Financial risk for councils burying their head in the drying ground

by Bryony Edwards / CACE

"Since this blog was originally posted the Victorian Government passed a new version of the local government act which now explicitly requires councils to act on global warming. Section 9.2c now states "the economic, social and environmental sustainability of the municipal district, including mitigation and planning for climate change risks, is to be promoted".  You can find the new Victorian Local Government Legislations here."

​Advice to councils on climate risk has been on the same trajectory for years now - ignorance is no excuse and can only increase your exposure. Indeed, councils are complaining they bear the burden of too much risk with minimal resources. Many council associations are pushing for higher levels of government to take more responsibility for climate risk and provide clear demarcation lines for where council responsibility starts and ends.

 The current state of this legal and financial framework is captured well in a recent webinar (February 2020) delivered by Sarah Barker, the Global Head of Climate Risk Governance at international law firm Minter Ellison).

The examples used were from Australia and internationally and were focused on infrastructure and planning issues. The first port of call for a homeowner whose insurance claim is refused is usually the council, eg, Why hasn’t council done more to prevent the flooding? Why was construction allowed in a floodplain? Why didn’t council warn me about the risk? 

Barker’s message for all councils is:

'There’s a financial and legal imperative to act and act now - across all [council] business, every decision that’s made. Ask how robust are the assumptions that we use in planning and how do we stress test against the plausible range of climate futures...sticking your head in the sand is no longer passable’.

Using modelling based on historical records rather than future scenarios counts as sticking one’s head in the sand. Force Majeure or ‘Acts of God’ don’t work with insurance companies as the frequency of acts of global warming rapidly grows. And assessing risk means accommodating for the worst case scenarios.

Avoiding litigation risk is key but Barker also provides examples of financial benefits for councils that properly assess and respond to climate change risk, including cheaper finance from new ‘sustainable’ loan products and lower insurance premiums and broader coverage for the council and the community. 

The Commonwealth Bank of Australia’s recent risk analysis of their mortgage portfolio is highlighted by Barker. The Bank looked at five categories of risk in a 5x5 meter square grid across Australia. The five risks tested were bushfire, increasing windsheer, coastal inundation and freshwater flooding, and drying soil, which turned out to be the most significant risk for the bank, because drying soil messes with housing foundations, and drying soil can and is resulting from changing climate conditions. 

So what are some concrete examples of what councils can do to avoid litigation and improve insurance and loan rates? 

Bushfire - Planning restrictions; rehydrating landscapes using Sponge city strategies and increasing soil water; planting fire-retardant trees as breaks; consider the merit of new estates abutting bush or plantations.
Increasing windsheer - Pushing for a higher standard of construction in wind prone areas. 
Coastal inundation - Purchasing at-risk properties and using them for dune building; revegetation and wetland restoration to reduce the impact of storm surges; preventing building from occurring in the first place; tidal walls, advocating up for state and federal action.
Freshwater flooding - Sponge city strategies; more porous surfaces; capturing excess such as in domestic water tanks, facilitating more moist and thus more absorbent soils; water sensitive urban design.
Drying soils - Sponge city strategies and appropriate regional strategies should help to alleviate and reverse this drying. 

Aside from planning and infrastructure, how would council risk manifest in other portfolio areas such as waste and more broadly, community welfare? This probably remains to be seen; however, where neighbourhoods with no canopy cover are 10 degrees celsius higher than leafy suburbs nearby it’s not hard to imagine the litigation that might occur following a heatwave. 

It’s worth also pointing out that all of Barker’s examples of risk exposure involve the resilience of the council community with regard to global warming, as opposed to councils’ political responsibility to reduce greenhouse gas emissions. It is a lucky coincidence that many strategies that build council resilience to global warming also reduce emissions. This includes across green space, stationary energy, waste, and roads. For example, planting trees helps mitigate extreme heat and sequester carbon dioxide; entering a large power purchase agreement for renewable power with other councils lowers power costs and reduces stationary energy emissions. 

And Barker’s message to councils that pass motions to acknowledge the climate emergency is that:

‘You can’t just declare an emergency and not change the way things happen. You need a credible and reasonable approach to starting that journey. The declaration is a good way to signal to insurance companies that you take it seriously, but councils have to follow up.’

Where can councils go for risk management resources? Barker pointed to the Task Force on Climate Related Financial Disclosures as well as the Bureau of Meteorology and CSIRO. Naturally, the council doesn’t need to go it alone and can join with other councils for economies of scale. 

Will councils be able to implement the sweeping changes that minimise exposure if they have not prioritised responding to climate risk? The answer is likely no. The change in how councils work and prioritise their work is so sweeping that these changes would not likely happen if competing with other priorities, and we have already seen this play out to some degree. As far as we know, no council has prioritised their climate emergency response  as their number one priority after delivering their core services. 
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What would an emergency response by a council actually look like? CACE has developed a recommendation for a staged implementation for a climate emergency response on our website. In short, it boils down to the following:

1. Educating all councillors and staff on the climate emergency 
2. Prioritising the climate emergency as the lead issue in all general communication
3. Reviewing all current council business with a climate emergency lens
4. Reallocating discretionary spending to the climate emergency
5. Undertaking a community wide climate emergency plan mitigation, resilience, education and advocacy with a target of negative emissions (includes advocacy to higher levels of government for required action) and community mobilisation.​