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Muni Bond Risks Vary with Climate Threats and Resilience

September 23, 2022

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Changes in climate may pose major challenges for local municipalities and test the resilience of society, infrastructure, and capital markets. Some geographical locations are more at risk.

Muni bond issues cover periods of decades. Over 30 years, just like a family home financed by a mortgage, neighborhoods and municipalities can both experience meaningful changes. For the next 30 years, from 2022 to 2052, these material changes include changes in climate – shifts in weather patterns, levels of water in sea and rivers, winds, risk of fires from droughts and higher temperatures – and will test the resilience of our society, infrastructure, and capital markets.

Muni bonds can finance new buildings – like college campus expansions and new hospital centers for research and patient care. Muni bonds that address climate risks include funding for real estate projects that achieve leadership in energy and environmental design (LEED) certification (Certified, Silver, Gold, Platinum), which aim to reduce energy consumption and greenhouse gas emissions, as well as more efficient water and waste management.

Some K–12 school districts use muni bond financing to build and implement solar technology, resulting in lower energy costs and increased energy self–sufficiency. Installing solar panels in schools also has an educational component, resulting in students being better informed and aware of energy consumption and resources.

In some cases, the energy savings from school solar generation can be passed on to the whole community, helping to lower electricity bills and making room for other expenses that can enable better learning outcomes1. These factors are built into the HIP Ratings and VanEck investment process applied in the VanEck HIP Sustainable Muni ETF (SMI).

Muni bonds finance local and regional infrastructure – upgraded roads, cleaner energy, and recyclable water facilities. Muni bonds that address these sustainability challenges are increasingly popular with investors, as they can reduce future risks and shocks from factors including navigable highways in extreme weather events, unexpectedly volatile energy prices, and increasing water scarcity.

These climate challenges are present today and are increasing. Flash floods and regional fires considered 1–in–100–year events are increasing in frequency and intensity. Thus, in muni bond timeframes of multiple decades, savvy investors can choose to allocate to geographic areas that may encounter fewer risks and scrutinize areas where higher risks are expected.

In the U.S. national map, based on HIP Investor’s Climate Threat Resilience Ratings of 3,100 counties2, the redder areas are higher climate risk and lower resilience, whereas the greener areas are lesser climate risk and enhanced resilience. Risks are rated according to HIP’s analysis of the U.S. Environmental Protection Agency (EPA) evaluations and projections of the impacts of future weather and climate events; resilience is rated based on analytics from the Sabin Center for Climate Change Law at Columbia University.

The south and southeast regions of the USA face many future risks, and local and state policies are lagging in pursuing and financing resilience.

Granular HIP Climate Threat Resilience Ratings for 3,100+ Counties Indicate Future Risks and Readiness for Climate Action

Map of USA - Granular HIP Climate Threat Resilience Ratings

Source: HIP Investor Climate Threat Resilience Ratings; US EPA; Sabin Center for Climate Change Law at Columbia University. As of 2021.

The states of Texas and Florida account for 9.40% and Florida 4.24% of the ICE US Broad Municipal Index (MUNI) yet have been generally slow – or even antagonistic – to climate action. Detailed maps of Texas and Florida show that most of the counties in those states need climate–related investments. States with lower household income and lower tax rates, like Mississippi, Alabama, and Louisiana, also face many climate risks that are not yet being addressed sufficiently.

Most Counties at Risk in Texas and Florida Green Bonds Could Target Less Risky Areas

Map of Texas - Granular HIP Climate Threat Resilience Ratings


  • 100 of 250 counties (or 40%) rate above the 33% hurdle rate.
  • 3.9 million people in better positioned counties.
  • Brownsville (southeast Texas), Laredo (southwest Texas), and Waco are less risky.

Map of Florida - Granular HIP Climate Threat Resilience Ratings


  • 10 of 54 counties rate above a 50% hurdle rate.
  • 300,000 people in better positioned counties.
  • Gainesville, Panama City, and Inverness are less risky.

Source: HIP Investor Climate Threat Resilience Ratings; US EPA; Sabin Center for Climate Change Law at Columbia University. As of 2021.

In the Midwest, additional green–stormwater infrastructure is needed, especially as many major cities and metro areas have high proportions of impervious surfaces like roads, parking lots, and highways.

In the Great Lakes Basin, Cities with the Most Impervious Surfaces Need Green Stormwater Infrastructure

Map of Great Lakes Basin Cities - Granular HIP Climate Threat Resilience Ratings

  • Minneapolis
  • Chicago
  • Detroit
  • Cleveland
  • Pittsburgh
  • Buffalo
  • Philadelphia
  • New York City

Source: HIP Investor with ECT Inc. As of 2021.

The VanEck HIP Sustainable Muni ETF (SMI) incorporates HIP’s Climate Threat Resilience Ratings into the bond evaluation and selection investment process. Muni bond issuers in the bottom–third (33%) of these ratings are excluded from consideration due to the risk of principal loss or potential degradation in the probability of timely and reliable bond interest payments; insurance is not sufficient to cover these major climate risks.

Only the top two–thirds (67%) are eligible for investment in SMI, which can reduce future risk related to climate and enhance the potential for solutions that contribute to mitigating climate risk, adapting to climate change, and supporting bonds that achieve meaningful climate action – all components of stronger, resilient fixed income portfolios.

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