Climate risk and credit ratings

Abstract

We find weak evidence suggesting that cities’ credit ratings reflect their climate risk exposure. Using a large sample of US cities, we test whether cities with higher exposure to physical or transition risks of climate change have lower credit ratings. We also compare the ratings of coastal and similar noncoastal cities, and run difference-in-differences tests around events that raise climate change awareness. Moreover, we study the climate risk effect within cities and at the bond level. We observe a negative association only between the Hallegatte et al. (2013) sea-level-rise measure and ratings, and this association is solely driven by New Orleans, which had already experienced a significant climate event.