Investors know the financial risks of climate change. The public should too. | Fix

<h1>Investors know the financial risks of climate change. The public should too.</h1>
 
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Sadie Frank is a program manager at CarbonPlan, where her policy research portfolio covers climate risk and financial regulation. She is also a public voices fellow on the climate crisis with the OpEd Project and the Yale Program on Climate Change Communication.

A <a href="https://home.treasury.gov/system/files/261/FSOC-Climate-Report.pdf" target="_blank" rel="noreferrer noopener">recent report</a> from the Treasury Department’s Financial Stability Oversight Council called for financial regulators, such as the Securities and Exchange Commission, Federal Reserve, and Federal Housing Finance Agency, to release the data they use in their investigations of climate-related financial risk. It’s mostly private companies and financial institutions that are privy to this information, and they are using it in assessments that could determine the fate of cities and communities across the United States.

These climate risk assessments inform investors’ decisions about where they put their money and when they cut their losses — moves that signal which communities will survive, even thrive, under climate change. Municipalities must be able to conduct their own analyses (with publicly available data), otherwise they’re in the dark about their own prospects for survival — and what actions they need to take before it’s too late.

As a policy researcher studying this issue, I can tell you that such financial hazards are due to increase by multiple orders of magnitude. This worries investors. Concerns about climate change are already <a href="https://iopscience.iop.org/article/10.1088/1748-9326/aabb32" target="_blank" rel="noreferrer noopener">showing signs of adversely impacting</a> real estate markets in Florida, while recent wildfires have hobbled homeowners insurance markets in California. Investors are not only concerned about direct impacts from fires or hurricanes, but also the indirect threats from chronic risks like extreme heat and sustained drought. These slower, long-term dangers can whittle away a community’s tax base as people and businesses move away, or as investment dwindles.

For instance, many heavy industrial processes rely on ready access to water. If a bank determines that excessive water stress will affect certain places in the coming decades (the <a href="https://new-grist-develop.go-vip.net/equity/colorado-river-drought-indigenous-water-rights/" target="_blank" rel="noreferrer noopener">Colorado River basin</a> comes to mind), they may prohibit lending or make it cost-prohibitive to borrow money in those locations. On the flip side, the factories already operating could face large enough increases in the costs of water that they can no longer pay their debts. Put simply, too much heat and too little water <a href="https://www.nytimes.com/2021/09/02/climate/climate-towns-bankruptcy.html" target="_blank" rel="noreferrer noopener">can destabilize</a> the economic foundation of a town or county.

These situations are not hypothetical: last summer small California towns struggled to afford <a href="https://www.nytimes.com/2021/08/14/us/drought-california-water-shortage.html" target="_blank" rel="noreferrer noopener">trucking in water from miles away</a> and wildfire smoke <a href="https://www.washingtonpost.com/climate-environment/2021/08/07/fire-smoke-winthrop-washington/">devastated</a> businesses in Washington’s Methow Valley, close to my own home in Kittitas County.

Investors and banks are hiring firms to run risk assessments for each variable of interest (for instance, potential mortgage losses) using models that predict the impacts of climate change on that variable. Meanwhile, Fortune 500 companies are determining where their own supply chains are vulnerable to flooding, fire, extreme heat, and drought. These corporate risk assessments present their own threat to many communities across the country: If a large company decides that skyrocketing water costs detract too heavily from profits and moves its facilities elsewhere, workers, families, and businesses will be left behind.

<figure class="wp-block-pullquote"><blockquote>Instead of burying our heads in the cracked lake beds, we must ensure that our communities have the resources they need to prepare for the world ahead.</blockquote></figure>

Municipalities need to conduct their own analyses, but few medium- and small-sized locales have the financial, human, and analytical resources necessary. Gathering and mining the facts to make informed decisions requires highly specialized expertise and lots of computing power to reconcile complex climate information, economic projections, and city-specific metrics. While an increasing number of <a href="https://climatetechvc.org/climate-risk-is-investment-risk/" target="_blank" rel="noreferrer noopener">climate risk startups</a> and consultancies are hiring earth scientists with PhDs and paying for private data sets to serve investors and companies, most communities don’t have that kind of cash or personnel. This puts many frontline communities at a sharp information disadvantage.

Nowhere is this asymmetry clearer than in the municipal debt market. U.S. cities and counties fund their infrastructure through municipal bonds, which investors consider safe investments often lasting decades. As physical climate risks like water stress are quantified and addressed, an investor’s decision against investing in a bond, or a rating agency’s decision to downgrade a bond’s credit rating, can fuel a cycle of disinvestment that leaves already vulnerable communities with financial losses and unable to borrow money. If a city is deemed a climate risk before it can raise funds for resilience, communities will be even more exposed.

Few mayors or CEOs will say it out loud, but some municipalities and companies are <a href="https://insideclimatenews.org/news/30042018/exxon-california-cities-climate-lawsuit-bond-fraud-allegations-sec-investigation-competitive-enterprise-institute/" target="_blank" rel="noreferrer noopener">avoiding</a> risk assessments even when they have the resources, because they don’t want to raise any red flags. This is understandable, but ignoring risk just further advantages those who are already measuring it. Instead, local communities need to build resilience through better infrastructure, zoning, or economic development strategies. This requires first understanding what the threats are.

While more countries move to compel banks to <a href="https://new-grist-develop.go-vip.net/accountability/as-disasters-mount-central-banks-gird-against-threat-of-climate-change/" target="_blank" rel="noreferrer noopener">disclose</a> the climate risks to their balance sheets, the U.S. government can and should step in at the local level by providing analytical tools to local governments — this can include developing open source software and streamlining <a href="https://www.c2es.org/wp-content/uploads/2021/10/a-federal-policy-action-plan-to-accelerate-local-climate-resilience.pdf" target="_blank" rel="noreferrer noopener">access to climate information</a>. Publicly available data should form the foundation for new tools, which ideally would be built in partnership with municipalities themselves, tailored to local constraints. And they should be paired with funding for resilience, so that as municipalities quantify their risks, they are able to address them, which could in turn impact an investor’s assessment.

Additionally, a federally or state-controlled infrastructure audit, which my former research team at the Brookings Institution <a href="https://www.brookings.edu/research/flying-blind-what-do-investors-really-know-about-climate-change-risks-in-the-u-s-equity-and-municipal-debt-markets/" target="_blank" rel="noreferrer noopener">recommended</a>, would help identify and prioritize critical infrastructure, but municipalities, especially frontline communities, must be full partners in designing such an audit, collecting the data, and informing its ultimate use.

The world of finance is moving light years ahead of Congress, with profound implications for communities across the country. Instead of burying our heads in the cracked lake beds, we must ensure that our communities have the resources they need to prepare for the world ahead — a world that the financial sector is already anticipating.

The views expressed here reflect those of the author.

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