The Fort McMurray, Alta., wildfire in 2016 resulted in total losses of almost $8.9-billion.JASON FRANSON/The Canadian Press
Canadian boards of directors could face lawsuits and regulatory penalties if their companies fail to account for a wide range of nature-related risks, from biodiversity loss to destructive weather to policy changes, a law firm warns in a detailed new opinion.
Companies have been focused on concerns specific to climate change, but dealing with more immediate dangers that involve land, water, air and Indigenous territories is being heaped onto the fiduciary duties of directors in numerous industries, according to the legal opinion, written by Toronto-based climate and energy law firm Resilient LLP and commissioned by British-based Commonwealth Climate and Law Initiative.
The CCLI is backed by several international and Canadian law schools and advocacy groups, such as the Canada Climate Law Initiative.
The paper, being released on Tuesday, addresses what constitute material risks to a company and its environmental surroundings and whether those risks are foreseeable; if directors are required to consider such risks among their duties; and what the obligations are for disclosure.
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The Canadian economy is particularly vulnerable to nature-related risk, given its reliance on resource extraction and industries that serve it. According to the brief, the country’s ecosystems provide an estimated $4.9-trillion in services annually, including pollination, water purification, flood mitigation and carbon dioxide sequestration.
These are under threat. More than four-fifths of wetlands in urban areas have been lost, 80 per cent of prairie grasslands have disappeared and 20 per cent of species are at risk of extinction, according to the paper.
“Boards of directors really have to understand the breadth of the class of nature-related risk and the immediacy,” said Lisa DeMarco, chief executive and senior partner at Resilient and co-author of the opinion. “Climate is usually a longer-term prospect when we’re talking about changes over a period of time, with immediate extreme weather events resulting.”
A key deadline is fast approaching. Canada is a signatory to the Kunming-Montréal Global Biodiversity Framework, which three years ago set a target to protect 30 per cent of the world’s land and water by 2030.
Not spotting and addressing the risks, or making false claims, open up directors to action by shareholders, creditors, environmental activists and others. That could include proxy fights, lawsuits as well as complaints to tribunals such as the Competition Bureau under new federal anti-greenwashing legislation, Ms. DeMarco said. It could also present serious damage to a company’s reputation, she said.
“It’s not a new thing. These are regular concepts of good corporate governance practices and financial management practices applied to a newly understood class of risks,” Ms. DeMarco said.
Key to managing such risks is disclosure using recognized frameworks, including the Taskforce on Nature-related Financial Disclosures, which several Canadian companies have tested and adopted, and international sustainability standards tailored for domestic companies by the Canadian Sustainability Standards Board. As it stands, use of those frameworks and standards remains voluntary in Canada.
In addition, the opinion recommends companies use external experts to pinpoint nature-related risks as well as consult with holders of Indigenous rights.
These issues rank as priorities among institutional and retail investors, as they concern material risks to long-term value of companies within their portfolios, said Patricia Fletcher, chief executive officer of the Responsible Investment Association.
“The biodiversity conversations, the nature conversations, also have to be the things that organizations are talking about, thinking about, particularly in Canada, given the makeup of our economy,” Ms. Fletcher said in an interview. “And I think this provides clarity on the onus for directors, that they need to be engaged around this, and that investors are going to have an expectation that they are.”
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The research shows how industries face different nature-related risks. Oil, gas and hydro projects across Canada, for instance, are negatively impacted by prolonged droughts, shifting weather patterns and inadequate water management practices. The paper points to the devastating Fort McMurray, Alta., wildfire in 2016 and how it put energy facilities at risk and prompted the shutdown of millions of barrels of oil sands production. Total losses from that fire are estimated at nearly $8.9-billion.
In forestry, risks arise from water shortages, habitat destruction, pollution and failing to address Indigenous rights. The mining industry disrupts biodiversity directly through mineral extraction, site preparation and waste management, resulting in habitat loss and degradation, the opinion says.
The financial services and insurance industries face a wide range of risks stemming from their investments and environmentally sensitive sectors, nature-dependent industries, climate and changing regulatory expectations. The latter is likely to become a larger factor if Canadian regulators move forward with requiring standardized risk disclosure.
In addition, the opinion noted, insurance companies are already dealing with increasing claims for property and agricultural crop damage from extreme weather and biodiversity pressures.