How nature-related risks could expose company directors to legal liability

Company directors in Kenya, South Africa and Nigeria could face legal liability for failing to manage nature-related risks, according to a report that links environmental governance to directors' duties.

The report, Directors' Duties and Nature-Related Risk in Africa, found directors must consider risks such as biodiversity loss, water scarcity and land degradation as part of their duty of care and obligation to promote the success of their companies.

The analysis by the Commonwealth Climate and Law Initiative (CCLI), FSD Africa and the African Natural Capital Alliance (ANCA) examined legal and governance frameworks in Kenya, South Africa and Nigeria.

"In advising boards and Kenyan directors, you get the feeling that they understand the environment in a narrower compliance approach, looking at environmental impact assessment (EIA) licences or regulatory requirements," said Sammy Ndolo, Managing Partner at Cliffe Dekker Hofmeyr (CDH) Kenya.

"Few have really internalised what it means to promote the success of the company under the Companies Act, which includes understanding and evaluating the impact of a company's operations on both the community and the environment," he said.

The report says directors who fail to address foreseeable and financially material nature-related risks could expose their companies and themselves to legal, financial and reputational consequences.

It found Africa's economies are particularly vulnerable because 62 per cent of the continent's gross domestic product (GDP) depends moderately or highly on nature.

A 2024 stress test across five African banking systems projected expected credit losses could rise by up to 21 per cent by 2050 if governments and businesses fail to take nature-positive action.

The report also points to growing adoption of the Taskforce on Nature-related Financial Disclosures (TNFD) and the International Financial Reporting Standards (IFRS) Sustainability Disclosure Standards S1 and S2, alongside regulations such as the European Union Deforestation Regulation (EUDR), as factors increasing scrutiny on company boards.

In Kenya, the report says directors who fail to manage foreseeable nature-related risks could breach their duties under the Companies Act 2015.

It found similar legal obligations exist in South Africa and Nigeria under their corporate governance and environmental laws.

Ndolo said many company boards still treat environmental matters as regulatory compliance rather than business strategy.

"When you look at how the environment is defined in our environmental legislation, it is quite wide and includes biodiversity and ecosystems," said Ndolo.

 "Nature-related risks therefore fall squarely within that scope, but many directors do not yet appreciate how broad those obligations are."

He said the report changes the conversation by showing directors already have legal responsibilities to address nature-related risks.

"It removes this optional ESG framing that directors may have, that it is a peripheral issue rather than central to how the business operates," noted Ndolo, adding, "The report shows that directors need to take these issues seriously as part of undertaking their business operations."

He also warned that courts are paying closer attention to environmental governance.

"We are also seeing a willingness from the judiciary to scrutinise how environmental approvals are obtained and whether sufficient environmental diligence has been exercised. The window between environmental liability and directors' responsibility is narrowing," explained Ndolo.

Ndolo said directors could increasingly face personal liability as environmental litigation grows.

"It is indeed true that personal liability can attach to directors at some point in time. What is likely to happen is that we are likely to begin to see much more litigation, even as we go forward, just like we're seeing in Europe and other parts of the world,” ," he said.

The report also says integrating nature-related governance can help companies access new sources of capital, citing Ecobank's Nature Bond and other nature-linked financing instruments as examples.