Climate change could become a credit issue for city and state governments as one of the US’ biggest credit ratings agencies, Moody’s, offers them a stark warning: prepare for climate change or see your creditworthiness fall.
Moody’s detailed how cities exposed to the effects of climate change will have to show how they are protecting themselves. It will consider whether they are reducing damage from extreme weather, limiting building on flood plains and defending coastal areas.
Investors in the US$3.8 trillion US municipal bond market have historically not incorporated climate data into city risk profiles. But this could be about to change.
Cities that ignore the risks could face higher interest rates, Moody’s warned. The greater these risks, the higher premiums cities will pay.
So, what does the announcement mean for cities on the ground?
Moody’s has indicated it will be paying close attention to key metrics on the key climate risks facing cities and states.
Its report will prompt “municipalities to think harder about disclosure," Adam Stern, a senior vice president at Breckinridge Capital Advisors, told Bloomberg. It is a sign that the investment community cares more than ever about whether cities and states have identified which risks climate change poses to their communities.
Measuring those risks – and the opportunities of acting on them – is therefore crucial. By collecting hard data, cities and states can see where they are most vulnerable and direct investment accordingly.
When faced with California’s worst drought in a thousand years, for example, the city of Benicia conducted a thorough search of its water pipes to identify leaks. By doing so, it made a sizeable cut to water wastage – one of the ways it was able to reduce its water consumption by 46% in just two years.
Reporting brings a multitude of benefits
By reporting environmental risks and opportunities through CDP, cities can better identify what’s at stake – and start to take action.
In 2017, 126 U.S. cities disclosed to CDP on how they are managing and mitigating the risks from climate change. Cities like Chicago, and Miami, to cities along the Mississippi River, and even small cities like Park City, Utah (population roughly 8,000) are stepping up and managing risks and creating opportunities in climate action by participating in CDP’s annual information request.
And these cities are already reaping the benefits.
Take, for example, San Diego, which passed an ambitious action plan in 2015, setting the country’s 8th largest city on a pathway to be 100% renewable energy powered. San Diego is now second only to Los Angeles, with more than 11,000 solar jobs, which are growing 17 times faster than the national job average. San Diego has also attracted $770 million in clean-tech venture capital funding in the last two years alone.
Municipal bond analysts can review the CDP cities disclosure to consider how US cities are integrating climate change strategies into their city’s economic development plans.
Cities need to consider long-term risks
Moody’s rating methodology considers the effects of climate change on cities – even if they are only likely to be felt a number of years in the future. That tells us cities must be planning and investing for the long term when they draw up adaptation strategies.
Beyond having the capacity to deal with the immediate effects of ‘climate shocks’ – like wildfires, extreme heat-waves or localized flooding – cities must understand what changes are likely over the coming decades.
By planning for the long-term, cities will not only be building social and environmental resilience but also economic resilience.
Cities can learn a lot from CDP’s work at the corporate level here. CDP's annual reporting results have shown that if a company is managing its environmental and social risk effectively, it is also likely to managing other risks more effectively too – with those corporations that are actively managing and planning for climate change securing higher return on investment than those companies that aren’t, and even more so than those companies that refuse to report their environmental data.
Given the widespread impacts of climate change, analysts will now be looking to cities to show if they report on their long-term climate change resilience planning, and if they are aware of the climate related risks facing their local economy. In 2015, CDP issued a white paper with Breckinridge Capital Advisor, a Boston based fixed income manager with environmental, social responsibility and corporate governance (ESG) on how ESG data is incorporated in muni analysis.
“ESG analysis gives us a better understanding of those in management, their priorities as well as their effectiveness,” says Robert Fernandez, vice president of credit research at Breckinridge. “There are certain key risks out there, such as climate, and if they’re not paying attention to these risks, does that speak to how well they’re managing the city overall?”
While each city has its own set of long-term challenges, there are many shared solutions, from renewable energy procurement to flood defenses to transport infrastructure. Our Open Data Portal allows cities to draw inspiration from each other by providing examples of best practice.
Investors are hungry for information
Moody’s is meeting investor demand for more detailed assessments of how cities are exposed to the risks of climate change.
But there is also increasing interest in discovering the opportunities of climate change mitigation. Investors are eager to support green infrastructure, but often lack the information they need to identify projects.
CDP’s Matchmaker offers a platform for cities to showcase to investors to projects of interest and to advance the implementation of climate resilient infrastructure projects, through project data disclosure and stakeholder consultation.
Moody’s announcement signals the start of a new era in how cities access investment. CDP provides the tools they need to make the most of the opportunities this offers.
Cities are invited to participate in the next disclosure period for CDP which opens Spring 2018. To learn more visit www.cdp.net/cities.