Rating agency warns of climate risks

Issuers focused on boosting ESG  scores through mitigation efforts must face the hard fact that climate risk trumps being prepared. 

“There could be a point where the materiality of this risk is greater than the ability to prepare or the ability to manage it,” said Nora Wittstruck, senior director, ESG sector leader, S&P Global Ratings. “It becomes material to credit quality and could result in a change to the rating or a change in your outlook.” 

The comments came during a panel discussion being held at the Government Finance Officers Association MiniMuni conference on Wednesday. The panel explored climate issues and how ESG has transformed into a widely used industry term that still lacks a clear definition. 

“Through the course of the last eighteen months ESG has become  sort of ubiquitous in the market,” said  Wittstruck, “It could mean everything, and it can mean nothing. When we talk about it from an S&P Global Ratings perspective, we are really talking about it as a nexus to credit.”  

In September S&P offered a snapshot of how ESG is affecting corporate credit ratings. The agency took sixteen ESG-related rating actions in August with four being positive and twelve tracking negative. S&P noted that “Governance factors were the key driver in August, with nine rating actions, followed by social factors with five, and environmental factors with two.” 

Public finance also logged some negative numbers in the same report. Per S&P, “All four of August’s negative transparency and reporting-related rating actions came from the U.S. public finance sector.”   

Mitigating the effects of climate change by moving infrastructure funding to municipalities remains a point of emphasis for the Biden Administration. 

“We understand there are serious capacity issues within state and local governments to focus on climate goals and to pursue federal funding,” said Leila Barbour, deputy director, Office of Capital Markets, U.S. Treasury. “We heard there’s a real fear that this once in a lifetime federal funding will pass by and be underutilized. “

Barbour issued a reminder about the Treasury’s efforts to help municipalities tap federal funds tied to green energy efforts.   

In June the agency teamed up with the Environmental Protection Agency, Department of Energy, and the United States Department of Agriculture to host a series of webinars designed to help solve the puzzle. An Internal Revenue Service ruling announced that month allows tax-exempt and government entities to use the direct-pay program to convert clean energy tax credits into cash.   

“Our interest is responsive to the President’s multiple executive orders on climate, and then more directly on from the Treasury Department’s strategic plan, which includes a key objective of improving the resilience of the municipal securities market, including pursuing and supporting developments that reduce government borrowing costs,” said Barbour. 

The sometimes incongruous nature of ESG-tagged debt financing was also highlighted by the review of an August $706 million bond issuance that included green-designated paper by the City of Atlanta to upgrade the infrastructure and carbon-heavy operations at Hartsfield-Jackson International Airport. 

“It’s our first time having green designated bonds,” said Maria Runnells, investor relations manager, City of Atlanta. “We did that under Kestrel’s second-party opinion. In the conversations that we had with the airport, it became very apparent that they had robust investor relations engagement as well as being aware of ESG.”  

The plan for airport renovations includes adding photovoltaic panels to the roofs of sixteen buildings and reducing waste while conserving energy and water resources. 

The important role played by the Federal Emergency Management Agency along with its shortcomings was also revealed during the discussion.  “Climate is one of those things that can really create an acute event for credit quality,” said Wittstruck. “Those can really create unexpected expenditures. FEMA may step in and help you reimburse them, potentially up to 90% of those expenditures.”