The 2017 Atlantic hurricane season, which officially began on June 1 and ends today, featured the highest number of major hurricanes since the 2005 season and was only the second time that two Category 5 hurricanes made landfall. However, it was by far the costliest hurricane season on record, with a preliminary total of $368.7 billion in damages, more than twice the cost in 2005. Nearly all of the damage resulted from the season’s three major hurricanes, Harvey, Irma and Maria. Yesterday, nine scientists writing in PLOS ONE estimated that almost 14,000 DINAA archaeological sites (Digital Index of North American Archaeology) on the Atlantic and Gulf Coasts in the US could be lost by 2100 as seas rise due to climate change.
In these circumstances, it’s not surprising that the rating agencies are looking to incorporate risks from climate change, e.g. rising seas and major storms, into the credit ratings of public sector borrowers with coastal communities. Business Insurance magazine quotes from Moody’s report.
“Climate shocks or extreme weather events have sharp, immediate and observable impacts on an issuer’s infrastructure, economy and revenue base, and environment,” the New York-based ratings agency said in its report published Tuesday. “As such, we factor these impacts into our analysis of an issuer's economy, fiscal position and capital infrastructure, as well as management’s ability to marshal resources and implement strategies to drive recovery. The interplay between an issuer's exposure to climate shocks and its resilience to this vulnerability is an increasingly important part of our credit analysis and one that will take on even greater significance as climate change continues.”
Moody’s acknowledges that there is likely to be some adaptation on the part of state and local governments in the form of mitigation strategies to lessen the impact. Nonetheless, the rating agency is serving a warning, as Bloomberg notes.
“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.
Why the sudden focus on climate change from ratings agencies, like Moody’s. Because, as is almost always the case, they only react after the event. In May 2017, Bloomberg reported that when Ocean County (there’s a clue in the name) issued $31m of bonds in 2016, neither Moody’s nor S&P asked any questions about the impact of climate change on its finances. As Bloomberg highlights.
Few parts of the U.S. are as exposed to the threats from climate change as Ocean County, New Jersey. It was here in Seaside Heights that Hurricane Sandy flooded an oceanfront amusement park, leaving an inundated roller coaster as an iconic image of rising sea levels. Scientists say more floods and stronger hurricanes are likely as the planet warms.
It becomes apparent that Moody’s focus on climate change has little to do with being pro-active, rather it’s a response to pressure from investors who, no doubt, remember what happened to many AAA-rated sub-prime mortgage bonds not too many years ago. Indeed, when asked, Moody’s was not ale to recall an example where the credit rating of a city or state had been downgraded for failing to address climate change. Bloomberg continues.
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.
What are investors’ views on this issue? Bloomberg provides some feedback.
"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."
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.
Public administrators are doubtful that anything will change until Moody’s and other ratings agencies show they mean business with actual downgrades.
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."
Unfortunately, our suspicion is that, for now, Moody’s focus on climate change risk is driven by the need to be seen saying the right things. We hope the agency “will walk the walk”, rather than merely “talk the talk”, with some downgrades. That would undoubtedly create a response from state and local governments.