Credit Rating Agency Issues Warning On Climate Change To Cities

Dec 1, 2017
Originally published on December 1, 2017 3:11 pm

One of the largest credit rating agencies in the country is warning U.S. cities and states to prepare for the effects of climate change or risk being downgraded.

In a new report, Moody's Investor Services Inc. explains how it assesses the credit risks to a city or state that's being impacted by climate change — whether that impact be a short-term "climate shock" like a wildfire, hurricane or drought, or a longer-term "incremental climate trend" like rising sea levels or increased temperatures.

Also taken into consideration: "[communities] preparedness for such shocks and their activities in respect of adapting to climate trends," the report says.

"If you have a place that simply throws up its hands in the face of changes to climate trends, then we have to sort of evaluate it on an ongoing basis to see how that abdication of response actually translates to changes in its credit profile," says Michael Wertz, a Moody's vice president.

Ratings from agencies such Moody's help determine interest rates on bonds for cities and states. The lower the rating, the greater the risk of default. That means cities or states with a low rating can expect to pay higher interest rates on bonds.

"This puts a direct economic incentive [for communities] to take protective measures against climate change," says Rachel Cleetus, the lead economist and climate policy manager at the Union of Concerned Scientists.

Moody's is the first of the country's big three credit rating agencies to publicly outline how it weighs climate change risks into its credit rating assessments. And it's just the latest "market-based signal," Cleetus says, "that what seemed like a far-off distant future gets collapsed into the present and that people have to start making decisions now based on what is already baked in reality for many of these places."

In its report, Moody's breaks the U.S. into seven "climate regions," based off of geography, regional economies and expected risks.

In the Midwest, "impacts on agriculture are forecast to be among the most significant economic effects of climate change," the report says.

The Southwest is projected to become more vulnerable to extreme heat, drought, rising sea levels and wildfires.

Rising sea levels and their effect on coastal infrastructure is the biggest forecast impact on the Northeast.

Communities that face a high risk of being seriously impacted by the impacts of climate change are being asked by analysts during the rating process how they're preparing for these risks, Moody's says.

Jennifer Jurato, the chief resilience officer for Broward County, Fla., says they received surveys from Moody's asking how the community and local government was responding to issues of sea-level rise and flood protection.

Broward County is the second-most populous county in the state and is part of the Southeast Florida Regional Climate Compact, which was created to prepare for and respond to climate change.

Jurato says Broward County and many communities in southeast Florida have been aggressive and proactive in preparing for the effects of climate change, creating barriers to flood waters, elevating properties, managing stormwater systems and implementing flood management programs.

But she says it hasn't always been easy to get buy-in politically. It can be difficult for a policymaker to justify a big investment when the associated benefits or risks seem a long way down the road.

Moody's announcement may change that.

"Now we've got the incentive on an annual economic basis to make the smart investments that we've been arguing for," she says. "The shorter-term economics are starting to come into play and they'll have immediate impacts on the cost of financing important community projects."

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One of the biggest credit rating agencies in the country issued a stark warning to U.S. cities and states this week. Prepare for climate change, or risk being downgraded. NPR's Nathan Rott reports.

NATHAN ROTT, BYLINE: It's hard to put a dollar amount on climate change, but it's fair to say that it will be costly. Damage to and loss of coastal property, changes in agricultural production, increased energy use - those are just some of the negative economic impacts listed in a new report by Moody's Investor Services.

MICHAEL WERTZ: Climate change also entails things like increased risk of droughts and wildfires and heat-related mortalities and heatwaves.

ROTT: Michael Wertz is a vice president and senior analyst at Moody's, and he says it's important for credit rating agencies to take all of those risks and what's being done to mitigate them into consideration when they're grading a local government.

WERTZ: If you have a place that simply throws up its hands in the face of changes to climate trends, then we have to sort of evaluate it on an ongoing basis to see how that abdication of response actually translates to changes in its credit profile.

RACHEL CLEETUS: These types of risks are now being recognized in the marketplace because they're causing multi-billion dollars' worth of damage already.

ROTT: Rachel Cleetus is the lead economist at the Union of Concerned Scientists, and she says this is a wake-up for those that think of the damages of climate change as a future issue.

CLEETUS: What we're seeing through this type of a market-based signal is that, yes, people have to start making decisions now based on what is already baked in reality for many of these places.

ROTT: Places like Broward County, Fla. Broward County is in southeast Florida, where seas are expected to rise by at least a half a foot by 2030. The county has been aggressive in preparing for that rise and the increased coastal flooding that will come with it. Jennifer Jurado is the county's chief resilience officer.

JENNIFER JURADO: We create barriers to flood waters. We elevate properties. We manage storm water.

ROTT: The point is Broward County is preparing for climate change even though it hasn't been easy politically. Jurado says it can be hard to get policy makers to back big investments when the associated risks or benefits seem to be so far down the road. That's where Moody's announcement comes into play.

JURADO: Now we've got the incentive on an annual economic basis to make the smart investments that we've been arguing for.

ROTT: That's assuming that Moody's follows through with the warning and actually downgrades a place that isn't taking similar steps. Nathan Rott, NPR News. Transcript provided by NPR, Copyright NPR.