This is huge news.
Moody’s Investor Services, one of three major credit rating agencies, released an important report in November – Evaluating the impact of climate change on US state and local issuers – which cities, states and sub-national governments should take seriously. Note to local governments: step up your action to protect your cities and regions from climate change shocks – or risk financial consequences.
A city or region’s credit score affects its ability to receive bonds, which they pay back with interest to creditors over time. In the past, extreme weather events, like hurricanes, floods, and fires, have downgraded credit ratings after the fact, but now, it could happen before-hand based on risk.
This will be a growing negative credit factor for issuers without sufficient adaptation and mitigation strategies.
In a press release, they write:
Moody’s analysts weigh the impact of climate risks with states and municipalities’ preparedness and planning for these changes when we are analyzing credit ratings.
In other words, local governments need to plan for and prepare for climate shock events, like the extreme weather events that may come more frequently with greater and more costly damage than ever before.
In addition to loss of life and threats to public health and safety, these events present a multitude of challenges in the form of compromised crop yields, economic disruption, damage to physical infrastructure, increased energy demand, recovery and restoration costs, and the cost of adaptive strategies for prevention or impact mitigation. These challenges can result in lower revenue, increased expense, impaired assets, higher liabilities and increased debt, among other effects.
The report uses the example of Hurricane Katrina as an example of how climate change can affect a city’s ability to recover from a climate shock: the city of New Orleans revenue declined significantly and a large proportion of its population was displaced after Katrina.
Six indicators are used to assess the susceptibility of an area to the physical effects of climate change:
- The proportion of gross domestic product (GDP) coming from coastal areas
- Total damage from hurricanes as a percent of the state’s GDP
- The number of coastal county dwelling units within the 100 or 500-year floodplain
- Total damage from non-hurricane weather events – including freezes, floods, droughts, wildfires and inter storms – as a proportion of GDP
- The number of non-coastal county dwelling units within the 100 or 500-year floodplain, which indicates risk of flood exposure
- Total proportion of GDP coming from agriculture, forestry, hunting, fishing – which indicates risks to these industries from climate change
As a result, they indicate that coastal communities in Texas, Florida and Mississippi are particularly vulnerable to being downgraded if they do not step up their climate adaptation plans. Adaptation can include converting to renewable energy among other actions, and mitigation could include upgrading infrastructure such as storm drainage systems, seawalls and dams.
A blog from Environmental Defense Fund remarked that while Moody’s focused on the importance of enhancing infrastructure, they failed to explicitly mention the importance of protecting natural infrastructure – forested floodplains for example – and the role it plays in mitigating damage from extreme weather.
On the other hand, Moody’s risk analyses do consider the proportion of GDP coming from forestry, fisheries, hunting and other activities dependent on natural resources, which implicitly assumes protecting them is important.
An article at Bloomberg mentioned that Moody’s may be too optimistic as to cities’ desire to adapt to climate change.
On the other hand, with 67 city mayors signing the Chicago Climate Charter that Rahm Emmanuel started, and the regions joining the We Are Still In movement, we at Path to Positive believe we can continue to motivate cities to make positive changes in their communities for financial, as well as myriad other reasons.
Are you in?
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