Let me go directly to my recommendation, no, rather my urging: if you have not already, read BlackRock’s April 2019 report,
It is essential information for all municipal professionals and this task should not get lost in the jumble of a busy schedule. Do it this week. And, while you are at it, if you are a municipal banker or a lawyer, send it to issuer clients.
More about the report below, but it is noteworthy to put it in context.
This past week the State of Louisiana released a 1,500-page report on the impact of coastal flooding due to climate change. It details anticipated affected geographic areas of the state, discusses an organized but voluntary plan of relocation for individuals in impacted areas, and sorts through preparations for communities within the state that might absorb this climate change-related relocation.
Louisiana Gov. John Bel Edwards in a statement puts it simply and directly: “We have to be realistic about current and future effects of coastal land loss and plan today to develop Louisiana’s next generation of communities.”
Moving to another coastal state—Florida. Spencer Glendon, a senior fellow at Woods Hole Research Center said at a
These are very public signs of what appears more than just isolated events. And, I have spared you a summary of the devastation of the November, 2018 Paradise, California fire.
I suggest we leave to politicians, at least in this context, the debate around the causes of and remedies for climate change.
However, the question is clear for municipal professionals: what is our legal duty to investors with respect to this potential when offering municipal securities to investors?
Which brings me back to the BlackRock Report, from the world’s largest asset manager. “Extreme weather events pose growing risks for the credit worthiness of state and local issuers on the $3.8 trillion U.S. municipal bond market,” the report said.
The calamities charted relate to “rising sea levels, droughts, wildfires, and storms.” BlackRock’s observations are sobering and immediate: this issue affects the U.S. economy “today”.
The Report creates a “damage graphic” color-coding the regions of the U.S. as to expected GDP changes from 2060-2080. The conclusion as to “biggest likely losers”: the Gulf Coast Region, the South Atlantic seaboard and much of Arizona.”
BlackRock makes the point that “climate-related risks are underappreciated in the U.S. municipal bond market.” The writers have spot checked municipal bonds comparing issuers with heightened climate change risks against those that appear to have less. They found little, if any pricing differential.
That is not going to last long.
Municipal bankers and lawyers, if they have not already, must add this issue to their list of considerations when bringing a transaction to market. Diligence and disclosure must reflect this now rapidly evolving issue.
Remember, the Tower Amendment makes municipal underwriters the target of disclosure regulatory enforcement. My own experience in the business leads me to the conclusion that this is the kind of issue of which Securities and Exchange Commission sweeps are made. Stay informed with respect to your clients’ potential exposure and keep ahead of the regulatory curve.
Don’t fall into the trap of denial or that this question is for another time decades from now.
The immediacy of addressing the issue is evident in BlackRock’s view that “within
a decade, more than 15% of the current S&P National Municipal Bond Index (by market value) would be issued by MSAs suffering likely average annualized economic losses of up to 0.5% to 1% of GDP.”
Climate change calamity is not just another endless Washington ideological debate. It exists in many of our backyards and it requires a thoughtful explanation to our municipal bond investors.
Which brings me to my final prediction: the youngest analyst and oldest managing director in any municipal banking group will be dealing with this issue for the remainder of their careers.
Now, go read the BlackRock Report.
