Hurricanes, floods and wildfires grab headlines, but municipal bond investors holding on to long-term debt would do well to keep their eyes on quieter trends like the rising number of record heat days.
It's a "slow-creep phenomenon" that prompts outmigration and that federal aid won't blunt that impact, said David Victor, a climate scientist at the University of California-San Diego, who spoke last week at a conference hosted by the University of Chicago's Center for Municipal Finance titled "The Future of Municipal Finance: Climate Adaption."
"The really big exposure … are places that are becoming uninhabitable," Victor said, noting that Qatar is at the point where it air-conditions the outdoors.
Muni investors and issuers that hold and float 30-year debt are increasingly trying to figure out how to anticipate and model the impacts of climate change.
Federal aid tends to protect against immediate fiscal fallout from extreme weather events like Hurricane Ian, and usually even brings a bit of a bounce from sales tax and rebuilding activities.
But federal aid doesn't address what climate scientists like Victor say is the longer-term trend of swaths of the planet becoming uninhabitable because of the heat.
In the U.S., "the southeast is the most heavily exposed because of the emptying-out effect," Victor said. "I'm worried about southern Texas and the south generally," he added. Analysts should look the number of extreme-heat days to get a sense of areas that may face future outmigration.
"Ratings agencies just assume if a community is hard hit, the government will bail them out," Victor said. "It's the moderate impacts that don't generate a lot of reaction" from the Federal Emergency Management Agency and Housing and Urban Development or other agencies, he said. "If they are hard hit but it's not that visible and they're being emptied out, they won't be bailed out."
So far, states like Texas and Florida – two of the most climate-exposed states in the country – not only haven't seen any migration, they have enjoyed double-digit population growth for years, according to a 2021 Brookings Institute
That's partly because FEMA and HUD have policies that "invite risk rather than build resilience," the paper said.
Of the $81 billion in total disaster grant funding that FEMA has spent since 2005, only 14% has gone to programs that advance resilience to climate-related disaster. The bulk of the money went to activities like rebuilding that "have the unintended effect of encouraging risky siting decisions and other behaviors that may discourage those best prepared to address these risks," the paper said.
There is currently a 7-1 ratio of disaster recovery to resilience funding across the federal government, the paper found.
Meanwhile, the United Nations' International Organization for Migration has said that climate migration through 2050 "is going to be the largest migration event ever in recorded history," said conference panelist David Dodd, founder of the International Sustainable Resilience Center.
It's not just a question of predicting which regions will be stressed in the future, said Tom Doe, president of Municipal Market Analytics, Inc.
"Maybe it's not so much you avoid a place for what its future is, but instead look for the opportunities for where people may go and where there may be financing opportunities," Doe said.
