Last fall, after a trio of deadly hurricanes, ratings companies warned vulnerable coastal cities to get ready for climate change -- or face higher borrowing costs on the $3.9 trillion municipal bond market. Climate advocates cheered, hoping the prospect of downgrades would push local officials to better protect their residents from the effects of global warming.
Twelve months, two catastrophic storms and thousands of credit ratings later, those companies have yet to downgrade a single city because of climate change. The companies, which include Moody’s Corp. and Fitch Ratings Ltd., say that’s because cities are taking steps to protect themselves.
“If we look at our rating universe, a huge percentage of them are actually taking resilience measures,” Lenny Jones, a managing director at Moody’s, said. “In the AA category and above, it’s like 100 percent.”
Some investors and policy experts dispute the idea that the municipalities have done enough to protect themselves from the storms, flooding and other risks of a warming planet to warrant the high ratings. They argue that bond downgrades are the real test of whether ratings companies account for climate risks.
“Words are cheap,” said Roy Wright, who ran risk mitigation for the Federal Emergency Management Agency until April, and now heads the Insurance Institute for Business & Home Safety. “I don’t know how anyone can look at the last two years of catastrophic damage from severe weather in communities all across America and suggest with a straight face that we have our risks under control.”
Big storms can do measurable damage to a city’s tax base and therefore its ability to pay back bonds. By contrast, gauging the effects of chronic problems such as sea-level rise, flooding and more severe storms is more challenging; vulnerable areas could see property values fall, residents and businesses leave and infrastructure costs rise. But the pace and scope of those shifts are hard to predict.
Even so, over the past year ratings companies have increasingly argued that those challenges are real, and have pledged to account for them in their analyses.
“It is important to consider the current long-term credit implications of the physical impact of climate change,” S&P Global Inc. wrote last October. Those impacts went beyond extreme weather events, to include “more gradual changes to the environment affecting land use, employment, and economic activity that support credit quality.”
For cities vulnerable to those risks, S&P cautioned, failing to address them “would be a credit negative.”
The next month, Moody’s released a similar paper, followed by Fitch this May. Each report carried a version of the same message: Ignoring the future risks of climate change, and failing to become more resilient to those risks, would imperil a city’s creditworthiness.