Salvation may demand disclosure but disclosure can be risky.
Over the past five or six years, there has been increased focus on disclosure by corporations of their risk of exposure to climate change. It is now a commonly-held view that, where there is an obligation to report on strategies and prospects of future financial years, private corporations are likely to be required to make disclosure about their climate risk, at least in certain circumstances.
The difficulty has been in deciding how to make that disclosure and what is material.
To provide some guidance as to how this disclosure should be made, in June 2017, American billionaire and the 108th mayor of New York City, Michael Bloomberg, presented a series of recommendations to the Governor of the Bank of England and chairman of the G20’s Financial Stability Board.
The Task Force on Climate-related Financial Disclosure, which Bloomberg leads, came up with four key recommendations on climate-related financial disclosures. The task force produced the recommendations on the basis that accurate and timely disclosure of current and past operating and financial results is fundamental to the essential functions of financial markets.
Within days of the release of the recommendations, major banks, insurers and investors representing over USD3 trillion in market capitalisation publicly committed to support the recommendations.
Since the task force’s recommendations, attention to climate risk disclosure has greatly increased. In May, the UN Environment Finance Initiative released its report following a collaboration between it and 16 of the world’s leading banks. The group piloted scenario-based assessments of transition-related risks and opportunities envisioned by the task force’s recommendations.
But while the private sector has enjoyed a year working through and piloting the recommendations, the question has been looming as to what disclosure governments at international, national and subnational levels should be making of their climate-related risk.
“There is not a clear rubric on what local government should consider to be
a material climate risk.”
While corporations, seeking wealth maximisation for their shareholders, may be concentrating on disclosure of financial risk, the purpose of local government is much broader. It requires consideration to be given to a range of financial and nonfinancial issues including social, economic, environmental and cultural ones.
As societal expectations about government disclosure of climate risk change, we will see an increasing onus on councils to make disclosure of these matters.
For lawyers this is a red flag. That’s not only because of the broad range of risks it presents but also because it potentially creates what could become a legitimate new basis for legal challenges and intervention.
In the past, greater transparency has demonstrated a range of benefits, not the least being improved governance practices. But liability risks will also arise as councils are pressured to expand and enhance their climate-related disclosures. This then means decisions must be made as to the materiality of information.
Currently, there is little legal guidance on the materiality of climate change risks. Identifying material climate risk information is extremely difficult given the boundless nature of climate change impacts.
The legal requirements related to materiality continue to evolve in response to ongoing investigations and litigation. Consequently, councils may face the increasing threat of legal action for not adequately responding to the material risks they have identified.
There is not a clear rubric on what local government should consider to be a material climate risk, and yet the requirement to make disclosure is inevitable. Failing action by councils, the question of what is material will likely be one that litigators will seek to answer.
Fortunately, groups of climate specialists are on the case and we should begin to see recommendations to local government appearing in the not-too-distant future.
This article was first published in the August 2018 issue of NZ Local Government Magazine.