Climate, Municipal Bonds, and Infrastructure

A Registered Investment Advisory Firm

Adapting To A Changing Climate January 25, 2019

Climate, Municipal Bonds And Infrastructure Patricia Healy, CFA Senior Vice President of Research & Portfolio Manager Patricia.Healy@cumber.com Š

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Rating Agencies • Rating Agencies do consider climate related risks in their analysis – Communities that are prepared to tackle sea level rise, flooding and hurricanes can attract new business and residents – Those that don’t risk economic disruption, infrastructure damage, insufficient health and safety services and population loss

• There are many other considerations – Pensions, OPEB, Cybersecurity, Affordability, Education and Healthcare spending

• Ratings are based on many items – Economy, financial and budgetary management, capital planning and security structure of the bonds

• Moody’s survey of the largest debt issuing entities – 57% have climate action plans, expect 82% by end of this year – Flooding is the dominant risk cities are guarding against ©

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Municipalities Are On The Forefront • Municipal employees are some of the first responders in a disaster • Municipalities are responsible for maintaining resilient infrastructure • Municipalities commit the bulk of capital for infrastructure in the US*

*MSRB ©

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Municipal Bonds • • • • • • •

Over 80,000 municipalities throughout the US Municipal bonds finance all types of equipment and infrastructure $3.8 trillion in total outstanding debt Various security structures General Obligation to Revenue Bonds Very high credit quality: Average is AA, Corporate Average rating is BB Very low default rate The interest earned on municipal bonds is exempt from federal taxes and state and local taxes to residents • The taxable equivalent yield or after tax return is competitive

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Infrastructure Plan • Municipal Bonds for America – MBFA.org – Coalition to educate and lobby congress

• Infrastructure Plan – America Association of Civil Engineers Report Card US D+ – Status update

• Public Private Partnerships, P3 or Project Finance

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Water and Wastewater

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Clean Water Act and Safe Drinking Water Act

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Grant funds and technical assistance

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The Ripple Effect by Ceres

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Large vs. small

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State Revolving Funds

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Access to Information • Demographic and Climate data currently unavailable due to government shutdown • Municipal Disclosure – much better than in the past – National Federation of Municipal Analysts Recommended Best Practices in Disclosure (NFMA.org) now includes climate threats and adaptation as well as Cybersecurity – Municipal Securities Rulemaking Board (MSRB) Electronic Municipal Market Access (EMMA)

• Task Force on Climate related financial disclosure – Availability of data and advanced programming enables insurers, companies, municipalities, investors and think tanks to drill down to specific assets – water supply, drought, superfund – Access to data supplied by federal government

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ESG and Impact Investing ESG - Environmental Social and Governance • Investors are more active today and see sustainability as important – Ceres, Sovereign Wealth Funds, large pension funds – CalPERS – Millennials and other individual investors want their investments to have impact

• Climate Bond Initiative – CBI Verifiers very specific ratings - there are number of companies that have cropped up

• Municipalities have issued self designated green bonds – No real noticeable difference in yield

• Municipal Impact Coalition – Green, Affordable Housing, Education

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Progress and Examples • Bloomberg Philanthropies • Governor DeSantis • CFWI

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• Miami • San Francisco seawall • Phoenix

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Florida Water Management Districts

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TA-DA! The moment you put a shovel in the ground you change the risk by providing relief to climate risk and preventing asset damage.

However, first you need to determine the risks, build a consensus, come up with a plan and then determine and execute the financing!

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Disclosure All material presented is compiled from sources believed to be reliable. However, accuracy cannot be guaranteed. Past performance is no guarantee of future results. All investments involve risk including loss of principal. Fixed income investments are subject to interest rate and credit risk.

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