October 24, 2017 Read More →

Credit Analysts Cite Climate Risk

The Bond Buyer:

As hurricane-stricken states on the Gulf of Mexico face prolonged recovery from this year’s massive storm damage and California douses the remnants of lethal wildfires, affected governments must also consider ways to protect their tax bases from the long-term threat of global warming, credit analysts say.

“S&P Global Ratings believes that what previously were viewed as the credit implications associated with transitory storms must now increasingly be viewed through the lens of climate change risk,” analysts wrote in an Oct. 17 report.

Long term, analysts will take note of property exposed to sea level rise, “which exacerbates coastal flooding and increases high tides, which can reduce the property tax base many public finance entities rely on,” the S&P team of analysts led by Kurt Forsgren wrote.

The 2017 Atlantic hurricane season was described by climate researchers as “hyperactive,” and September marked the highest month ever recorded for accumulated cyclone energy, which measures the combined strength and duration of tropical storms and hurricanes, according to the National Hurricane Center. This year saw the highest number of major hurricanes since 2005.

Hurricanes Harvey and Irma did the most damage to Louisiana, Florida, Puerto Rico and the U.S. Virgin Islands, but coastal areas also had to make costly preparations in the event the storms’ paths came their way. A satellite photo by NASA on Sept. 8 showed three hurricanes, Katia, Irma and Jose, headed toward the Caribbean and Gulf of Mexico.

S&P analysts also pointed out climate change’s threats to credits far from shore.

“The higher average and extreme temperatures associated with climate change can have many effects: increase electricity loads in many regions; cause or contribute to droughts and desertification; affect crop production, soften pavement and make roadways more susceptible to wear and tear; make rail tracks buckle; and prevent aircraft from taking off under some conditions,” analysts wrote.

“The costs of mitigating and adapting to climate change could strain the debt metrics of entities responsible for financing the adaptation costs, potentially leading to downgrades,” the report said. “Alternatively, the potential rating impact of higher leverage might be neutral, if sufficiently offset by the quantifiable benefits of mitigating long-term risks associated with climate change such as long-term cost savings.”

“Planning for climate change and mitigating risks is one component to our credit analysis and our opinion regarding the adequacy of management’s plan is one of many factors that determine ratings,” S&P said.

According to global insurer Swiss Re, the financial cost of natural disasters has increased and various studies have identified climate change as a key factor for that is the growth in exposure in high- risk affected areas.

More ($): Why one rating agency calls climate change a growing credit factor

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