Muni investors and issuers evaluate climate risks

BY SourceMedia | MUNICIPAL | 11/18/21 03:06 PM EST By Kelley R. Taylor

In a briefing Thursday on state and local finances, industry and local leaders agreed that climate change presents both possibilities and challenges for the municipal market.

?One of the themes that we really try to hammer home with our clients...and stakeholders...is that the municipal market is on the frontlines of climate change,? said Timothy Coffin, director of sustainability at Boston-based Breckinridge Capital Advisors.

?From that I mean both from a risk standpoint and from an opportunity standpoint,? added Coffin, who says that Breckinridge manages about $37 billion of municipal bond assets.

The briefing was sponsored by the Penn Institute for Urban Research (IUR) and the Volcker Alliance, with funding from The Century Foundation. Though it is part of an ongoing series, Thursday?s discussion focused on the financial impact of climate change on state and local governments.

Looking at that issue through a credit lens, but from the investor perspective, Emily Robare, vice president and credit risk analyst at PIMCO Municipals, talked about factoring in climate risk when deciding what bonds to buy or to hold.

Acute risks, like natural disasters, ?have always been happening,? Robare said. ?It?s just that climate change, we look at as a threat multiplier, so it is worsening these.?

?What this really comes down to is that our communities and our cities were built for a different time period," she continued. "And so we?re having to think how can we adapt and how can we manage these changes."

As a result, Robare says that PIMCO is focused on risks that communities are facing and ?what is being done from an adaptation perspective.? For issuers, this is where market disclosures take on added importance.

?[The disclosures being provided to the market] are your chance to tell your story--what are you doing about these risks?? Robare said. ?A lot of us access third party data...on what risks specific communities might be facing, but what is being done at the individual level is not always as readily available.?

Other speakers agreed that local communities and perspectives are key to addressing climate risk. ?We all recognize that climate is very local and that the solutions to climate are going to be local,? Coffin said.

Hughey Newsome, chief financial officer for Wayne County Michigan, which encompasses the city of Detroit, noted that the county, as an issuer, has just started to receive its first ESG, i.e. environmental, social and governance, scores.

ESG represents a body of strategies for sustainability in investing.

?Moody's did walk ...a couple of us through where we stand in terms of the E, the S, and the G in ESG...and one of things that was prevalent..was our adaptability and our exposure,? Newsome explained, noting that the Wayne County was rated unfavorably on carbonization because of its automotive industry.

Newsome said that the county hopes to use American Rescue Plan Act (ARPA) funds to launch a sustainability office. That office would look not only at adaptation but also consider how to transition away from carbon, move manufacturing to net zero, and spur local investment in the creation of electric vehicles.

Wayne County has also experienced two 500-year floods in a 7-year time span and is facing rising levels in the Great Lakes. As a result, Newsome says that they will focus on changing existing infrastructure to deal with impacts of future floods and ?talk about what [sustainability] looks like in the region.?

Newsome, who was formerly the CFO of Flint, Michigan, described the city of Detroit as one of the ?poorest in the country.?

?Because of that, we always have to be mindful of the ?S? portion of ESG,? Newsome explained. ?Ratings agencies have communicated to us that they are looking at...how well we are dealing with disparities in health and access and disasters such as floods,? Newsome said.

Consequently, Newsome emphasized that adaptation cannot just focus on weather disasters.

?We also have to think about the environmental justice portion of that for our constituents?[for example,] how we take care of those that are disproportionately impacted from such events and make sure that we?re addressing that and have plans to address that,? Newsome explained.

Coffin echoed that ?climate issue[s] can magnify existing credit issues--particularly for distressed communities,? but also said that investors often ask, ?why should I care about climate risk if my bonds are going to mature in 5 years??

In response, Coffin pointed out that the municipal market enjoys strong investor confidence. ?So ?viability of the market over the long term is key,? Coffin said. ?So when we say that munis are on the frontlines of climate risk from a credit standpoint, that?s something that I think we all need to be paying attention to.?

Overall, Coffin and the other briefing panelists agreed that much of the infrastructure from the $1trillion bipartisan bill signed by President Biden Monday, is going to be addressed at the local level.

As a result, Coffin reiterated, ?the U.S. municipal market can be an incredibly powerful lever in U.S. climate action.?

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

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