This report focuses on one form of biodiversity-related risk: liability risks. It proposes a framework of liability exposures which covers physical impacts, transition risks and misrepresentation of biodiversity risks. Legal exposures to liability risks include and extend beyond litigation risks. Biodiversity-related liability risks include regulatory fines and enforcement, or a determination outside the courtroom of who is legally responsible. 

There are three avenues in which claims may impact the financial sector:

• Direct impacts as defendants in litigation
• Indirect impacts of biodiversity through credit, investment and underwriting risk
• Systemic risks where biodiversity-related liability risk extends across sectors or geographies.

Biodiversity risks are considered financial risks because of the dependency and impact business and financial organisations have on biodiversity. High risk sectors include construction and building materials, electricity, food and drug retailers, food producers and processors,  farming, fishing, livestock, forestry and paper, leisure and hotels, mining, oil and gas, utilities, infrastructure and other extractives. 

The extent of liability exposure as a biodiversity-related financial risk, and its materiality to any given financial institution or system depend on three factors:

• the nature and breadth of potential liability exposures (causes of action);
• the transmission mechanisms within and between the real economy and the financial sector;
• legal and market dynamics in the jurisdiction.

Framework of liability exposures

The report proposes a broad framework of legal exposures that should be considered in a biodiversity context. It is built around three categories: the physical risks of biodiversity, the economic transition, and misrepresentations:

Category one – Liability risks arising from physical or ecosystem impacts on biodiversity

• Direct impact through failure to prevent biodiversity loss or ecosystem consequences
• Indirect enablement through failure to prevent biodiversity loss or ecosystem consequences
• Failure to manage or adapt to biodiversity-related physical risks or ecosystem dependencies
• Failure to comply with regulatory requirements associated with biodiversity loss or ecosystem protection
• Financier or advisor liability for investee conduct under sub-categories above

Category two – Liability risks arising from the transition to a sustainable or regenerative economy

• Failure to manage or adapt to biodiversity-related economic transition risks from policy, regulation, technology or shifts in stakeholder preferences
• ‘Anti’ biodiversity regulation claims disputing the validity or application of biodiversity-related regulation

Category  three – Liability risks arising from misrepresentation of biodiversity risks or ecosystem impacts

• Market misrepresentation of material biodiversity-related risks in mandatory securities or other regulatory filings
• Promotional misrepresentation or ‘greenwashing’ of biodiversity-related impacts or credentials in advertising or promotion
• Financier, advisor or auditor liability for investee or client misrepresentations under sub-categories above

Legal and market dynamics in the jurisdiction

The magnitude of biodiversity-related liability risks cannot be measured precisely without consideration of the unique characteristics of the legal framework and economy within which an institution operates. Financial supervisors should consider the legal and market variables unique to the jurisdiction as they consider potential biodiversity-related liability risks to regulated entities and broader systemic impacts.

1. Financial supervisors and their regulated entities are under increasing pressure to consider the financial risks associated with the loss of biodiversity and ecosystem services at both a macro- and micro-economic level.
2. Biodiversity-related liability exposure is not limited to prevailing categories of 'environmental' law claims.
3. Litigation and liability can be both a driver and a consequence of biodiversity-related issues. It is a consequence where, for example, claims arise from a direct action, or failure, that results in biodiversity loss. It can be a driver where there are successful 'anti-biodiversity regulation' claims that wind back biodiversity protections.
4. The report does not intend to promote the commodification of nature or undermine the intrinsic value of biodiversity.
5. Financial supervisors should consider the legal and market variables unique to the jurisdiction as they consider potential biodiversity-related liability risks to regulated entities and broader systemic impacts.
6. Understanding the range of potential liability risks will enhance the position of financial institutions to identify, price and mitigate the direct and indirect impacts, and for financial regulators to integrate these risks into their supervisory activities under their financial stability mandates.
7. Indigenous and local communities are disproportionately affected by biodiversity loss and often face a lack of access to legal solutions compared to financial and business organisations.
8. Recent research suggests that biodiversity risks may be financially material for all business sectors. For example, annual global food production worth US$235 to $577 billion is at risk as a result of the loss of bee and butterfly pollinators.
9. Research suggests there are four reasons businesses currently take action on biodiversity issues: taking advantage of economic opportunities; enhancing relationships with stakeholders; addressing ethical concerns and setting examples of good corporate behaviour; and complying with legal or non-regulatory requirements.