In defending climate liability lawsuits brought by several U.S. communities, the fossil fuel industry is arguing that local governments are telling courts they face staggering climate-related costs but are not disclosing those risks to potential municipal bond investors.
The argument implies that the communities are trying to mislead investors. Yet interviews with experts and a review of bond documents suggest this argument has little substance.
The National Association of Manufacturers (NAM), a trade group waging a campaign against the communities pursuing climate suits, sent a letter to the Securities and Exchange Commission, asking it to investigate the municipalities’ statements about climate impacts in their bond offerings. The same claim of deception was included in ExxonMobil’s petition to a Texas court in response to the California communities’ suits.
In its letter to the SEC, NAM wrote that the lawsuits had “asserted specific impacts of climate change. Separately, these same cities and counties have issued municipal bonds in which the respective prospectuses omit the same climate-related liabilities detailed in their civil suits or state their inability to predict such future damage.”
A document search by Climate Liability News showed that many of the municipalities named in the letter, including San Francisco, San Mateo County and Imperial Beach, did indeed disclose details about climate change risks.
One Imperial Beach document discloses a 2016 Sea Level Rise Assessment that “references and finds risk of potential damage to property in the City in the event of various sea level rise scenarios. The Assessment concludes that if the sea level were to rise to certain levels, the resulting flooding would damage infrastructure and property in the City to varying degrees based on varying levels of flooding.”
The document also disclosed its climate litigation and cited Moody’s Investor Services statements that warned of credit downgrades for cities with insufficient climate change adaptation and mitigation strategies.
NAM cited only one bond offering in its SEC letter: Oakland’s disclaimer that the bond issuers could not predict the effects of sea level rise on the city, described by one expert as simple “boilerplate” language.
“Generic language like that is the norm,” Justin Marlowe, endowed professor of public finance and civic engagement at University of Washington, told Climate Liability News. “The boilerplate is adequate. The bond counselors who sign off on it are extremely conservative, not in the political sense, but in the sense that every single thing that is said there is something that will be backed up and will hold up in court.”
This week, the American Enterprise Institute, a conservative think tank that has consistently lobbied for policies favorable to the fossil fuel industry, organized a panel discussion in Washington, D.C., on climate litigation and the issue of municipal bonds. At that event, David Bookbinder, chief counsel for the Niskanen Center, called Exxon’s claims that the bond offerings had failed to disclose climate change risks “pure bullshit.”
During a short presentation, Bookbinder, who is co-counsel in a Colorado climate case that was announced the same day, displayed a slide showing disclaimer text from a San Mateo County bond offering. He said Exxon had presented this text in its filing in a Texas court as evidence the city had failed to warn potential investors of climate change-related risks. He then revealed the document’s previous paragraph, which contained details about climate change risk that Exxon did not include in its petition. He said he was “ashamed” of Exxon counsel for the omission.
Another panelist highlighted the importance of transparency in bond offerings and the risks associated with failures to disclose.
“We as institutional investors in the marketplace rely on these disclosures much more than many individual investors realize,” said Stephen P. Winterstein, managing director of research and chief municipal strategist at Wilmington Trust Investment Advisors. “If there are apparent contradictions—I’m not saying there are in these lawsuits or not. The courts are going to decide that.”
Winterstein also noted that the SEC has little regulatory jurisdiction over state and local governments, although “if fraud is suspected or discovered, it could open the doors for the SEC to investigate and become involved.”
Marlowe said the SEC would not be likely to investigate. Municipal bonds are primarily regulated through the Municipal Securities Rulemaking Board (MSRB). When the SEC does get involved in this market, he said “it’s because of wrongdoing that is very specific, and very deliberate,” such as Miami’s hiding of a municipal bond’s financial losses by shifting them to another fund.
Marlowe said investors have pressured bond issuers to include more specific disclosures about potentially catastrophic events such as hurricanes and volcanic eruptions. Now they are looking for more information about risks related to climate change impacts, such as sea level rise.
“This issue is in its infancy,” said John Miller, a water resources engineer who studies the connection between credit ratings and climate change at the Wharton Risk Center at the University of Pennsylvania. “The bond-rating companies started early, but they really don’t get into the detail that I think investors want them to be.”
“If sea level rise could eliminate part of your tax base, that is something investors worry about. That makes default on the bond more likely. So investors want to be compensated for additional risk,” he said.