Resources

[Article] Property Insurance & ESG

Triet Nguyen’s latest article in the Fixed Income Insights winter edition explains the historical reasons for the municipal market’s apparent lack of concern about climate risk. It then explores how the current property insurance crisis in several states may dramatically shorten the climate risk horizon for municipal investors.

Property Insurance: A Direct Link Between Climate Risk and Municipal Bond Creditworthiness

In September 2015, then Bank of England Governor Mark Carney gave a speech in which he famously referred to the “Tragedy of the Horizon.” He was referring to the fact that financial markets tend to mis-price climate risk because the perceived timing for such risk lies far into the future, beyond the normal investment horizon for most investors. Nowhere is this phenomenon more evident than in the municipal market, where climate risk continues to be largely ignored, even though state and local governments clearly stand on the front line for climate change impact and mitigation.

In this article, DPC DATA’s Triet Nguyen explains the historical reasons for the market’s apparent lack of concern and explores how the current property insurance crisis in several states may dramatically shorten the climate risk horizon for municipal investors.

Some article insights:

  • The cost of natural disasters at the state and local level has historically been “federalized” through federal disaster relief. 
  • Unlimited post-disaster federal transfers may no longer be taken for granted, given the ballooning federal deficit. 
  • The economic costs associated with chronic climate events, such as riverine flooding and drought, may prove to have a longer-lasting negative impact on state and local governments’ fiscal condition. Florida, Alabama, Louisiana and California are four prime examples of states facing a growing property insurance crisis.
  • Property insurance “rationing” and its potentially negative impact on local property values may well turn out to be the direct link between climate risk and municipal credit risk.

Read the full article.