Sea-level rise among climate change factors for credit agencies

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Flooding, fallen trees, and downed power lines are seen on a residential street after Hurricane Michael hit in Panama City in the Florida panhandle in October 2018.

A recent report by Moody’s Investors Service on the credit risk of sea-level rise to certain coastal cities highlights the role climate change is increasingly taking in municipal bond ratings.

Over the last four years, Moody’s and S&P Global have both acquired climate data analysis firms in an effort to provide more depth to the environmental portion of the ESG ratings.

In April S&P started highlighting the ESG factors within its credit ratings.

The climate data provided by the firms, according to the credit rating agencies, is more detailed and tailored to municipal governments compared to the more general federal data provided by agencies such as the National Oceanic and Atmospheric Administration and Federal Emergency Management Agency.

Moody’s affiliate Four Twenty Seven estimates in the report issued Sept. 17 that by 2040 rising sea levels will affect over 110 U.S. cities with a population greater than 50,000 as well as most coastal counties and every coastal state.

Four Twenty Seven places eight cities in the highest risk category: Miami Beach and Jupiter, Florida; Kenner, Louisiana; Camden and Bayonne, New Jersey; Galveston, Texas; and Alameda and San Mateo, California.

“More frequent and severe flooding from high tides and storm surges from major weather events threaten coastal economies, property values, and critical infrastructure,” the report said. “Over the next several decades, increased investment in adaptation and coordinated government responses will become essential for federal, state, and local governments to more effectively respond to sea-level rise. The scale of the challenges will make federal government leadership and funding even more vital.”

The report ranked Florida as No. 1 among the most vulnerable states with 24% of its GDP within the 100-year flood zone.

On a more detailed level, the analysis found a 100-year flood zone exposure for 90% of the economy of Monroe County in the Florida Keys, 47% for Miami-Dade County, and 30% for Florida’s Broward County.

Elsewhere, New Jersey’s Cape May County has 52% of its economy concentrated in the 100-year flood zone while the exposure is 20% for the economy of Norfolk, Virginia and 16% for Harris County, Texas.

Leonard Jones, managing director of Moody’s Public Finance Group and co-manager of local government ratings in the U.S. said the purpose of the sea-level report is to tell the market that Moody’s is taking the increased risk into consideration in its credit ratings.

“At least in the United States, sea-level rise has not resulted in any specific downgrade, but in certain places, it’s applying negative credit pressure,” Jones said, noting that the pressure is occurring in thousands of communities.

Moody’s acquired Four Twenty Seven in the summer of 2019.

S&P Global similarly acquired Trucost, another climate change data analysis firm, three years earlier in October 2016.

Lisa Schroeer, senior director at S&P, said climate risks come in two components, the immediate acute risks such as hurricanes and fires and then the longer-term risks which bring into play management and financial choices governments are making to offset or adapt to climate trends.

“This year, we put some local governments in Oregon on credit watch negative,” Schrooer said as an example of recent actions involving wildfires. Similar actions were taken with respect to several municipal utility districts in the wake of Hurricane Harvey in 2017.

Schrooer said S&P has had extensive conversations with local officials in Boston and New York about how they are addressing climate change.

“But most places that we speak with are discussing these issues,” she said. “And we try and cover that within our management when we think it's appropriate to the credit.”

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Climate change ESG Moody's S&P Washington DC
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