The risks — and opportunities — climate change poses to muni market

The municipal market has a big role to play in satisfying the national need for infrastructure that can protect against climate-related risks, but issuers should hurry to take advantage in case those same risks end up locking them out of the market.

“Resilience projects are going to create the greatest opportunity for the municipal market,” Tom Doe, president of Municipal Market Analytics, Inc., said Thursday during a daylong conference hosted by the University of Chicago’s Center for Municipal Finance titled “The Future of Municipal Finance: Climate Adaption.”

“The opportunity is for the banking community to interface with the issuer community to say, how can the muni market help you out with your projects?” said Doe, who sits on the center’s advisory board and helped host the conference.

Local resiliency officers need to start talking with their debt officers who connect to the bankers, he said. “That’s the opportunity the market has; whether it seizes it or not we will see.”

Physical climate hazards – the credit dangers and financing opportunities, and how investors and issuers can help respond to the nearly overwhelming phenomenon that is climate change – was the topic of several panels at the conference Thursday. It was the first in a series of Future of Municipal Finance conferences on environmental, social and governance-related investing.

While the need to upgrade or finance resilient infrastructure is clear, the market’s current lack of standards or bond pricing differential means that issuers who are exposed to climate risks aren’t facing much, if any, penalty when they borrow. At least not yet, said Doe and other panelists.

“There’s this window that exists for at-risk issuers that should be taken advantage of,” Doe said. “If you know you have the risk, you can [now] issue debt to stabilize your infrastructure, where you won’t be able to access [the market] in the future or at high costs.”

The lack of standards from regulators and ratings agencies leaves muni credit analysts “on their own,” said Emily Robare, a vice president and credit research analyst on the PIMCO Municipals credit research team.

“There is no one out there helping you, showing you how to evaluate climate risk and add it to your analysis,” Robare said. “And it’s the same with issuers – no one is walking them through that. We really need someone to take leadership and give guidance and until that happens, we’re still going to have these debates.”

Environmental or climate-related factors have now become a muni analyst’s fifth pillar of evaluation, on top of economy/tax base; finances; debt/pensions; and government management, Robare said.

“This is fundamentally different from any other category – there’s an inherent uncertainty,” she said.

Robare likened the current disordered market analysis of ESG factors to the way the market viewed pensions years ago.

“Over a 10-year period, the municipal market collectively said, ‘Oh, here’s how to look at pensions,’ and we don’t have that happening much on the climate side,” she said. “Maybe that’s because the ratings agencies haven’t stepped up like they did with pensions.”

Despite its rising prominence as an issue, climate-related risks remain one of the many pieces that fit into overall credit analysis, said David Blair, an ESG Portfolio Manager at Nuveen Asset Management.

“At the end of the day we’re trying to get a sense…of the [chances of] a credit weakening, getting a downgrade or even worse a default,” Blair said. “This is one piece that fits into that whole process of determining the value of this bond against another bond.”