This article from The Wall Street Journal considers what happens when climate change meets the bond market, which in the U.S. alone currently amounts to $4 trillion in municipal bonds plus another $12 trillion in mortgage-backed bonds.
"For centuries, bond investing has boiled down to forecasting two things: which way interest rates are going to move and how likely a borrower is to repay its debts. A handful of startups are betting that to predict repayments in the future, bond analysts will need better data on something they’ve long overlooked—climate risk. The new firms are competing to design algorithms that can predict the likelihood of natural disasters hitting specific towns, industrial parks, even individual buildings, and how much damage they could do. That could become more relevant if wildfires, floods, storms and drought strike more frequently and with greater severity, creating potential new losses for holders of municipal, corporate and mortgage-backed debt. ... 'Eventually this chicken is going to come home to roost,' says the firm’s [risQ's] 34-year-old Chief Executive Evan Kodra.... Paradise, Calif., which was ravaged by the 2018 Camp Fire, disclosed in a March regulatory filing that one of its agencies may default on a $4.8 million bond next year. The town received $219 million from a settlement in 2020 but said it plans to use those funds to rebuild infrastructure instead. ... Over and over, risQ’s model showed that bond markets weren’t discriminating between municipalities with very different climate risk. A school district near California’s wine country has five times the wildfire property-damage risk of a school district a few hours north of Sacramento, for example, but their bonds trade at identical yields, according to risQ research."
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