https://www.bloomberg.com/news/articles/2017-11-29/moody-s-warns-cities-to-address-climate-risks-or-face-downgrades
[Note specific warning to coastal communities due to impacts of climate
change. If a rating agency sees it as a problem, that means the impacts
are already being felt, not just physically, but financially across a
broad base.]
Moody's Warns Cities to Address Climate Risks or Face Downgrades
By Christopher Flavelle
November 29, 2017, 4:00 AM EST
Coastal communities from Maine to California have been put on notice
from one of the top credit rating agencies: Start preparing for climate
change or risk losing access to cheap credit.
In a report to its clients Tuesday, Moody’s Investors Service Inc.
explained how it incorporates climate change into its credit ratings for
state and local bonds. If cities and states don’t deal with risks from
surging seas or intense storms, they are at greater risk of default.
"What we want people to realize is: If you’re exposed, we know that.
We’re going to ask questions about what you’re doing to mitigate that
exposure," Lenny Jones, a managing director at Moody’s, said in a phone
interview. "That’s taken into your credit ratings."
In its report, Moody’s lists six indicators it uses "to assess the
exposure and overall susceptibility of U.S. states to the physical
effects of climate change." They include the share of economic activity
that comes from coastal areas, hurricane and extreme-weather damage as a
share of the economy, and the share of homes in a flood plain.
Based on those overall risks, Texas, Florida, Georgia and Mississippi
are among the states most at risk from climate change. Moody’s didn’t
identify which cities or municipalities were most exposed.
Read More: Rising Seas May Wipe Out Jersey Towns and Millions in AAA Bonds
Bond rating agencies such as Moody’s are important both for bond issuers
and buyers, as they assign ratings that are used to judge the risk of
default. The greater the risk, the higher the interest rate
municipalities pay.
Bloomberg News reported in May that towns and counties were able to
secure AAA ratings despite their risks of flooding and other destruction
from storms, which are likely to be more frequent and intense because of
climate change. If repeated storms and floods are likely to send
property values -- and tax revenue -- sinking while spending on sea
walls, storm drains or flood-resistant buildings goes up, investors say
bond buyers should be warned.
Jones said Tuesday that the company had been pressured by investors to
be more transparent about how it incorporates climate change into the
ratings process. Some praised the move, while also urging it to go further.
Think Harder
"This kind of publication shoots for municipalities to think harder
about disclosure," Adam Stern, a senior vice president at Breckinridge
Capital Advisors in Boston, said in an interview. "The action would
start to happen when and if you start seeing downgrades."
Jones, the Moody’s managing director, said he couldn’t recall any
examples of the company downgrading a city or state because it failed to
address climate risk.
Eric Glass, a fixed-income portfolio manager at Alliance Bernstein, said
real transparency required having a separate category or score for
climate risk, rather than mixing it in with other factors like economic
diversity and fiscal strength.
Still, the new analysis is "certainly a step in the right direction,"
Glass said by email.
Others worried that Moody’s is being too optimistic about cities’ desire
to adapt to the risks associated with climate change.
Shalini Vajjhala, a former Obama administration official who consults
with cities on preparing for climate change, says that won’t happen on a
large scale until cities start facing consequences for failing to act --
in this case, a ratings downgrade.
"Investors and governments alike are looking for clear market signals to
pursue, and perhaps even more importantly, to defend investments in
major adaptation and resilience projects to their constituents and
taxpayers," Vajjhala, who now runs Re:Focus Partners, said in an email.
"Outside of the rating agencies, it is not obvious who else could send a
meaningful market-wide signal."
Rob Moore, a senior policy analyst at the Natural Resources Defense
Council, said increased attention from rating agencies could push cities
to reconsider where they build.
"If I was a city official, I’d be asking a whole lot of questions about
what vulnerabilities their community has, and how each new proposed
development adds to that vulnerability," Moore said in an email.
"Because at some point, your creditors certainly will."
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See also:
http://www.bbc.com/future/story/20170403-miamis-fight-against-sea-level-rise