◼ FINANCE Bloomberg Businessweek November 11, 2019
29● Thebankersin bonddealsaredisclosingcities’exposure
Investmentbankshavebegunquietlysounding
alarmbellsaboutclimatechange.Theirworries
areshowingupinthedocumentsthataccompany
themunicipalbondstheyunderwrite.
Whenstateandlocalgovernmentsissuedebt,
federalsecuritieslawsholdtheirbankersaccount-
ableformakingsurethatstatesandcitiesade-
quatelydisclosetherisksbondbuyersaretaking
on.Thesemightincludeanylawsuitsa townis fac-
ing,orhowthesalestaxesusedtopaybackbond-
holderscouldfluctuateina recession.Nowmany
ofthesedocumentsincludelanguageaboutcli-
matechange,hurricanerisks,andrisingseas.
“Everybankshouldbeaskingtheirclientsabout
thisrisk,”saysChristopherHamel,a seniorfellow
atMunicipalMarketAnalyticsandformerheadof
municipalfinanceatRBCCapitalMarkets.
BloombergNewsanalyzedmorethana dozen
duediligencequestionnairespreparedbybanks
orlegalcounselsandsent togovernmentsin
coastalFlorida,andmorethan 40 officialstate-
mentsforprospectivebondinvestors.Abouthalf
thequestionnairesandthemajorityofthestate-
mentsincludedlanguageonstorm-relatedrisksor
climatechange.Thequestionsaboutclimaterisk
sometimescomefromthebanksortheirlawyers
andsometimesfromdisclosurecounselswhoare
hiredbycitiestopreparefora bonddeal.
DuringthepreparationsforJacksonville’ssale
of$197millioninbondsinAugust,a disclosure
counselaskedif thecityhadlong-termplansto
implementprojectsthatincreasedresilienceagainst
storm-relatedrisks.Questionslikethatarenew,
saysRandallBarnes,thetreasurerofJacksonville,
Florida’slargestcity.“Wehadbeenaskedabout
impactsofhurricanesbefore,butnotspecifically
onwhatwearedoingforthefuture,”hesays.
Scientistspredictglobalwarmingandrisingseas
couldleadtomoreintensestormssuchasHurricane
Maria,whichdevastatedPuertoRicoin2017.Tidal
flooding—alreadyoccurringinMiamiBeachand
othercities—couldforceresidentstomoveinland.
BlackRockInc.saysthatwithina decade,morethan
15%ofdebtintheS&PNationalMunicipalBond
Indexwillcomefromregionsthatcouldsufferaver-
ageannualizedlossesfromclimatechangeofas
much as 0.5% to 1% of their gross domestic product.
THEBOTTOMLINE Theunderwritersoflocalbonds,whoare
responsible for ensuring that threats are adequately disclosed, are
asking more questions about the risks of hurricanes and rising seas.Thequestions askedbythebanksorlegal
counselsin thedocumentsBloombergNews
reviewedvaried in specificity. Forexample,
beforeJPMorganChase& Co.brought$162mil-
lioninbondstomarketforMiamiBeach,oneofits
counselsaskedtheofficialstoanswerthreeques-
tionsthatdirectlyaddressclimatechangeandits
effectsonthecity’sfinancialhealth.TheFlorida
KeysAqueductAuthoritywasaskedbyCitigroup
Inc.toexplaintheimpactofHurricaneIrmaonthe
utilitysystem.MichaelCarlson,JPMorgan’shead
ofpublicfinanceinfrastructure,saystheclimate
discussionis“verymucha partofourduedili-
gence,”andhe’sseenan“exponentialincrease”
indisclosuresinrecentmonths.
ThomasMcLoughlin,headofmunisatUBS
FinancialServices, saysthe turning point in
awarenesscamewhenSuperstormSandyhitthe
NewYorkareain2012.Asthestormforcedthe
HudsonRiverintothestreetsand subwaysof
LowerManhattan,WallStreetfinancierssawfirst-
handthedamagethosetypesofeventscoulddoto
cities’infrastructures,mostofwhicharefinanced
bymunibonds.McLoughlinsaysconcernwas
elevatedinthepasttwoyearsasfiresravaged
CaliforniaandhurricanesslammedtheEastCoast.
Climateriskisn’tnecessarilyshowingupin
munibondpricingyet—communitiesthataremore
susceptibletothesehazardsdon’tseemtopayany
penaltyintheformofhigheryields.Evenso,some
investorssaymanybondissuersstillaren’tdisclos-
ingenough.“Climatedisclosurehastoincrease,”
saysDanielRabasco,headofmunicipalbondsat
MellonInvestmentsCorp.“Thereis a broadtrend
todoit,butmoreneedstobedone.”Mostoffi-
cialstatementsanalyzedshowa paragraphortwo
mentioningthatclimatechangeis aninvestment
consideration.TomDoe,president of Municipal
Market Analytics, says these are usually “enough
to satisfy investors today,” but he thinks bond buy-
ers will be demanding more within the next five
years. “Vague presentations of adaptation strat-
egies and cursory actions taken will not suffice,”
he says. �Danielle MoranClimate Risk Comes to Munis
“We had been
asked about
impacts of
hurricanes
before, but not
specifically
on what we
are doing for
the future”