The underwriters of municipal bonds are disclosing more about cities’ exposure to higher temperatures and rising seas.
Danielle Moran reports for Bloomberg
November 5, 2019, 5:00 AM EST
Investment banks have begun quietly sounding alarm bells about climate change. Their worries are showing up in the documents that accompany municipal bonds they underwrite.
When state and local governments issue debt, federal securities laws hold their bankers accountable for making sure that states and cities adequately disclose the risks bond buyers will be taking on. These might include any lawsuits a town is facing, or how the sales taxes used to pay back bondholders could fluctuate in a recession. Now many of these documents include language about climate change, hurricane risks, and rising seas. “Every bank should be asking their clients about this risk,” says Christopher Hamel, a senior fellow at Municipal Market Analytics and former head of municipal finance at RBC Capital Markets.
Bloomberg News analyzed more than a dozen due diligence questionnaires prepared by banks or legal counsels and sent to governments in coastal Florida, and over 40 official statements for prospective bond investors. About half of the questionnaires and the majority of the statements included language on storm-related risks or climate change. The questions about climate risk sometimes come from the banks or their lawyers, and sometimes from disclosure counsels who are hired by cities to prepare for a bond deal.
During the preparations for Jacksonville’s sale of $197 million in bonds in August, a disclosure counsel asked if the city had long term plans to implement projects that increased resilience against storm-related risks. Questions like that are new, says Randall Barnes, the treasurer of Jacksonville, Florida’s largest city. “We had been asked about impacts of hurricanes before, but not specifically on what we are doing for the future,” he says.
Scientists predict that global warming and rising seas could lead to more intense storms such as Hurricane Maria, which devastated Puerto Rico in 2017. Tidal flooding—already happening in such cities as Miami Beach, Fla.—could force residents to move farther inland. BlackRock Inc. says that within a decade, more than 15% of debt in the S&P National Municipal Bond Index will come from regions that could suffer average annualized losses from climate change of as much as 0.5% to 1% of their gross domestic product.
The questions asked by the banks or legal counsels in the documents Bloomberg reviewed varied in specificity. For example, before JPMorgan brought $162 million in bonds to market for Miami Beach, one of its counsels asked the officials to answer three questions that directly address climate change and its impacts on the city’s financial health. The Florida Keys Aqueduct Authority was asked by Citigroup to explain the impacts of Hurricane Irma on the utility system. Michael Carlson, JPMorgan’s head of public finance infrastructure, says that the climate discussion is “very much a part of our due diligence,” and he’s seen an “exponential increase” in disclosures in recent months.
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