What you need to know about what’s in – and absent from – Moody’s climate risk report

Moody’s Investors Service Inc.’s recent report linking credit worthiness to climate adaptation was a timely and clear wake-up call to cities and states that they must prepare for climate change.

After three devastating heel-to-heel hurricanes and a dramatic rise in damages in 2017, it’s clear that extreme weather will affect the economy and fiscal position of bond issuers in the United States – and leave vulnerable communities with diminishing access to credit just as they may need it most.

Moody’s report is a good start. But it left out critical information about disaster risk reduction measures for communities that will seek to retain their credit worthiness amid rising impacts from climate change. Without such information, states and municipalities may find it harder to decide how to prepare for rising seas and extreme weather.

When considering adaptation measures bond issuers can take to prepare for direct impacts of climate change, Moody’s focuses on infrastructure investments such as enhanced storm drainage systems and improvements to dams, levees and seawalls.

But mainstream thinking on resilience has evolved well beyond structural measures. In its report, Moody’s missed ecosystem-based disaster risk reduction approaches, for example, as well as the benefits of implementing risk-informed zoning and building codes.

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It would have been nice to see some recognition of how protecting and restoring natural infrastructure, such as forested floodplains, can reduce disaster costs. Maritime forests and forested river floodplains not only slow and absorb floodwaters and can reduce wind speeds, they can also improve water quality and serve as recreational assets.

Unclear what methods Moody’s uses

Nor has Moody’s changed the methods it uses to account for climate change in its ratings. As the agency says, such credit risks are embedded in the organization’s approach for analyzing key credit factors in its methodologies.

Without more specific information on Moody’s methods, however, it’s hard to know if they will adequately capture all negative credit risk implications.

For example, Moody’s cites property losses as a driver of lower credit worthiness – but will the agency consider declines in property values due to increased “sunny day,” or high tide, flooding? And will it account for rises in public health expenditures due to increased water pollution from flooded septic tanks or a rise in mosquito, tick and sewage-borne diseases?

More explicit information on the methods Moody’s analysts use would make it easier for communities to identify and prioritize corrective actions to improve their resilience, and to maintain or improve their credit rating.

Moody’s assumes the federal government will help. Will it?

Moody’s seems optimistic that the federal government will continue to provide significant support to local communities in the wake of disasters. While this could be the case, it is also quite possible that reforms of federal disaster assistance will place greater responsibility on states, communities, businesses and individuals to shoulder such costs.

The head of the cash-strapped Federal Emergency Management Agency recently told Congress as much.

“It’s time to question what is FEMA’s role in disaster response and recovery,” said Brock Long, the agency’s administrator, while also noting that “it’s time to hit the reset button on how we become resilient.”

Unclear how Moody’s measures “preparedness”

Finally, Moody’s report says that as it rates local governments that face higher risks of climate shocks, their analysts will specifically ask about their “preparedness for such shocks and their activities in respect to climate trends.” It’s unclear, however, how the effectiveness of such preparedness will be evaluated.

Some standards to guide communities would help. It seems that independent expert assessment of whether those efforts were inadequate, sufficient or exemplary would be necessary.

What Moody’s got right – and where to go from here

The ratings agency does recognize the role carbon dioxide emissions plays in our warming climate, presenting summary evidence of climate change and its connection to natural disaster frequency. Moody’s demonstrates that the economic effects of climate change are real, and that they will increase over time and vary by region.

Moody’s outlines four main climate change risks: physical damage, economic disruption, health and public safety, and population shifts. It then shows how each has negative credit implications. Each point is illustrated with examples of how extreme weather has already affected local economies by increasing expenses, debt, and weakening their revenue base.

That’s a good start, but as we’ve seen, Moody’s will need to get back to cities and states with more detail – before we see bond ratings begin to slip and it becomes even more challenging for communities to invest in their future.

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