How Better Climate Data Can Help the Municipal Market
Climate risks pose a potential threat to the creditworthiness of many debt issuers – particularly in the $3.8 trillion US municipal bond market. Scenario analysis based on standardized climate models can help to clarify the impact of global warming on credit risks and investors’ confidence.
LONDON – The COVID-19 pandemic has heightened awareness of the possibility of “green swan” events and the opportunities for greater foresight regarding both chronic and acute risks, including those related to climate change. Scenario analysis, using future climate projections from standardized models, may thus become increasingly relevant as another source of information to support risk evaluation.
More specifically, scenario analysis and better data may help to improve our understanding of the longer-term challenges facing municipal bond issuers in the United States, and help to inform the analysis of the possible climate threats faced by US towns and cities. More information could enable issuers to demonstrate the strength of their climate adaptation and resilience strategies, their risk-mitigation measures, and how such measures might be funded – all of which could contribute to more (and more comparable and useful) disclosure.
Such efforts are important, because climate risks may be increasingly relevant to many US municipal issuers. In our view, consistent disclosure of these risks has been lacking for some time in the $3.8 trillion US municipal bond market. Alternative data may bring into sharper focus the areas where physical climate risks may be more pronounced, and encourage greater awareness of the benefits of enhanced and more comparable disclosure.