Climate Risk and Credit Ratings

Abstract

We investigate whether credit rating agencies incorporate climate risk in their rating models. As climate risk is not well defined, we implement several identification strategies using a sample of U.S. cities whose creditworthiness should vary with climate risk–related disruptions to their local economies. We study the relation between cities’ credit ratings and sea level rise exposures, examine how this relation changes over time, compare the credit ratings of coastal and noncoastal cities, and run difference-in-difference tests around events that raise awareness about climate risk. We also use cities’ exposures to wildfires as a proxy for climate risk. The results suggest that climate risk is not a significant factor in cities’ credit ratings. We find similar results using a climate risk proxy that varies within cities. Cities’ endogenous responses to climate risk (e.g., reducing leverage or increasing infrastructure spending) cannot explain these insignificant findings.