If you’re interested in buying New York bonds, the state wants you to know that “climate change poses a long-term risk to the state’s finances.” This warning now appears on its bond offerings, making New York, according to the New York Times, the first state to caution investors about climate change. Sounds reasonable, right? After all Hurricane Sandy wasn’t that long ago.
Well, not so fast, say the rating agencies. A senior executive at Standard & Poor’s told the Times that he has “a hard time finding a direct relationship for climate change on New York State’s economy at this point.” Another senior executive at Moody’s explained that FEMA mitigates the risk by picking up the bill when big natural disaster events happen. In other words, investors in NY bonds shouldn’t worry too much about climate change.
So who should investors listen to – the state of New York or the rating agencies?
The fact that New York is the first state to include climate change in its bonds’ risk disclosure is not that surprising. After all, along with Mayor Bloomberg, Governor Cuomo was a prominent voice connecting the dots between extreme weather events and climate change in the aftermath of Hurricane Sandy. Back then, he said that “anyone who says there’s not a dramatic change in weather patterns, I think, is denying reality.”
Cuomo repeated this notion in his latest State of the State Address last January. “Climate change is real,” he said. “It is denial to say each of these situations is a once-in-a-lifetime. There is a 100-year flood every two years now. It is inarguable that the sea is warmer and there is a changing weather pattern, and the time to act is now.”
OK, so the political will, which we all know is a necessary condition to acknowledging climate change risks, is there when it comes to New York State. But, political will alone still doesn’t prove that climate change is indeed a risk investors should be taking into consideration. To prove that also requires economic evidence.
The best evidence is provided, not surprisingly, by Hurricane Sandy. When Governor Cuomo asked the federal government for emergency relief funds after Sandy, his request, according to Huffington Post, included $32.8 billion to help clean up the damage from the storm, and another $9 billion to help prepare for the next big one. This request showed damages to infrastructure (the Metropolitan Transportation Authority alone suffered $5 billion in damages), housing, businesses, parks and environment facilities, and so on.
Now, $42 billion is not small change even for a state with a gross domestic product of about $1.1 trillion. And this is just one example, so why aren’t rating agencies concerned about the risk posed by climate change?
It depends which rating agency you’re asking. David Hitchcock, a senior director in the public finance practice at Standard & Poor’s, told the Times that climate change was not a criterion in evaluating state finances. “I have a hard time finding a direct relationship for climate change on New York State’s economy at this point. It’s not something that’s really on our radar screen right now,” he said.
This plainspoken reply seems to be at odds with the State of New York’s own evaluation of its own risks as well as reports from Ceres, PwC, Munich Re and many others indicating how climate change risks become more and more material – as PwC puts it: “There’s broad recognition that the risk landscape has changed. Heightened turbulence is now the norm.”
Is it possible that S&P doesn’t get it? Well, everything is possible. After all, as Bloomberg reminded us last year, “securitization enabled by S&P contributed to more than $2 trillion in losses and writedowns at the world’s largest financial institutions and the collapse of Lehman Brothers Holdings Inc. three years ago, causing credit markets to seize up and leading to the global recession.” So it’s not out of the question that these guys might get it wrong here and there.
Even more fascinating is the argument made by Moody’s. Emily Raimes, VP at Moody’s Investors Service told the Times that most of the risk for local and state governments from powerful storms was mitigated by the presence of FEMA. “After Hurricane Sandy, after big natural disaster events, FEMA picks up most of the cost of the immediate cleanup and rebuilding of public infrastructure,” she said.
So here, the argument is not lack of materiality, but that the federal government provides sort of a blank check covering climate change’s damages. I’m sure Mitt Romney and others who support shutting down the agency will be happy to read this, but otherwise it brings up the question whether FEMA indeed makes it possible for states like New York to ignore the real costs of climate change.
The underlying assumption is that FEMA will always be there for New York, but will this be the case if the state continues to experience a growing number of costly extreme weather events? Another factor to take into consideration is that it takes time for FEMA checks to come in. So far, for example, it has paid only $4 billion, and this slow response could also hurt the state’s economy.
So are the rating agencies again out of touch with reality or is it that New York overemphasize climate change risks because of Governor Cuomo’s views on this matter – what do you think?
Raz Godelnik is the co-founder of Eco-Libris and an adjunct faculty at the University of Delaware’s Business School, CUNY SPS and Parsons the New School for Design, teaching courses in green business, sustainable design and new product development. You can follow Raz on Twitter.