The municipal bond market has staged a strong, somewhat unexpected rally in 2019, but faces growing risks from climate change, according to a growing number of investment firms.
“Extreme weather events pose growing risks for the creditworthiness of state and local issuers due to impact of those events on local GDP which could reduce GDP growth of affected metropolitan areas by 0.5% to 1%,” BlackRock has warned.
Moody’s climate intelligence unit, Four Twenty Seven Inc., in which it holds a majority stake, reports that rising temperatures, “if significant enough, now and over the ensuing decades … have the potential to lower revenue, increase expenses, impair assets and increase liabilities and debt.”
The impact, of course, will depend on the strength of the economies affected and the costs of emergency responses and mitigation efforts, but the growing risks are something that all municipal bond investors, analysts and portfolio managers have to think about to a greater degree than previously, says David Alter, a portfolio manager and co-head of municipal bond research for Goldman Sachs Asset Management.
Despite fire risks in California and in other states and municipalities affected by devastating fires, floods or extreme heat, muni bond prices have not been affected significantly. “The marketplace has not discounted” these risks in places where it probably should,” says Alter, adding that the rating agencies also are not doing enough analysis of the climate risks that municipalities face.
“Ratings agencies talk about climate risks, but I’m not seeing that reflected much in their ratings or views on securities packages,” he says.
This year could be a turning point, however. It could be “the first time [that] climate change risks will be priced into some bonds … the most directly affected bonds,” says Matt Fabian, a partner at Municipal Market Analytics.
“There is so much pervasive interest in climate change risk in the muni industry on the asset management side that it’s only a matter of time when it becomes apparent in prices.”