Weathering the Storm: Staying Ahead of Climate Risk in the Muni Market

New York - As cities and states deal with increased risk of damage from extreme weather conditions, the financial impact of climate change is becoming more acute. That's why it's important for investors to understand the potential impact of global warming on the municipal bond market, both now and in the future.

Weather-related events and damage are rising

From 1980-2017, each year the U.S. experienced six weather-related events that each caused at least $1 billion in damage.1 Yet over the last five years, the average has doubled to 12 a year. In 2017 alone, the U.S. was hit by 16 natural disasters resulting in at least $1 billion, tying the 2011 record.

More recently, so far in 2018 there have been major wildfires in California, and two major hurricanes in the Southeast, all with damages exceeding $1 billion. Along with the increased frequency of disasters, the damages from these occurrences have also been rising. Of the five most expensive hurricanes in terms of damages, three were in 2017 -- Hurricanes Harvey, Irma and Maria (the other two being Hurricane Katrina in 2005 and Hurricane Sandy in 2012).

Assessing risks for muni bonds

Despite an uptick in damage from weather-related events, we haven't seen any weather-related defaults in the municipal market. We believe, however, that it's important to incorporate the increased environmental risks into our investment decision-making process. We believe storm damage and rising seas, including coastal erosion, property damage from flooding, and other weather-related destruction, need to be assessed from a municipal credit perspective.

We attempt to incorporate key metrics related to the risks of climate change into the overall credit analysis of our municipal holdings. This analysis includes metric such as percentage of gross domestic product (GDP) generated in coastal areas, percentage of property values in a floodplain, recent flooding activity in the area, and whether the community has enacted any resiliency plans to combat risks from weather-related events.

For example, when evaluating coastal cities such as New York City -- where there is increased risk of flooding damage and the economy's entire GDP is generated in a coastal area -- we are looking at the measures the city is taking to mitigate these risks. New York City has a 10-year, $20 billion resiliency plan in place to protect the city's infrastructure from flooding and storm damage, and these resiliency measures are incorporated into our evaluation of the city's credit condition.