The municipal bond market is confronting a reality that has been discussed for more than a decade by government and finance, but is only now being fully reckoned with on a grand scale, according to a new Ceres report.
Climate change has moved from an abstract environmental concern to a primary fiscal risk, one that threatens the foundations of municipal credit: infrastructure, tax bases, and long-term fiscal stability. That's what the nonprofit environmental advocacy group concluded
As record-breaking heat waves, wildfires, and floods become more intense and frequent, the necessity for clear, transparent, and forward-looking financial disclosure has never been more urgent, the report's authors said.
The market is struggling to keep pace, the report said, leaving municipal bond investors with a patchwork of information that fails to adequately price the risks inherent in a warming world.
"There is enormous climate risk built into the $4 trillion bond market for investors, the public issuers, cities, counties and the state," said Steven Rothstein, chief program officer at Ceres.
The report aims to highlight that risk, but also demonstrate where issuers are spending on resilience projects to lessen the impact of natural disasters.
The report analyzed 60 recent bond offerings across 20 of the most physically climate-exposed U.S. metropolitan areas revealing a market that is, at best, hesitant and, at worst, dangerously opaque regarding climate preparedness.
"As
Some borrowers are spending on projects that make their cities more resilient to natural disasters, but they are not disclosing it in bond documents, said Holly Li, director of Ceres' Accelerator for Sustainable Capital Markets program, who co-authored the report with former ASCM program director Jake Rascoff and Eunyoung Lee, senior associate in the ASCM program.
"We want to highlight the need for that information and how that information can be helpful for investors," Rothstein said.
Over time, Rothstein would also like to see issuers that are investing in resilience infrastructure rewarded with lower interest rates on the debt they issue, he said.
"What happened in Los Angeles was a real wakeup call for people: the aftermath of the fires, the bond
The
Municipal bonds had always been considered to be safe and secure, but the rating actions after the Los Angeles wildfires called that assumption into question, he said.
And it's not just what happened in Los Angeles, Rothstein said, because climate records are "being broken every day" as the number of natural disasters grows.
A full third of the bond offerings reviewed by Ceres made no mention of climate or extreme weather risk whatsoever.
Only 12% of the sampled offerings included quantitative metrics or targets to help investors evaluate how climate risks are being managed, and a mere 15% disclosed who within the municipal government is actually accountable for managing those risks, Li said.
Municipalities are, in many cases, already undertaking significant resilience investments — relocating wastewater plants out of floodplains, upgrading power grids for wildfire resistance, and reinforcing infrastructure against rising sea levels — but these critical activities are often absent from official bond statements, Li said.
Because this work is not reflected in the disclosures, the authors contend, investors are effectively flying blind.
They are unable to price in the risk reduction achieved by these projects, which means the issuers themselves are not receiving the market credit or potential interest rate advantages that should come with proactively managing and reducing climate exposure.
The reliance on boilerplate, backward-looking language — detailing past disasters rather than anticipating future exposure — is a relic of a time when the climate was considered a stable variable in financial modeling, according to the report. Today, that assumption no longer holds.
Nikolai J. Sklaroff, the capital finance director for the San Francisco Public Utilities Commission, has been at the center of this conversation for years.
The San Francisco PUC is frequently cited as a model for transparency and proactive resilience, and Sklaroff has become a prominent voice in the dialogue about how utilities can and should communicate their climate strategy to the market.
Sklaroff notes that while the market has become highly proficient at measuring traditional metrics like leverage and debt burden, it has historically failed to provide issuers with credit for the investments they make in resilience.
The San Francisco PUC has spent decades integrating climate risk into its operations, moving far beyond simple compliance to a model of resource recovery, Sklaroff said.
"We are trying to articulate to the market what those investments have accomplished in terms of alleviating risks," he said.
Sklaroff paints a picture of a utility that is fundamentally reimagining its infrastructure.
The Southeast Treatment Plant, which treats 80% of the city's wastewater, is undergoing a massive transformation, transitioning from a traditional facility reliant on 1940s and 1950s technology into a modern resource recovery plant, he said.
The plant will produce grade-A fertilizer from wastewater solids and biogas that can be reinjected into the gas pipeline.
Simultaneously, the city is engineering the facility to withstand three feet of sea level rise, a proactive measure that directly mitigates the financial risk of future catastrophic failure.
For Sklaroff, this is the story that needs to be told to the market.
"Everything we have done is to get a larger investor base," Sklaroff said. "If it means releasing the preliminary offering statement earlier or hosting more meetings with investors... Whatever we can do to gain advantage for our bonds, we will do. If that means attracting younger investors who are really concerned about climate and the impact of their investments, we think that is worth pursuing."
Li emphasizes that investors are looking for specific, location-based information, governance accountability, and measurable indicators of resilience.
They want to know who is in charge of the strategy and what progress is being made year over year, she said.
One of the more contentious issues within this debate is the
In an era where
Sklaroff acknowledges
He argues that whether an issuer calls it climate change, natural disaster resilience, or ESG is immaterial to the actual risk.
The risk exists regardless of the political climate, and the responsibility to address it falls squarely under the banner of fiduciary duty, he said.
While San Francisco remains committed to the green bond label, Sklaroff recognizes that the primary value for the issuer has not necessarily been a price differential, but the ability to attract a broader, more engaged investor base. Younger investors, in particular, are deeply concerned about the impact of their investments and are driving demand for transparency, he said.
The tension between rating agencies and issuers is another layer of this complex dynamic.
Sklaroff recalls the frustration of seeing across-the-board outlook changes in the wake of the Los Angeles wildfires even for San Francisco Bay area issuers, when his own organization has been utilizing high-tech tools and artificial intelligence-driven dashboards to monitor and mitigate wildfire risk for years.
When agencies act broadly, he said, they often set filters that ignore the nuance of specific issuer actions, relying on high-level data rather than the detailed disclosure that issuers provide.
This creates an incentive for issuers to become more vocal about telling their story to rating agencies, and to do it more frequently, moving beyond speaking to the agencies during periodic reviews ahead of bond sales, he said.
Building more transparency around climate change risk requires an internal village, bringing together not just the capital finance team but the engineers, the planners, and the operations staff who understand the tangible impacts of climate change on their systems, Li said.
Rothstein said it is a process of evolution.
The municipal bond market has long been considered the bedrock of safety and security in the U.S. financial system, and this status quo is being tested, Rothstein said.
The goal is not to punish issuers, but to create a market that properly rewards those who are taking the necessary steps to protect their communities, he said.
If municipalities are transparent about their resilience investments, the market should theoretically reward them with better pricing, thereby creating a positive feedback loop that encourages further investment, he said.
