work, thought, effort, infrastructure behind it, that it’s really the building block, I suppose, for how most corporations will be considering the broader suite of nature related risk issues that they need to go forward with. |
00:15:38 | DT | And so when we’re talking about this opinion, we should think about it in terms of the earlier opinion as expanding in two directions. On the one hand, we’re expanding from is it permissible to consider climate related risks to is it required to consider a certain category of risk? And on the other hand, we’re talking about not just climate related risks, a particular category of nature related risk, but a far broader universe of risks that fall under this umbrella that we’ve just described as nature related risk.
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LW | Yeah, I think that’s fair. | |
00:16:00 | DT | Now, we’ve already mentioned the TNFD a couple of times in the episode, the task force on nature related financial disclosure. We’ve talked about that both in the context of this opinion and in the context of some of the work that Pollination does. What is it to help some of us who might be less familiar and how does it interact with the opinion that we’re talking about? |
00:16:27 | LW | Okay, the task force on nature related financial disclosures is, as I think I mentioned before, really the sister process to the task force on climate related financial disclosures. It was first conceived of in about 2020. And it’s an industry led initiative to start to give some structure to the way investors in particular are asking organisations to engage with this topic of nature related risks. It’s ultimately a reporting and disclosure framework. But in the way that we use it, we also think it’s a really helpful tool for setting strategy and aligning with nature positive transition considerations. So we think that it is a tool that I think goes really beyond the question of reporting and disclosure, although that’s really relevant for the purposes of section 180(1) and director’s duties. But I think it’s really a helpful process for most organisations to step through in understanding to Liv’s point previously where their business intersects with nature, both from an impacts and dependencies perspective, and then starting to understand and unpack really what are the associated commercial implications of those interactions with nature in a given location. Where are they material? What can you be doing to mitigate or manage those risks? And ultimately, do you need to be disclosing on them? |
00:17:40 | DT | To the extent you can, because you do work with businesses in this area as part of your practice, can you give us an example of where you see this sort of nature related risk being relevant for Australian companies? |
00:17:51 | LW | Yeah, I think what’s quite interesting is to have an eye on the regulatory developments that are coming out of Europe at the moment and how those could intersect with actors in the Australian economy. So there’s a huge focus in Europe at the moment around nature and biodiversity related risks. They’ve already got mandatory biodiversity disclosures in France in particular, which is quite interesting. But beyond that, there’s a focus in particular on deforestation free supply chains. And there’s a range of commodities that have been identified by the European parliament as ones that deserve extra scrutiny and where entities in Europe that want to import those products need to be able to substantiate that the supply chains are in fact deforestation free. And amongst those is beef. And where that gets quite interesting for Australia is that Queensland in particular is identified as a global deforestation hotspot. We are sadly the only country to have a deforestation hotspot on that list, that is a developed country, which is a little bit challenging I think for a lot of us that think of Australia as having quite a good record on environmental matters. But the essence of that is that if you are a beef producer in Queensland, or an exporter of beef somewhere in that supply chain, it’s likely to become more challenging or there’ll be additional hurdles to meet to show that you are not guilty of deforestation so that it’s possible to get your product into Europe. And so it’s a parallel type of development to the carbon border adjustment mechanism type of requirements that are also coming out of Europe and pose some challenges for Australian companies in that space. I guess I would say this is almost like the first cab off the rank environmental version of that. |
00:19:25 | DT | Got it. Thank you for that example, because I think it highlights sort of the work you do on both sides of the business. On the one hand, you can really clearly see that there’s a practical issue affecting the operations of the business for a beef producer in Queensland that needs to export globally. On the other hand, you can see that solving that problem for one producer or for an entire industry places an enormous burden on the individual producers when there should be a regulatory response that encourages not only compliance but makes compliance less burdensome for industry. And so you can see how there’s both a policy part of solving that problem and there’s a legal advice, practice, consulting and advisory piece to solving that problem, so thank you. |
00:20:10 | LW | And if you’re interested in examples, there’s another one that’s a bit closer to home and I think probably relevant to my and Liv’s interests as former environment and planning lawyers. There’s a really interesting case study around Lendlease last year. They were actually divested from by one of their investors, Australian Ethical, because of likely impacts on a koala habitat actually at one of their housing development sites. And although they had all of the relevant legal regulatory approvals to go ahead with the development from an environment and planning perspective, it was actually Australian Ethical’s concerns that they weren’t still doing enough to protect that koala habitat that led to the divestment. And I think that’s actually a really strong example and an early example in terms of how advanced we are in this conversation around nature related risks of an access to capital issue associated with nature impacts, which is quite fascinating from my perspective that we’ve already seen an instance of that in the Australian market. |
00:21:12 | DT | Well, and I think describing that as an early example is both appropriate and prescient because it’s not just investors like Australian Ethical who would describe themselves as an ethical or CSG only investor. What we see is a lot of mainstream funds, both asset managers and superannuation funds find that their CSG products are their popular products that they tend to outperform other portfolios as well. There’s a whole other conversation about whether that has a causal link or whether there’s just a non-causal link there between investing in industries that tend not to have much of an environmental impact like financial services, for example, but that’s maybe another podcast. If CSG and focusing on investments that limit or mitigate their impact and dependencies on nature and the production of nature related risks, then that is going to be an early example of an access to capital problem. We might see that from other more mainstream institutional investors. |
00:22:09 | LW | Yeah, I think that’s entirely possible. |
00:22:10 | DT | So let’s go back to this opinion. What prompted you to do this work? Because the Noel Hutley and Sebastian Hartford-Davis paper that we were talking about earlier, I think that was 2021. Is that about right? |
00:22:23 | OB | The first one’s 2016 and then there’s supplementary 2019 and then another one in 2021. |
00:22:29 | DT | Okay, 2021 was the second supplementary opinion. So there’s been this evolving body of literature from 2016 until now, what was the impetus for this paper with its broader scope in both those directions? |
00:22:42 | LW | So I started thinking about whether or not perhaps this existed in about 2019 because I guess I had grown up as a junior lawyer, really fascinated by the impact that the Hutley opinion had in terms of lifting corporate ambition to engage on climate related risks. And I was reasonably aware of the elements that had gone into that opinion in terms of satisfying the reasonable foreseeability test. And from about 2019 and especially into 2020, I could start to see some of those pieces of the puzzle falling into place for the conversation around nature and biodiversity. That was the time when we started getting some really significant reports from a scientific perspective, clarifying just how dire the biodiversity crisis was. So statistics like one million species are at risk of extinction came through from some work that the IPBES body did, which is the equivalent of the IPCC for climate. So all of a sudden we have some facts and figures to really start to be able to articulate the size of the problem. We also had an increasing focus coming through at that time around the intersection between biodiversity, ecosystem services and the economy. So a few big reports – Dasgupta review, one by the World Economic Forum, and a few others that really underscore the fact that the economy is dependent on nature through that ecosystem services paradigm that we’ve mentioned previously. And in addition to that, negotiations around a global framework for biodiversity, which was agreed at the end of last year, finally, but those negotiations were really sharpening in the early part of this decade. And so I guess seeing all of those threads come together, a lot of the elements that we knew were important from the Hutley opinion were really starting to come together around that time. And it took us a few years to get to the point where we published the opinion, obviously, if I was thinking about this in 2019. But in that time, the amount of information and realistically evidence that we put into the brief, it just turned into an absolute mountain. Part of the reason that it took us so long to get here is because every few months also some significant development would happen and we would need to update the brief to take that into consideration. So I think there were eight volumes of material that sat behind our observations to counsel. It was a pretty sizable brief in the end. |
00:24:56 | DT | Wow, it’s a nice problem to have, though, isn’t it? |
00:24:57 | LW | Yeah, I think by the time we shipped it off, we felt reasonably confident that we probably had enough to be getting on with in terms of satisfying the barristers that it was a real thing. |
00:24:57 | OB | And in addition to the mounting evidence and scientific reports Laura mentioned, it was other things like the TNFD that we’ve spoken about launching in September this year, when it had been in draft form prior to that, the global biodiversity framework being agreed by countries like Australia at the end of last year. So it was mounting nature developments like that, coupled with the research and seeing what had been said about climate risk and the work that we were doing with corporates on nature risk. There really was a place for an opinion like this. |
00:25:39 | DT | So tell us a little bit about the process of producing this opinion. How did you go about the process of preparing the brief and then having the opinion written? And it was actually co-commissioned, wasn’t it? |
00:25:50 | OB | That’s correct. It was a co-commissioned piece. We worked closely with the CCLI. So that’s the Commonwealth Climate and Law Initiative. The way that you brief barristers and lawyers for a legal opinion is like how you brief them for litigation, essentially. So we drafted instructions for Zoe and Sebastian, and those instructions included key questions that we were putting to them in relation to interpretation of Section 180(1) of the Corporations Act. With those instructions, we provided them with, as Laura referenced, about seven or eight volumes of evidence and case law developments, articles, which would help them draft the opinion. We then worked closely with Zoe and Sebastian, CCLI and ourselves on the opinion, and just provided support as it was written and as needed, kept providing updates because as we referenced prior, things like the TNFD was launched, the Global Biodiversity Framework was agreed to, and all these developments actually happened after we’d initially instructed and engaged Zoe and Sebastian. So that was the process as well, just in keeping them informed of what we were seeing happening in the nature space, practical examples that we were seeing in our work, and then ultimately getting to a point where the opinion was finalised. |
00:27:09 | DT | So you’re sort of, I suppose, in that loop of ingesting the relevant information and drafting the opinion, you’re sort of the source of truth. You’re looking for the relevant evidence, assessing its relevance, and kind of curating what material is really needed to form a considered opinion. |
00:27:25 | LW | Yes, our barristers probably would have preferred that we didn’t consider eight volumes of material to be relevant, but they did a great job of wading through it. |
00:27:32 | DT | Can you talk for a minute about some of that evidence, especially some of the work coming out of the scientific community around the dependence of the economy, especially the Australian economy on nature? |
00:27:43 | LW | So there are a few significant pieces of the puzzle, I think, that have fallen into place in the last few years in relation to that question. The first really influential report was one that was done by the World Economic Forum. It’s called the Nature Risk Rising Report, and the headline fact coming out of that report was that about 50% of the global economy is highly or moderately dependent on nature. Not too long after, the UK Treasury also commissioned a report that’s called the Dasgupta Review, and it found similarly, as a build on the World Economic Forum findings that not only is the economy very dependent on nature, at least indirectly, every dollar in the economy is dependent on nature. And then I think there’s been a bit of a proliferation of similar studies by region and by country since then. So there is a similar report that’s employed a similar methodology for Southeast Asia that found really similar levels of dependency on nature. And then most recently, ACF in Australia has done a similar study that we supported looking at the Australian economy specifically, and again found that it’s about 50% of the economy that’s moderately or highly dependent on nature, but indirectly, every dollar, they’re very clear about that point. |
00:28:53 | DT | Yeah, I suppose you can intuitively understand why at some level, some secondary or even tertiary level, every dollar in the economy is in some way dependent on nature. And so was it those scientific and regulatory developments that ultimately prompted you to go ahead with the brief and with the opinion? Was there something that you were seeing in your practice, seeing in the market that contributed to that as well? |
00:29:16 | LW | I think the other factor in terms of why now for us is that through our engagement, companies and financial institutions on this topic, there is certainly and has been for a couple of years now, really widespread interest. So for example, the Responsible Investment Association of Australasia has had a working group on nature for a couple of years, and it is, I think, by far and away the largest working group across all of the ESG topics that they engage on. |
00:29:44 | TIP: For those who might be outside the corporate law space, ESG is big news. The acronym stands for Environmental, Social, and Governance. It’s arguably an evolution of the more familiar Corporate Social Responsibility, or CSR, paradigm for businesses. And it’s a way of qualitatively measuring the impact on society and stakeholders of a business. We’ve spoken broadly about CSR on the podcast before in a few episodes – definitely check out Episode 104, Stakeholder Primacy? Putting Purpose at the Heart of Legal Practice if you’re interested in that topic. An ESG investor is someone looking specifically at these impacts in order to make an investment decision. One easy example is to consider an investment in an oil and gas company. A proactive ESG investor might avoid these investments because of their impact on society and stakeholders. | |
00:30:36 | LW | So there’s a huge amount of interest and engagement, but we were seeing a bit of rhetoric coming through around, well, we understand this is going to be really important for us, and we want to be on the bandwagon, but we’re still really working out how to do climate risk well. And so once we’ve got that squared away, then we’ll turn to nature risk and we’ll start to work through that problem because it’s a bit hard and a bit broad and a bit overwhelming for us to engage with today. And I think we felt because of the evidence that we’ve discussed that in all likelihood, this duty already existed and that we probably needed to bring that to fore and shed a bit of light on that and to make sure that company directors are aware that this probably isn’t something that you can, depending on the circumstances of your company, it’s not necessarily something that you can defer because you’re still dealing with climate risk, but actually you need to also be engaging with nature risk today and that there are benefits in looking at your approach to both climate and nature risk in tandem because in many cases the solutions will be aligned in the context of nature-based solutions to both climate and nature challenges. But I think there’s also an issue that we’re increasingly grappling with with our clients where there might be trade-offs. You might think that you’re doing the right thing from a climate mitigation perspective in terms of a business strategy pivot, but you need to make sure that you’re future-proofing those decisions from a biodiversity and nature impacts perspective as well. And so realistically, as much as it might seem challenging to look at both of these things together from a longevity of business strategy perspective, it’s definitely something that’s likely to pay off. |
00:32:09 | DT | Well, and because as you said, one is part of the whole. I’m really interested in that example of the trade-off where something might be good for mitigating climate risk, but might present a biodiversity risk. Can you give us an idea of what that might be? |
00:32:24 | OB | So I think a good example of that would be a clean energy development or something like a solar farm, which has very evident positive climate outcomes, but some of the more negative environmental outcomes, which could carry nature-related risks, could be related to if land clearing was associated with the solar energy project development, impacts on biodiversity and species living in the area, things like that. So that can be the flip side, which would have negative biodiversity and nature implications for the area, but positive climate implications. |
00:32:59 | DT | Got it. Your kind of large-scale solar panel project produces a lot of clean energy, but in order to construct it, you might be impinging on or harming the habitat of an endangered species. |
00:33:11 | LW | We’re definitely not suggesting that we don’t need huge, huge investment in renewable energy in Australia. I guess we’re just saying that it’s coming through in a lot of our conversations and it’s really important to be optimising the location of those types of developments for minimising biodiversity impacts, as well as thinking about the economics of those projects, which is always a challenge, but also the climate benefits. |
00:33:34 | DT | And for those reports that identified about 50% of the economy was highly or moderately dependent on nature, what sort of industries were they describing there? |
00:33:45 | LW | I think it’s actually quite intuitive. It’s the industries that have the most direct interface with nature in their operations. So it’s things like the agriculture sector, the mining sector, fisheries, forestry, those types of things that would just come to mind if you asked kind of Joe Blow off the street, where would you expect the risk would sit? And I think it’s important to understand that and to know that. But I guess I would just say particularly through the broader work that Olivia and I have been doing with a range of different companies, both within those sectors and in other sectors, there’s actually a reasonably material exposure to nature related risk, even for companies that don’t sit within that category of sectors that we think have the most direct interface with nature, because what the TNFD asks you to do and really what this opinion is saying you need to do as well, is to look right across the spectrum of your value chain. And so it might be that you’re a transport company, and you don’t have a particularly direct interface with nature in the way that some of those other industries do. But way back in your value chain, there might be a huge amount of mining for metals to construct the transport infrastructure in your value chain. And so that is actually part of your exposure to nature related risk that you need to understand and be managing and potentially reporting on. |
00:35:01 | DT | Yeah. And that’s sort of why I ask, because I suppose for those of our listeners who are advising Australian boards, who are advising directors who might now be considering that this is something that has to go on the agenda for board meetings going forward, that this is something they do need to be watching and reporting on, there might be a tendency to say; “oh, well, I’m not in one of those intuitive, high impact, high dependency industries. We’re not an agricultural business. We’re not a mining business. We’re not a primary industries player. This isn’t really for us”. But as you said, every dollar in the economy is in some way dependent on nature. And what the opinion really speaks to is that risk is one that you can be exposed to anywhere in your value chain. And the authors of the paper do say that directors of companies should at least identify the company’s nature related dependencies and impacts and consider the potential risks that this may pose to the company. For those boards at the helm of companies that haven’t traditionally seen themselves as having a close dependence or impact on nature, whose dependence or impact might be further up the value chain, might be a kind of secondary impact, and they’re not used to considering nature related risk or their impact on the environment as a sort of regular board item, but they might now have to consider doing that. How do they approach that through a framework? How do they go about identifying those risks? How do they go about prioritising them? How do they go about deciding what to do about them? Do they accept them, mitigate them, externalise them through insurance? What’s the kind of model for approaching this for a board that hasn’t done it before? |
00:36:40 | OB | So I think the first thing before we even start talking about the framework you use is we would say it’s really important to have a briefing with the directors on what is nature risk to really get comfortable with the concepts. And we’ve done this for quite a few clients, a deep dive on what do we mean by impacts and dependencies like company specific examples. I think it’s important in terms of the approach you take to mitigation, identification, everything like that. It will be relatively company specific and that’s made clear in the opinion. But saying that the TNFD framework, the LEAP framework, which is Locate, Evaluate, Assess, Prioritise, that’s an incredibly useful framework for identifying and assessing nature related risks. There’s sector specific guidance that’s been released by the TNFD on how you apply the framework for different sectors, which is really useful. And it’s a way of identifying all the risks that sit across your value chain, but also working out those that are most material. And that’s usually where you start because there’ll be the risks that carry the most significant commercial implications for the company. |
00:37:50 | LW | Just for context, it is really important that directors start grappling with this and it will be a challenge for companies in sectors that are not used to engaging, for example, with environmental regulation, because it’s not necessarily hugely relevant to their direct operations. But in saying that the TNFD in terms of the guidance that they’ve put out about how corporates and financial institutions need to start engaging with the framework, they’ve been quite clear that it’s not an expectation that boards and companies go from zero to 100 on this topic overnight. There is a recognition that it’s a complex task and that there are many aspects of this that will need to be unpacked. Not least of all is transparency over supply chains. Still not really something that most corporations have cracked in the context of modern slavery or even scope three emissions. And so there is more homework to be done there, I think, for almost all companies probably on understanding their supply chain so that they can effectively undertake a deep dive in terms of that LEAP process. So it’s appropriate, I think, to start taking steps to put in place the infrastructure to get that visibility on supply chains. That’s, for example, a really sensible place to start in terms of showing that you’re engaging as a board director effectively on this topic. But then there is also work that can be done in the absence of that really site-specific data or location data around kind of guesstimating, estimating, getting a sense of where hotspots might be in your supply chain based on things like tier one spend, for example, you can extrapolate back from that to get an approximation of where supply chains might go and where risk might sit. And so whilst I think if you took a kind of black letter reading of the TNFD requirements, it could seem quite confronting. I guess it’s just really important to know that even the way the opinion should be read and interpreted, it’s based on the circumstances of the company today. And so if you don’t have all of that data, I think that’s a relevant consideration for exactly how high the threshold is for consideration. The important thing, I think, for boards and company directors is that they’re taking steps now to make sure that they are well-positioned to be fully implementing that framework into the future. And I guess I would say that’s maybe a pragmatic perspective on what that threshold requirement is. |
00:40:04 | DT | Yeah, absolutely, Laura. I think we said this at the top of the episode, right, that these duties under the Corporations Act, they’re subject to the size and complexity and sophistication of the corporation. They’re tempered by the business judgment rule. And we’ve seen this with other domains in the past. We saw 10 plus years ago boards having to upskill around work health and safety with sweeping reforms in that area and the introduction of PCBU responsibilities. Over the last few years, we’ve seen boards upskilling on cyber risk that was previously not considered a risk by many businesses that didn’t regard themselves as being in the kind of personal data business. And I think this is another one of those areas where, as you said, it’s really about the board upskilling at a reasonable and measured pace. And as you said, Olivia, understanding a nature-related risk conceptually before you move to these are processes and frameworks by which we will categorise and respond to them as a board. Well, Laura, Olivia, we’re nearly out of time. But before you go, I did have a question on behalf of our listeners who are law students or who are just starting out in their journey in the legal profession. If they found this episode interesting and they want to get into not just environment and planning law or environmental law, but that intersection between nature and corporate advisory, corporations law, where’s a good place to start? |
00:41:26 | OB | I think something that we would say, and it’s an idea that the Chief Justice of the New South Wales Environment and Planning Court mentioned a couple of years ago in a speech where he talked about the idea of a climate-conscious lawyer and climate-conscious lawyering. And that actually all lawyers, all Australian practitioners in some way need to be taking climate change into consideration, whether they’re a transaction lawyer, a regulatory lawyer, an ENP lawyer, litigation. And I think we would say the same is true in terms of nature, that all lawyers, all legal practitioners can be and should do nature-conscious lawyering. And so I think if we’re talking about law students, you can have a path like Laura and I, which is a bit loopy. You don’t necessarily need to be doing one thing to get into this space. |
00:42:13 | LW | From my perspective, it’s actually a really great time to be a law student with an interest in this area. It’s certainly when I started out and Liv wasn’t too far behind me. I just don’t think that it was even necessarily reasonably foreseeable that this type of job would exist at the time that we started out. And so part of the reason that Liv and I, I think, have had what you could probably call mosaic careers and pivoted a bit here and there, trying to find an area that was most aligned to our interest in sustainability is because that area just didn’t quite exist in the way that it does now. And so there are opportunities emerging. I mean, this is a huge focus of all of the major law firms in Australia at the moment. So there are opportunities within the mainstream commercial law path to pursue this, I think. And it’s about just being upfront about that being your interest. And if you’re somebody that’s really eager and you’re willing to put in a bit of work, I think that there are more opportunities now to pursue this than there were certainly 10 years ago or however long ago it was that I started down this journey. |
00:43:11 | DT | Absolutely. There’s such a multitude of opportunities for young lawyers and law students now, areas of practice that didn’t exist a decade ago. And I think it’s been a bit of a consistent theme on the career advice for our younger listeners over the past few episodes that articulating a preference, articulating an interest and really pursuing it rather than trying to fit in where you can find the opportunity is a great suggestion. But also, I think it’s fitting that in a discussion today about how nature related risk is becoming a mainstream topic for boards of Australian companies to consider that we do think about how we can be, as you said, Olivia, climate conscious or nature conscious lawyers and bring that perspective to any field of practice that we work in. That idea that what was a discrete field of practice or a discrete area of interest is becoming a holistic and complete part of kind of any field of practice, especially now for corporations lawyers. So Laura and Olivia from Pollination Law, thank you so much for joining me today on Hearsay. |
00:44:14 | RD | As always, you’ve been listening to Hearsay The Legal Podcast. I’d like to thank our guests today, Laura Waterford and Olivia Back from Pollination, for coming on the show. If you’re an Australian legal practitioner, you can claim one continuing professional development point for listening to this episode. Whether an activity entitles you to claim a CPD unit is, as you well know, self-assessed but we suggest this episode entitles you to claim a substantive unit. More information on claiming and tracking your points on Hearsay can be found on our website. Hearsay The Legal Podcast is brought to you by Lext Australia, a legal innovation company that makes the law easier to access and easier to practice, and that includes your CPD. Hearsay is recorded in Sydney on the lands of the Gadigal people of the Eora nation, and we would like to pay our respects to elders past and present. Thank you for listening and see you all on the next episode of Hearsay. |
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