As climate change continues to wreak havoc on the built environment in the United States, investors are often unaware of its effects. State and local governments, which issue around $ 500 billion in bonds each year, are urged to be more proactive in addressing climate change, as MarketWatch reported.
See: Climate risk hits states and local governments
Now, a new proposal from a long-time municipal bond research firm offers a suggestion to regulators focused on climate risk and seeking to encourage municipal issuers to be more direct with buyers of their bonds.
The solution: “A Climate MCDC program that allows municipal borrowers who do not sufficiently disclose their physical credit vulnerabilities due to climate change for a short period of time to officially release the related information they have,” Municipal analysts wrote. Market Analytics in a November 22 report.
MCDC stands for Municipal Continuing Disclosure Cooperation and refers to a successful 2014 initiative of the United States Securities and Exchange Commission, which offered more favorable terms to any municipal bond issuer willing to voluntarily report prior instances of non-compliance. -compliance with disclosure regulations.
As the Municipal Market Analytics report notes, “In the last month of the MCDC Safe Window (December 2014), 30 municipal issuers filed their first notices of past technical (23) and monetary (7) defaults. Even taking into account the COVID-19 pandemic, December 2014 still holds the record for the most new monthly impairments since the Great Recession. “
MMA chairman Thomas Doe has expressed skepticism about the municipal bond market’s approach to assessing climate change risk. In a series of interviews with MarketWatch in August, he called migration to the sunny states of the United States “denial”: “You may be able to live there for a short time, but it will not be a 20 years “.
See: Cities and states on the front lines of climate change are not always upfront about the risks. Does the municipal bond market care?
Defaults on municipal bonds are rare: 0.10% versus 2.25% of all corporate bonds, according to the Municipal Securities Rulemaking Board, but proponents of better disclosure, like Doe, say the risk climate is very poorly assessed. It may take just one weather event and a reluctant Congress to continue bailing out states and residents for an issuer to struggle to pay its debts.
Few other public finance observers have been so hawkish, but many share some concern that state and local issuers are not being as candid about the climate risks they face as investors might wish, whether on purpose or no.
The November 22 memo echoes much of what Doe told MarketWatch last summer: As the municipal market needs discipline, it is unlikely to come from investors, as supply and market demand are so imbalanced.
Read: “Food fight” in the municipal bond market as demand devours all supply
Investors urge issuers to disclose ‘more and better information’ about risk, but fail to impose real market discipline, analysts wrote.
Yet “industry organizations representing issuers are encouraging voluntary disclosure in hopes of avoiding a future regulatory mandate. But history suggests that efforts to obtain new voluntary disclosures may not generate the justified participation and ultimately lead to a regulatory response. “
MMA concludes its proposal by noting that there are many, often free, tools that issuers can use to quantify their climate risk. The SEC would be well within its rights to review the bond documents to see if they “adequately disclose material risks that are reasonably known to investors”; and, more broadly, to “convey your expectations in terms of disclosure”.
States are better placed to lead these efforts than local governments, writes MMA, adding: very complex data, determining how their tax bases, revenues and operations might be affected, developing resilience plans and making the appropriate disclosures, while struggling to keep or increase their respective local aid allocations as their states decide what to pay and where. “
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