Like any other investment vehicle, municipal bonds come with risks. While generally considered safer than other investments, municipal bonds’ value depends on the issuer’s ability to pay interest and principal. There’s an emerging problem in the municipal bond market: issuers are avoiding climate details in and omitting climate risks in disclosures. A recent report from Ceres found:
“A third of the 60 municipal bonds sampled from the 20 highest-risk metro areas make no mention of climate or extreme weather risk in their official statements. And among the two-thirds that include a section on climate or extreme weather-related risk, most do so in boilerplate language that omits any specific information about the risks tied to their actual geography or most material threats. Issuers frequently overlook or neglect to disclose the specific perils most relevant to their location — even when those risks are well understood and already reflected in investment decisions.”
In 2005, Hurricane Katrina hit my home town on the Gulf Coast of Mississippi. It took many years to rebuild, and still over 20 years later, some places are still recovering. I use this example to illustrate how a climate disaster can reshape a region and potentially bankrupt a municipality. By avoiding climate details and risks, issuers hurt their credibility. They also lose their opportunity to discuss mitigation strategies. Institutional investors are smart folks, they are well aware of the climate risks faced by municipalities. What they may be less aware of is that municipalities plan to address those risks. Transparency and climate planning may actually increase the attractiveness of an investment opportunity. This lesson isn’t limited to municipal bonds. You can’t hide climate risks from savvy investors, but you can show concrete actions to address and mitigate those risks.
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