When a Pew Research Center study highlighted the fact that a large percentage of people don’t believe humans were to blame for climate change – and nearly 20% said there is no statistical evidence of climate change – and while it is hard to blame people for not trusting media – this might have benchmarked a moment in history from several standpoints.
Not only did it point to the trend of statistical facts playing a less important role in society, but it highlighted an avoidance of an issue that, to address, required mass sacrifice. But while the general population appears avoiding the tough issue, those with money in the game are taking a different tact. A recent Moody’s report benchmarks the point in history by noting the impact on state and local bond issuers, pointing to a financial planning that considers the trend of climate change with a focus on one of the hot themes of investing which we profiled earlier today, water supplies and droughts.
Moody's breaks down financial risk from climate change into slow and fast moving categories
The trend of climate change is well documented in statistics, and Moody’s thinks understanding where it leads should be of concern to bondholders in the regions most impacted.
“Credit risks resulting from climate change are embedded in our existing approach to analyzing the key credit factors in our methodologies,” Moody’s analyst Michael Wertz and his team wrote in a November 28 report. “Our analysis of economic strength and diversity, which signals the speed with which an economy may recover, captures climate-driven credit risks such as economic disruption, physical damage, health and public safety, and population displacement.”
There are several points of climate change to consider. Moody’s breaks them down into two primary categories: slow moving “climate trends” and the more immediate and unexpected “climate shocks.”
Climate trends include slowly warming temperatures, lower precipitation or, conversely, extreme precipitation, snow cover trends, ocean acidification and rising sea level issues. Climate shocks, which sometimes share similar performance drivers with trends, include drought, wildfire, floods, and storms, for example.
When evaluating bond investments, Moody’s overlays each of the factors to determine potential impact.
Climate change to impact regions differently, with water supplies under pressure in California
When climate change hits a geographic region, it does so in differing ways. But the impact on the bond issuer’s balance sheet is nonetheless measured in a consistent fashion. Moody’s considers the impact on both revenue, in the form of impaired tax assets, as well impact on a region’s liabilities.
When a climate change disaster hits, lower tax revenue and higher expenses lead to increased debt.
Looking at large geographic regions, the Northeast is expected to see “coastal infrastructure represent the major impact.” Heat waves and risks to fisheries and agriculture are also anticipated.
The Southeast is the area most likely impacted by high temperatures. “On the current emissions pathway, increased temperatures are expected to reduce labor productivity and drive up heat-related mortalities over the course of the current century,” the report said. Major cities in the region, such as Miami and New Orleans, meanwhile, are significantly subject to sea level changes and flooding damage.
In the Midwest, agriculture is expected to be the most impacted but there is a human toll that will come to pass. “The region may also have to bear the costs of mitigation practices to offset more frequent heat waves and the impact these may have on mortality and labor productivity,” the report noted, pointing to a heatwave in July 1995 that killed 730 people in Chicago alone.
The Great Plains region is expected to see strain put on water resources, which will impact its economic output. “Reduced water supplies would also be problematic for the region’s highly productive energy sector, which generates power from oil, coal, wind and natural gas,” the report said. “Warmer temperatures may increase the intensity of hydrological droughts as water supplies become more susceptible to evaporation and increased competition for supply.”
The already hot and dry Southwest is expected to become more vulnerable to extreme heat, rising sea levels, drought, and wildfires. “This would affect states such as California, whose water supplies depend on mountain snowmelt that would become less abundant as winters become shorter, precipitation declines and reservoirs evaporate,” the report said. “These states would also become more prone to more frequent and intense droughts.”
No region escapes the wrath of climate change, but its impact in the Northwest is expected to be among the more “muted” nationally, but there will nonetheless be an impact. “Temperature increases and precipitation declines would cause forests to become more vulnerable to wildfires and insects whose numbers will be less affected by colder winters,” Moody’s said. “Although the rise in sea levels is expected to be less pronounced than for other regions, the Northwest would be vulnerable to increased ocean acidification and erosion impacting the fishing industry.”
While many may be denying climate change, Moody's is considering the trend and how it impacts bond investments.
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