Climate Change to Be an Increasing Credit Factor

The increasing effects of climate change are expected to incur an economic impact on U.S. state and local governments, according to a new report from Moody’s Investors Service. Climbing global temperatures and rising sea levels will be a negative credit factor for those without sufficient adaptation and mitigation strategies, the ratings agency said.

“While we anticipate states and municipalities will adopt mitigation strategies for these events, costs to employ them could also become an ongoing credit challenge,” said Michael Wertz, a Moody’s vice president. “Our analysis of economic strength and diversity, 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.”

Moody’s credit analysis takes into account the effects of climate change when analysts believe that a meaningful credit impact is highly likely and will not be mitigated by issuer actions, even if it is years in the future. The report makes a distinction between climate trends, which are shifts in climate that take place over decades, and climate shock, which includes extreme weather events such as natural disasters and floods that are made worse by climate change. Extreme weather patterns can create economic challenges from smaller crop yields, infrastructure damage and higher energy demands.

“U.S. issuer resilience to extreme climate events is enhanced by a variety of local, state and federal tools to improve immediate response and long-term recovery from climate shocks,” Wertz said.

The ability of local government to mitigate credit impacts can be affected by the availability of state and federal resources. Municipalities can benefit from disaster aid provided by the Federal Emergency Management Agency to assist in economic recovery. The preparedness and planning of municipalities is weighed with the impact of climate risks when Moody’s analyzes credit ratings. Analysts for municipalities that have higher exposure to climate risk also focus on current and future mitigation steps and how those steps affect the issuer’s overall profile, Moody’s said.

– Adam Fusco, associate editor

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