In 2023, the hottest year on record globally, the US faced a record-setting number of billion-dollar weather and climate disasters: 28 in total, causing at least $92.9 billion in damage, according to the National Oceanic and Atmospheric Administration (NOAA). Some of the most severe climate events included atmospheric rivers that caused massive flooding in California, a months-long extreme drought in the South and Midwest, and a wildfire on the island of Maui in Hawaii that NOAA reported was the deadliest fire in the US in more than a century. Climate change continues to raise the frequency and severity of extreme weather events. In this blog, we will explore what climate challenges US cities, counties and locales face, and what exposure to climate hazards means for their municipal bonds.
The increasing frequency and severity of climate hazards mean rising financial risks for local government issuers in the $4 trillion US muni bond market. Given the illiquidity and often long duration of muni bonds, their investors as well are highly vulnerable to climate change and the potential for pricing correction due to changing insurance market dynamics, property and business losses from disasters, and rising infrastructure and emergency outlays.
The S&P Global Sustainable1 Municipal Climate Physical Risk dataset quantifies climate hazard exposures for US local governments and their general obligation bonds, spanning more than 3,100 counties, all 50 states, and 47,000 general obligation bond issuances. It covers nine climate hazards (extreme heat, extreme cold, wildfire, water stress, drought, coastal flood, fluvial flood, pluvial flood, and tropical cyclone) across four climate scenarios (SSP1, SSP2, SSP3, SSP5), averaged for decadal time periods from the 2020s through 2090s. The dataset includes contextual scores describing the relative exposure of a region to climate change hazards in relation to the US overall as well as globally, and exposure metrics calculating the percentage of a region’s GDP and population exposed to climate hazards. Calculation of hazard metrics and global exposures for state and county governments and their muni obligations are consistent with S&P Global Sustainable1’s corporate climate physical risk dataset.
A high-level analysis of the dataset indicates that about 17% of US counties, or 545 counties, are projected to have compound material exposures to two or more acute climate hazards during the 2020s, under a medium-high climate change scenario (SSP3-7.0). Of these counties, slightly over one-third will also face exposure to a chronic climate hazard, most often water stress. Acute climate hazards refer to event-driven hazards including cyclones, floods, extreme precipitation and wildfires. Chronic hazards include extreme heat, extreme cold, drought, and water stress.
Compound exposures to physical climate hazards are of particular concern as hazards can interact with each other and with human systems and responses in complex ways, amplifying negative impacts. The 2023 wildfire event in Maui, for example, was a compound event exacerbated by drought and intense winds generated by offshore hurricanes.
By the 2050s under the medium-high scenario, the percentage of US counties facing compound acute hazard exposures rises to 21%. Coastal flooding begins to markedly accelerate in the 2050s, while pluvial flooding intensifies in the West and Southeast US. Nearly every county (98%) facing compound acute exposure is projected to also face one or more chronic hazards, typically drought or water stress. While the data doesn’t specify whether these hazards will be concurrent or sequential, or whether hazard interaction in a given area will intensify a given hazard (for example, whether prolonged drought will increase wildfire intensity), current and future adaptation investment will need to anticipate higher frequencies of both chronic and acute hazards as well as the potential for even greater compound impacts.
Dynamic heat maps generated from the S&P Global Sustainable1 Municipal Climate Physical Risk dataset allow us to see how the distribution and intensity of climate hazards may evolve throughout the US, and which regions face the greatest potential for damages now and in the future.
Knowledge of what climate challenges different localities face in the near- and medium-term is essential information for a wide range of stakeholders, from local officials and policymakers to property owners to muni bond investors. Quantifying the severity and type of climate physical risks a locality faces can help indicate whether its climate adaptation plans are commensurate with what hazards the area may face, and if enough funding is in place to help the area prepare. Ultimately, more transparency into US issuer climate exposure is a first step in directing capital where it is most critically needed.
This piece was published by S&P Global Sustainable1 and not by S&P Global Ratings, which is a separately managed division of S&P Global.