The bushfire crisis has brought a sense of immediacy to conversations on the impact of climate change on Australian businesses.
Credit ratings agencies, finance markets and insurers are all beginning to price climate-related financial risks, and so local governments face an unprecedented challenge to the management of their financial stability and liability exposures that can no longer be deferred for consideration in the 'long term'.
We consider the 'new normal' of climate change-related pressures facing local governments, as they attempt to balance political and financial considerations with community expectations. You can also refer to MinterEllison's Plain Language Guide to Climate Change if you would like some further context around what climate change is, its drivers and relevant impacts.
Physical risks
Extreme weather events and other environmental disasters cause direct damage and risks to built infrastructure, flora and fauna, water supply, landforms including coastlines and water courses, and most importantly, human health. These events can be either acute (including natural catastrophe risks compounded by climate change, such as bushfires, heatwaves, drought and inland floods), or gradual onset (such as sea level rise and increases in average temperatures).
In short, climate change has catalysed a 'new normal' for physical risks – one in which historical experience alone no longer provides a proxy for the present or future. Local governments will need to plan strategically for the impact of climate change on their assets and infrastructure; and how the impact of climate change on private assets may lead to demands being made on local governments.
Economic transitional risks
Whilst physical impacts may seem more immediately tangible, local governments now also need to consider how economic transition risks associated with climate change may impact on their financial stability. Economic transition risks (and opportunities) are the responses of financial markets and the real economy to climate change-related impacts. They include policy and regulatory responses, technological developments and shifts in stakeholder preferences in the transition to a low-emissions economy. Relevant economic transition risks for Councils may include, for example:
- Difficulty in sourcing funding, or increased cost of funding;
- Restrictions on the availability of adequate insurance for Councils and/or their constituents (both catastrophe-based and financial lines such as public liability et cetera);
- Ultimately it may have 'stranded' assets, materially devalue prior to the planned end of their useful lives.
Local governments should consider the potential 'twin challenges' of both increased capital expenditures in ensuring their assets are climate-resilient, and decreasing and/or variable revenue streams (from rates, rentals or otherwise) from which to fund core services.
Litigation arising from the risks of climate change.
Local governments are particularly exposed to litigation arising from the risks of climate change. Claims might be made against local governments in the future in relation to such matters as:
- Development approvals and conditions that do not appropriately or adequately have regard to climate-related considerations;
- Development conditions that seek to address future climate change risks which applicants view as unduly 'onerous'; and
- Failure to implement strategies for the protection of properties and assets from physical climate change risks.
There have already been appeals in other States on the basis of Councils' failure to adequately consider climate change in planning-related decisions.
Local Government Act requirements
The Local Government Act 1995 (WA) requires local governments to have a strategic community plan and a corporate business plan. As strategic community plans come up for review again in 2021, local governments will need to consider the impact of climate change and consequential economic risks as part of that review, if they haven't already done so. Similarly, climate change and consequential economic risks will also need to be addressed in the periodical review of a local government's corporate business plan.
What should local governments be doing?
Local governments need to be actively considering the impacts of climate change on all aspects of its business including:
- Integration into governance frameworks, and its strategic community plan and corporate business plan;
- Strategic planning and risk assessment and management across both planning and service delivery;
- Review of planning schemes and policy documents to support planning and development decisions, and to ensure provision of up to date information;
- Liability exposure reviews;
- Review of current and proposed infrastructure and assets investments;
- Review of emergency response plans; and
- Facilitation of increased regional collaboration and planning.
Local governments need to consider how climate change may impact its budgets including whether there may be increased expenditures and/or a need for provisioning about historical norms on:
- Health, community care and emergency response capabilities;
- Adaptation and resilience works on public infrastructure and local government authority owned buildings, infrastructure and facilities in order to maintain service levels or protect assets such as from coastal erosion;
- Energy costs;
- Waste disposal – collection, landfill and recycling;
- Storm water and sewerage – capacity to respond to more extreme downpours; and
- Litigation – increased exposures from outdated planning schemes and information services.
Local governments also need to consider how climate change may impact on its revenues including declining or variable rates revenue potentially arising from:
- Declining property values;
- Adverse impacts on local industries, particularly if there is a concentration of one or a few industries facing physical and/or economic transition risks such as agriculture or tourism.
The impact of climate change and risks will differ for each local government authority, and the questions that need to be considered to assess potential impacts on its financial stability, will be unique. In all cases, stress-testing and scenario planning against the range of plausible climate change futures will be critical to the efficient identification and management of the financial risks for local governments.
About MinterEllison's Climate Change team
MinterEllison’s Climate Risk Governance team is an integral part of our Responsible Business practice. We lead the market in advising both State and local government clients on climate change through a finance and liability lens. Our unique multi-disciplinary team of lawyers and auditors works closely with scientists, economists, financiers and international regulators to ensure that our clients have the benefit of global thought leadership in this dynamic risk area.