Ceres offers guidance on disclosing climate, adaptation risks

Ceres

The Ceres Accelerator for Sustainable Capital Markets laid out its case for better climate-risk disclosure from municipal bond issuers in a report released Tuesday.

While the rating downgrades and outlook revisions in the wake of January's Los Angeles-area wildfires weren't the impetus behind the report, their level of destruction was another example of the dramatic growth in climate risk and the need for better disclosure, said Steven Rothstein, the accelerator's managing director.

The Ceres Accelerator, a center within the larger nonprofit sustainability advocacy group, "aims to improve the practices and policies that govern capital markets to reduce the financial impacts of climate change and promote opportunities associated with these changes," according to its website.

"Investors who are buying bonds with 20- or 30-year maturities want to know they are going to get paid back," Rothstein said. "There is not consistent climate information in bond disclosure today."

The Los Angeles Department of Water and Power bonds, on both the power and water side, experienced widening spreads during the height of the region's wildfires. More than 16,000 homes and businesses were destroyed by the wildfires on the county's east and west sides sparked and whipped into a frenzy by 80 to 100 mile-per-hour winds.

The report also noted that redevelopment bonds issued by the city of Paradise in northern California, which was nearly wiped out by the 2019 Camp fire, could be the first bond default related to climate risk. The city defaulted on over $5 million in redevelopment agency bonds in 2023 after depleting its reserve fund.

Rising sea levels, hurricanes, floods, wildfires and extreme heat increasingly threaten municipal revenues, while creating significant adaptation costs, and investors want more assurance that they will be paid back as risks grow, Rothstein said.

A 2024 National Oceanic and Atmospheric Administration report found that there have been 403 weather and climate disasters since 1980 with overall damages of more than $1 billion and with a total cost over $2.9 trillion, according to the report.

"In the 1980s, we were having a $1 billion storm every three months, and now we are having them every two weeks," Rothstein said. "The number of storms has grown and the severity of storms has grown."

State and local governments have been called the first responders to the escalating risks of costly heatwaves, floods, drought and storms, according to the Ceres report.

"These disasters aren't isolated threats — they are growing material financial risks for public sector organizations nationwide," according to the report. "As global temperatures climb, the cost of repairing damage and rebuilding and adapting infrastructure and assets will be significant."

Good climate risk disclosure may become the "price of admission" to capital market access, according to the report. "Strong disclosure is an opportunity to own the narrative on their preparedness, as well as a means to be better prepared organizationally to meet those risks."

Ceres is not the first to say investors should be more selective about buying bonds from municipal issuers that don't disclose climate risks.

Municipal Market Analytics said in a report in 2024 that bondholders can start to assume that any lack of disclosure related to the "constant, widespread reporting of climate change perils" belies a lack of issuer consideration of these risks.

Every public sector organization will have to make investments in resilience; and these investments will need to be funded in part by issuing municipal bond debt and will require ongoing access to the capital markets, Rothstein said.

The report outlines guidance and best practices for how local municipalities can disclose their risk mitigation and climate adaptation efforts.

Ceres recommends issuers closely follow the Governmental Accounting Standards Board's evolving standards related to recording material events in financial statements and include discussion in the management discussion and analysis section of key material climate risks.

It contends bond offering documents should contain a description of past materially impactful past weather events, classification of the risks and a clear statement of how climate risks could impact payment of debt services and detailed information of natural disaster resilience planning.

It lauded Miami-Dade County's water enterprise for the disclosure it included in its official statement when it issued revenue bonds in 2024 and the city of Boston for the disclosure on climate risks included in its offering documents when it issued 2023 general obligation bonds.

Ceres also recommended that issuers with over $1 billion in outstanding debt produce a stand-alone report on climate risks and adaptation measures.