Cities may need to act on climate change
The Trump administration may believe that climate change is a hoax invented by the Chinese, but Moody’s Investor Services is taking it quite seriously.
Moody’s, one of the main agencies that rate the ability of states and communities to pay back money borrowed in the form of bonds, is beginning to consider how well those jurisdictions are prepared for climate extremes and instability. It recently unveiled standards they plan to use to integrate climate risks into their ratings for bond issues, pri.org reported.
Fixed-income expert Andrew Teras of Breckenridge Capital Advisors in Boston said this is just the beginning of a movement within credit rating agencies and ¿nancial advisors.
“In many places across the country, a credit rating is an important thing,” Teras explained.
“It allows cities to access the capital markets or borrow for infrastructure projects at a reasonable interest rate. The rating agencies are telling us that we are starting to move to a point where they may take action — that is, lower your credit rating — if you are not attuned to these risks. So, this could be pretty signi¿cant going forward.”
Teras’ company has already been integrating what are called ESGS — environmental, social and governance factors — into their traditional credit analysis for about six or seven years, Teras said.
“Traditional credit analysis would be when you’re looking at the riskiness of a borrower,” he explains.
“You might look at their ¿nancial statements. How much cash do they have in the bank? You might look at their debt. How much debt do they have relative to the tax base? What we do here is take those traditional credit metrics and layer on top of that this concept of ESG. So, we’re looking at a broader spectrum of risk.”
When a city issues bonds, it’s pledging to pay lenders back from the property tax base, and the property tax base is a function of overall property values. To the extent that property values decline due to increased risk of weather catastrophe, Teras explains, that can have huge implications for a city’s budget, including less money to pay back investors.
“I think a lot of folks are having to grapple with not necessarily if climate change exists, but how fast is it going to impact?” Teras said.
“And then, even if it does come fairly fast, how severe are these problems going to be and what parts of the country are going to be impacted more than others?”
Teras believes Moody’s is sending a “pretty signi¿cant message”, and his company welcomes it.
“As investors, we de¿nitely appreciate this, because the more attention paid to these types of issues, the more likely that meaningful actions are going to be taken to mitigate some of these risks,” he said.