Imperiled cities, mounting costs: Facing the big climate risk blindspot

As the planet warms, Annapolis, Md., faces rising seas, supercharged storms and costly damage to public and private property. Worried about the city’s ability to pay its bills, Annapolis officials recently sued more than 20 oil and gas companies, demanding financial help for the damage. The lawsuit, like those filed by other cities and states, claims the companies knew their fossil fuels would contribute to a changing climate and catastrophic impacts. 

While these suits slowly wind through the courts, financial regulators are sounding similar alarms, observing that cities and other public entities face major financial risks from a changing climate. The U.S. Commodity Futures Trading Commission (CFTC) recently joined the growing list of regulators creating committees to ponder a response to this risk. For the moment, however, they continue to prioritize solutions that reduce risks to private sector actors, promoting, for example, increased public disclosure of risks so investors can avoid harm when cities can’t make bond payments. 

As important as these private sector concerns are, the current challenge demands a bolder rethink of how our financial system approaches risk, responsibility, public entities and the public interest.

Climate change is unlike previous risks to the financial system. Because we have reached limits in our Earth’s capacity to assimilate greenhouse gas (GHG) emissions, weather-related disasters have become more frequent, severe and costly. And, unlike the dot-com bubble or the mortgage crisis, these risks are here to stay. 

Cities and other public entities are particularly vulnerable because — unlike private companies — they are geographically fixed; they cannot simply move to avoid exposure to climate impacts. They have multiple assets that are affected simultaneously when disaster strikes. At the same time, they have special responsibilities — they’re mandated to build infrastructure, supply water, provide public services and ensure the protection of natural resources. Compounding this double-whammy is a third challenge: they face severe limits in their ability to raise funds to take on these risks and responsibilities. 

Today, the physical impacts of climate change are colliding with the particular vulnerabilities of public entities. The financial risks to these entities — as both capital market participants and as guardians of our common good — are significant. And when the assets of many cities in a region are simultaneously impacted, the risks might imperil the broader financial system itself —regionally, if not nationally.

Of course, these climate risks have largely been created over time by private sector entities: major GHG emitters, such as the fossil fuel industry, and the banks, investors and insurers that invest in and underwrite them. Yet, existing measures mostly let these entities off the hook.

The U.S. fossil fuel industry pays few direct costs for their contribution to climate impacts; only a handful of states have carbon pricing initiatives, for example. The U.S. banking sector has provided more than $1 trillion in financing for fossil fuel infrastructure since the Paris climate summit in 2015. Yet, the sector’s measures to address climate risks are largely limited to promises by some banks to curb future lending to certain high-impact GHG activities and to require clients to consider low impact alternatives. Several U.S. banks have pledged to become “net-zero by 2050,” yet with few details. Some investors are divesting from fossil fuels, but investors aren’t otherwise assuming responsibilities for enabled risks. The same is true for insurers, only some of whom are avoiding underwriting and investing in GHG activities.

While public entities are forced to pick up the tab for climate disaster, they face a cruel irony: the more they need money, the harder it is to get. As regulators push to increase disclosure of climate risks, cities in climate change hotspots face credit-rating downgrades, increased insurance costs and fewer investors. Ratings agencies are warning low-lying cities such as New Orleans, for example, that climate risks could force new downgrades. Worse, many of these high-risk “blue-lined” areas are home to the same communities of color that have long been excluded from access to financing by discriminatory redlining practices. 

As policymakers and others seek to rebuild the battered economy and strengthen the financial system, they will inevitably be forced to confront and deal with this public sector climate risk.

The first step is to provide the public with a more complete picture of what these risks are and who is responsible. This picture would describe not only how cities and states will be financially stressed by climate events, but how historical and current social inequities underlie this stress. It would also detail how financiers and companies are contributing to GHG emissions. 

With this information, we can make sure entities are contributing their fair financial share to building the financial resilience of cities and states. Funds can repair damaged public infrastructure, such as utilities, and make public assets less vulnerable to climate impacts. And new takes on more traditional approaches should also be part of the financial resilience mix, including building financial buffers for cities to ensure payments to bondholders when extreme weather impacts their assets. These buffers would be similar to capital buffers that banks must establish to ensure payments to depositors when banks assume significant risks. 

This sharing of financial responsibilities will help realign the financial system to the imperatives of climate change. Still, as the health of our financial system is tied to a climate that is nearing a critical tipping point, greater alignment also depends on major GHG emitters taking rapid and ambitious measures to reduce their emissions.

Lawsuits filed by Annapolis and other cities may yet prevail, but public entities — and taxpayers — need protection from climate risk now. As lawmakers and regulators gear into action, they have an opportunity to respond boldly to this need. For the sake of our families, our economy and our shared future, let’s hope they seize that opportunity.

Anne Perrault is a senior fellow at the Georgetown Climate Center (GCC), advancing research on climate change and finance. She also consults to the United Nations on issues related to human rights, the environment and accountability to local communities. The views expressed herein are those of the author and do not necessarily reflect the views of the United Nations Development Programme (UNDP) or the GCC.

Editor’s note: This piece has been updated to correct the name of the  Commodity Futures Trading Commission.