The debate about climate change continues, but one financial institution has decided to penalize municipalities that don’t embrace the idea and plan accordingly.
Moody’s Investors Services Inc., a bond credit rating entity, issued a report late last month that warns coastal cities in the United States about a possible downgrade to their credit status if they fail to take steps to address climate change.
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 [on Nov. 28], 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,” Lenny Jones, a managing director at Moody’s told Bloomberg. “We’re going to ask questions about what you’re doing to mitigate that exposure.”
“That’s taken into your credit ratings,” Jones said.
The summary of the report on Moody’s website takes a firm stand on the existence of climate change and its impact on bond credit rating businesses:
The growing effects of climate change, including climbing global temperatures, and rising sea levels, are forecast to have an increasing economic impact on U.S. state and local issuers. This will be a growing negative credit factor for issuers without sufficient adaptation and mitigation strategies, Moody’s Investors Service says in a new report.
Our credit analysis considers the effects of climate change when we believe a meaningful credit impact is highly likely to occur and not be mitigated by issuer actions, even if this is a number of years in the future.
“While we anticipate states and municipalities will adopt mitigation strategies for these events, costs to employ them could also become an ongoing credit challenge,” Michael Wertz, a Moody’s vice president, said in the report summary. “Our analysis of economic strength and diversity, access to liquidity and levers to raise additional revenue are also key to our assessment of climate risks as is evaluating asset management and governance.”
The report summary concludes:
Moody’s analysts weigh the impact of climate risks with states and municipalities’ preparedness and planning for these changes when we are analyzing credit ratings. Analysts for municipal issuers with higher exposure to climate risks will also focus on current and future mitigation steps and how these steps will impact the issuer’s overall profile when assigning ratings.
In its report — which is available only to subscribers — Moody’s lists six indicators “to assess the exposure and overall susceptibility of U.S. states to the physical effects of climate change,” according to Bloomberg.
Those indicators include the share of economic activity in coastal areas, hurricane and extreme-weather damage as a share of the economy, and the share of homes in a floodplain.
Moody’s determined that Texas, Florida, Georgia, and Mississippi are among the states with the highest risk of climate-change-related damage, but it did not include the names of cities most at risk, according to Bloomberg.
Managing Director Jones said in the Bloomberg article that the company has been pressured by investors to be more transparent about how it incorporates climate change into the rating process.