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Environmental risks are increasingly important in evaluating the impact of climate change on U.S. state and local government bond issuers, which must adapt to and mitigate these risks, according to a Moody’s Investors Service Inc. 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.”
Global climate change is forecast to increase the country’s exposure and vulnerability to a range of factors such as severe heat, changes in precipitation patterns and rising sea levels — changes that are projected to drive an increased frequency of extreme weather occurrences, including heat waves, droughts, nuisance flooding, wildfire and more damaging coastal storm surges, the company said.
“If federal, state and local governments do not adapt, these risks are forecast to become more frequent and severe over time,” the company stated. “However, we anticipate that some level of adaptation and mitigation strategies will be adopted to lessen these impacts.”
Credit risks resulting from climate change are embedded in Moody’s approach to analyzing credit factors, including capturing climate-driven credit risks such as economic disruption, physical damage, health and public safety, and population displacement, according to the report.
“Fiscal strength, access to liquidity and levers to raise additional revenue are also key to our assessment of climate risks, as is evaluating asset management and governance,” the report said.
The report included a case study on Superstorm Sandy, which made landfall in New York City — rated Aa2 stable — on Oct. 29, 2012, and caused billions of dollars of economic damage — an impact exacerbated by the effects of rising sea levels.
“Despite significant economic disruption, the city maintained its rating and outlook following the storm due to its resilient and exceptionally large and diverse economy, solid financial position underscored by strong liquidity, and financial support via federal disaster and rebuilding aid,” the report said.
The consistency and depth of corporate climate risk reporting is likely to improve under recommendations for climate-related financial disclosures finalized in June, according to a new analysis.