Climate Change and Municipal Bond Ratings

Abstract

This paper examines whether climate change risks are incorporated into municipal bond ratings. In particular, I investigate whether municipalities with exposure to sea-level rise have lower bond ratings. Using a sample of rated bond issuances from 2011 to 2020, I docu- ment a negative relationship between bond ratings and climate risk for municipalities with exposure to sea-level rise. I also test whether there is a difference in ratings between coastal municipalities and a control group of non-coastal municipalities and find mixed results. My preliminary findings suggest that this risk is at least partially incorporated into bond ratings, however, the magnitude of the effect is small.