“Adaptation” projects, on the other hand, are those intended to lower a given area’s exposure to natural catastrophes and/or manage their impacts by, for example, making communities and critical infrastructure more resilient to the risk of extreme climate change-related weather events.
These designations have not been universally adopted across the muni market, and it may be overly simplistic to think of green bonds as belonging exclusively to either mitigation or adaptation. However, this framework may be helpful to bear in mind in order to ensure that investors’ dollars are used to pursue the environmental priorities that matter most to them.
• Monitor evolving risks stemming from climate change. Outside the green bond segment, proceeds from many munis are increasingly being used to alleviate the impact of natural disasters, including climate change-driven events. Muni investors in all segments, therefore, should take care to understand how environmentally driven risk factors are evolving for many issuers.
As mentioned above, climate change-related defaults or downgrades are not an issue, but administrative glitches may still occur that delay debt service payments in the event of unforeseen natural disasters. Issuers with inadequate budgetary flexibility, reserve balances or liquidity—or with substandard disaster management records—may also see additional downward pressure in such circumstances.
While disclosures are improving in the areas of climate conditions and remediation activity, transparency can vary by issuer. Often, the answer as to whether to buy a given bond is not found in the issuer’s disaster-related disclosures, but in the broader picture of its pre-disaster financial health.
Overall, there has never been a better time for investors to jump into the market for green bonds and other munis that address the challenges of climate change. Keeping the above tips in mind can help them conduct more effective due diligence and ensure that their investment dollars are working toward their environmental priorities as well as their financial ones.
Jeff Lipton is managing director and head of municipal credit and market strategy at Oppenheimer & Co. Inc.