Climate considerations can have an impact on the credit quality of municipal bond issuers, analyst Alan Schankel explains.
A recent report from Pew Trusts and Stateline, Climate Change Could Make Borrowing Costlier for States and Cities,
is a reminder that climate considerations can have meaningful impact on the credit quality of individual municipal bond issuers. Most individual investors rely on ratings from Moody’s, S&P, Fitch, and/or Kroll to assess a state or local
government issuer’s credit quality. Rating agencies are increasingly including environmental considerations in rating decisions. We reviewed rating agency state and local government methodologies, but found few references to climate or weather
factors. The nature of the risks and challenges posed by climate change to public finance issuers do not translate into measurable data that can be easily incorporated into credit evaluation. Raters do consider climate risk and events in their rating
decisions, but typically not in measurable, quantifiable ways.