AAA Spark Meeting of the Regions

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City Climate Disclosures and Municipal Bond Ratings

Fri, June 2, 3:30 to 4:30pm, Virtual, TBA

Abstract

Do voluntary climate disclosures affect municipal bond ratings? Cities play a critical role in determining the trajectory of climate change. The major rating agencies have affirmed their use of climate information in their credit evaluations as well as indicated their preference for cities that safeguard against climate risk. Drawing on information, voluntary disclosure, legitimacy, and signaling theories, this study investigates whether the presence of city climate disclosures and the quality of such disclosures increase the municipal bond rating. Additionally, using both legitimacy and signaling theories, this study examines the moderating effect of disclosure quality on the relationship between voluntary disclosures and municipal bond ratings. For purposes of this study, disclosure quality is defined in terms of a city’s climate action, specifically mitigation and adaptation factors. The study expects to find that voluntary climate disclosures have a positive impact on municipal bond ratings. This finding suggests that rating agencies use climate information in their rating evaluations and respond to voluntary climate disclosures favorably. The study also expects to find that disclosure quality is positively associated with bond ratings, which suggests that rating agencies respond more favorably to higher quality disclosures. Finally, the study expects to find that the quality of city level climate disclosures strengthens the relationship between voluntary climate disclosures and municipal bond ratings. This finding would suggest the value relevance of disclosures to rating agencies is higher for cities with strong disclosure quality. Overall, the study contributes to the voluntary climate disclosure and municipal bond rating literature as well as assists both city officials and municipal bond investors by revealing the impact of climate information on bond ratings. Additionally, results from this study help to determine the specific climate actions and policies that affect bond rating decisions, providing valuable information to city officials, policymakers, and municipal bond market participants.

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