S&P data shows governments, investors ‘highly vulnerable’ to climate risk

New findings show the increasing frequency and severity of climate hazards pose growing financial risks for local government issuers in the U.S. municipal bond market, according to a report from S&P Global Sustainable1.

In 2023, the hottest year on record globally, the U.S. faced 28, billion-dollar weather and climate disasters, that caused a record $92 billion in damage, according to a National Oceanic and Atmospheric Administration report cited by S&P.

Sustainable1, a division launched in April 2021, to act as a centralized group for S&P Global’s climate risk research, announced on Monday it has created the Municipal Climate Physical Risk dataset, which tracks current and future climate hazard exposures of U.S. localities and their municipal bonds through the 2090s.

“States, cities, and towns across the U.S. are seeing an increasing frequency and severity of extreme weather events caused by climate change,” Steven Bullock, Managing Director, Global Head of Research and Methodology at S&P Global Sustainable1, said in a statement. It “poses growing risks to municipal bonds which often have long maturities and therefore higher vulnerability to the longer-term effects of climate change compared to other investments.”

Given the illiquidity and often long duration of muni bonds, investors in the $4 trillion muni market “are highly vulnerable to climate change and the potential for pricing correction due to changing insurance market dynamics, property and business losses from disasters, and raising infrastructure and emergency outlays,” according to the report.

Using the dataset, Sustainable1 found that 17% of U.S. counties, or 545 counties, face compound material exposure to two or more acute climate hazards such as cyclones or flooding through 2029 under a medium-high climate change scenario. Of these counties, slightly more than one-third will also face exposure to a chronic climate hazard such as extreme heat, extreme cold, drought or water stress, according to the report.

The 2023 wildfire event in Maui, for example, was a compound event, exacerbated by drought and intense winds generated by offshore hurricanes, according to the report.

The dataset that Sustainable 1 created provides municipal bond market participants and investors a tool to help understand exposure to the physical risks of climate change, Bullock said.

The dataset measures the climate hazard exposures for over 47,000 general obligation bonds covering more than 3,100 counties.

By 2050, 6% of U.S. counties will have material gross domestic product exposure to extreme rainfall-related flooding — a number that rises to 60% by 2090.

Two of the biggest climate hazards on the rise are drought and flooding, demonstrated by the atmospheric rivers that caused massive flooding in California earlier this year, and in fall 2023, the extreme drought in the south and Midwest and the Maui wildfire considered the deadliest in U.S. history, according to the report.

Analysts who work for the S&P Global Ratings division that issues municipal bond ratings use the U.S. Muni Bond Climate Physical Risk dataset from Sustainable 1 in determining the potential exposure of U.S. states, counties and municipalities, according to a 22-page report released April 23 on climate risks.