Special Briefing on Climate Change, Federal Aid and State and Local Strategies

As international leaders struggle over the details of the global response to climate change, state and local governments are already facing climate risks. At the same time that they bear cost burdens from these risks, they also have the opportunity to act on the ground.

“Climate transition risk is really accelerating for U.S.-based issuers in the municipal market,”  Environmental, Social, and Governance (ESG) bond expert Nora Wittstruck of S&P Global said at a Nov. 18 panel discussion hosted by the Volcker Alliance and Penn Institute for Urban Research (Penn IUR). “This is driven by changes in federal policy direction on this issue. It's the U.S. recommitting to the Paris Agreement and also the U.S.'s participation in the global methane pledge, which was one of the outcomes of [the climate conference] in Glasgow.”

“Special Briefing on Climate Change, Federal Aid, and State and Local Strategies” explored the credit implications of increased spending on roads, power grids, and water works to make them more resilient, as well as the fiscal risks of weaning some local economies off of fossil fuel.

The discussion was moderated by William Glasgall, Volcker Alliance Senior Vice President and Director of State and Local Initiatives, and Nora Fitzpatrick, a Penn IUR Fellow and regional affairs specialist at the Federal Reserve Bank of New York. The panel featured: Wittstruck, who is Director-ESG Lead in U.S. Public Finance at S&P; Emily Robare, Vice President and Credit Research Analyst at PIMCO Municipals; Hughey Newsome, Chief Financial Officer of Wayne County, Michigan; and Tim Coffin, Director of Sustainability at Breckinridge Capital Advisors.

The Special Briefing was the 25th in a series of 60-minute online conversations featuring experts from the Volcker Alliance’s national research network and Penn IUR, along with other leading academics, economists, and federal, state, and local leaders. Special Briefings are made possible by funding from The Century Foundation, the Volcker Alliance, and members of the Penn IUR Advisory Board.

The infrastructure needed to shift from carbon is likely to require significant funding from  the municipal bond market, which Glasgall estimated has the capacity to finance at least $2.5 trillion dollars of projects over ten years.

“Munis are on the front lines of climate change,” said Coffin, who helps manage $37 billion of municipal bonds at Breckinridge. “Climates are very local and the solutions to climate are going to be very local,” he said. He said action on the climate “begins with disclosure” and with the budgeting process.

“Investment in infrastructure, relative to making an area more resilient, is expensive,” Wittstruck said. “Stakeholders have to be invested as well. So, we also need to talk to issuers about how they are communicating climate risk to their communities, how they're figuring out how to fund these.”

With respect to making the transition, she said, some public power utilities in California appear to be “ahead of the game,” thanks to the state's more stringent approach to adopting renewable energy resources.

The economic risks of transition may be more pronounced in states like Alaska and Wyoming, where the governments rely on the energy sector to generate operating funds. Such risks tend to be localized in areas like the Permian Basin in Texas, Wittstruck said. In states such as Kentucky and West Virginia, based on their “topography and the entrenchment they have with coal,” Wittstruck said, it may take longer and prove less feasible to make the transition.

In contrast, she said that localities in states with acute and chronic risks, such as Florida, with its exposure to rising sea levels and hurricanes, will need and benefit from regional planning efforts like the Southeast Florida Regional Climate Change Compact to help identify and inform their capital investments.

Investment analysts look at climate change as “a threat multiplier,” PIMCO's Robare said. While demand for municipal bonds remains strong, climate risk is being priced into the market, she said, and some bonds may become unsuitable for higher credit quality portfolios.

“Wealthier communities have more means to do some of this adaptation,” she said, citing shoreline-strengthening projects in the Hamptons, in New York, and efforts to protect water supplies in Marin County, in California. In less affluent places there's more of a tendency toward buyout or retreat to resolve environmental crises, which depletes tax bases and worsens economic disparities, she said. “There's definitely a widening berth there, and a chance for federal or state or other dollars to come in and help with those inequities.”

Wayne County, home to Detroit, faces economic challenges and opportunities from the transition of the auto industry away from fossil fuels, as well as increased risks from climate events such as flooding. Newsome said Wayne County has started to receive ESG scores from Moody's investors Service. While the county has been “rated unfavorably” over to its exposure to the automobile industry, Newsome said local officials are “very excited” about the move toward electric vehicles, which was highlighted by President Biden when he visited a local plant after signing the infrastructure bill. “The challenge is, we can manufacture those,” Newsome said. “We also have to make sure that those plants are net-zero from cradle to grave, so the impact of the production of those vehicles, not just the carbon that's emitted from those vehicles, also is positive, or at least a net-zero impact.”

Newsome said Wayne County plans to use part of the $340 million it received in American Rescue Plan Act money to start a dedicated sustainability office. He said Michigan doesn't face the risk of hurricanes, like Florida, or the risk of wildfires, like western states, but does face elevated dangers due to climate change. “We have less and less ice cover and fewer and fewer days where the Great Lakes are frozen, which means we have not just rain events but also the Great Lakes themselves are starting to rise,” he said. Wayne County currently is using $5.5 million from the state of Michigan to repair the damage from its second 500-year flood in a seven-year time span, Newsome said. “Our game plan going forward will be focused on changing our infrastructure to make sure we’ll be able to deal with the impact of future 500-year floods in the region.”

As home to one of the poorest cities in the nation, Wayne County includes minority communities that are more vulnerable and less able to adapt to climate disasters. In evaluating the county's ESG performance, Newsome said, “we have to be thinking about the environmental justice portion."