Is climate change part of the bonding discussion? Ratings agencies say it is

When a severe storm blows through your area, a river floods your town, or an extended drought starts affecting the year’s crops, you’re unlikely to respond by thinking, “How is this going to affect the state’s credit rating?”

But those in the financial industry look at such things. And how a state prepares and responds to the risks posed by climate change – such as increased frequency of extreme weather events and long heat waves – can cause bond rating agencies to take actions that steer investors toward or away from your state.

So what can a state do to be perceived as a solid long-range investment? The House Capital Investment Committee was provided some food for thought Thursday, courtesy of four testifiers who have examined closely the intersection of bond ratings and climate change.

Among the key takeaways was that it’s important the state think in terms of risk and resilience when making long-range decisions on such issues as infrastructure and disaster management. And ratings agencies like it when they see a state preparing for potential difficulties, not just reacting after they happen.

Committee members were also shown examples of how other states are taking actions that are being looked upon favorably by bonding analysts.

Nora Wittstruck works for one such ratings agency. She’s the senior director in U.S. Public Finance for S&P Global Ratings.

“We believe that climate change is real, and that flooding will increase,” Wittstruck said. “That’s probably the most material risk for Minnesota. … We’ve always baked these risks into credit ratings. We’ve always talked to states about how they’re prioritizing their risks. Once we know something has been prioritized, we will regularly check in about execution.”

More than one testifier said that the Securities and Exchange Commission is increasingly asking bond ratings agencies to look at such factors as greenhouse gas emissions and climate risk when assessing a state’s stability as an investment. The commission issued a new rule about it last week.

“We don’t have an account for mitigation or prevention,” said Rep. Rick Hansen (DFL-South St. Paul). “Are some states creating a climate impact mitigation fund? There’s a difference between building levees and changing things upstream.”

Wittstruck said some states do have such accounts for mitigation and response, saying that Hawaii has a dedicated fund related to hurricanes. Peter Muller, an officer with the Pew Charitable Trust’s Fiscal Federalism Initiative, said California and Colorado are both using tools to simulate the likelihood and magnitude of wildfires over the coming decades.

“We believe economies will be disrupted by these acute impacts like floods, wildfires and drought,” Wittstruck said. “For example, we think last year’s Texas ice storm was driven by climate change.

“Your budget performance when these occur can result in higher expenditures in the short term before [the Federal Emergency Management Agency] comes in or the long term, such as if you have to repave your roads more frequently or with more resilient materials.”

Natalie Cohen, president of National Municipal Research, was asked by Rep. Dean Urdahl (R-Grove City) if the condition of a state’s infrastructure affects its credit rating.

“Yes, it does,” Cohen replied. “That’s something ratings agencies look at.”

“These effects will show up first at the local level,” Muller said. “When a shock hits, it can have a much more catastrophic effect on the town’s economy, especially if it’s a one-industry town.”