result

${prev-page}

${next-page}

Find us

1909 K St, NW

Suite 510 Washington, DC 20006

202 204 7907

Discover the members benefits

BDA events

Market Regulation

BY Nixon Peabody

What do we do about climate change disclosure now?

Scroll down

Climate change disclosure in the municipal securities market has never seemed to be as important as it is now, and has never seemed as irrelevant as it is now. In January 2025, the municipal securities market experienced one of the most impactful natural hazard casualty events it has ever seen. The wildfires that damaged iconic neighborhoods in Los Angeles were also accompanied by some of the most volatile trading in the municipal markets that we have seen following a casualty event—with yields for the power system bonds of the Los Angeles Department of Water and Power spiking in the days following the wildfires. During that same period, the federal administration changed and with it the United States Securities Exchange Commission (SEC) has withdrawn its defense of the corporate climate change disclosure rule. Seldom do we see events that seem to cut in opposite directions in our market like this. So, what do we do about climate change disclosure now?

As we describe below, much of the emphasis on climate change has been an episodic reaction to significant climate change events that both shock investors but also come with concerns that the issuer could have foreseen the event. When events like that happen, political winds quickly shift, and disclosure and the diligence that went into disclosure undergo significant scrutiny by both investors and the SEC. In addition, the SEC has often times operated with bi-partisan consensus when seeking to address concerns in the municipal securities market. Accordingly, we believe that it is important to develop a systematic approach to climate change disclosure now so that when future climate events occur our market is prepared for the response that would come from investors and the SEC.

What has been the path to where we are at in our market?

While efforts to address the need for improved climate change disclosure date back several years (the Task Force on Climate-Related Financial Disclosures published its first materials in 2017), the SEC’s forceful entrance into the topic of climate change disclosure arose from the February 2021 extreme winter weather event and ensuing power outages in Texas. As a result of that event, investors raised concerns that the event was more foreseeable than corporate disclosure would suggest. This quickly led to a request in March 2021 by the SEC for public input on climate disclosure from investors, registrants, and other market participants. A year later, in March 2022, the SEC proposed a new extensive climate change disclosure regime for public companies, which was scaled back when the final rule was adopted in March 2024. One year later, in March 2025, the SEC voted to drop its defense of the final climate change rule—which had been challenged in court after its adoption.

As these climate change regulatory disclosure developments in the corporate market progressed, both municipal market participants and SEC staff increased their discussion of the topic and the implications for the municipal securities market. The topic became a frequent one for conference panel discussions. Investors expressed concerns that climate change disclosure in the municipal market is scarcely provided and overly generic when it is. The Municipal Securities Rulemaking Board has attempted to gather the thoughts of market participants on the topic. In addition, Dave Sanchez, the Director of the Office of Municipal Securities at the SEC has been vocal that his office has been evaluating climate change disclosure and has noted that it is inconsistent within regions and has expressed concerns whether the level of climate change disclosure is adequate in the municipal securities market.

Thus, at the time when the SEC is seemingly backing off climate change disclosure in the corporate market, the Los Angeles wildfires are a reminder that our market’s version of the Texas weather event may be in the near future. That is, some market participants are concerned that vulnerabilities to the physical impact of climate change may be known to municipal issuers but have not clearly been disclosed to investors; and, if one of those vulnerabilities arises in a significant manner, the SEC may be compelled to address disclosure deficiencies.

What could our market learn from the SEC’s corporate climate change disclosure rule?

The SEC’s climate change rule does not apply to the municipal securities market and only applies to public companies governed by the more proscriptive corporate securities regime. But the SEC’s climate change rule provides a helpful framework that represents the most significant explanation from the SEC, or any other regulator, what climate change disclosure consists of, why it matters to investors, and what climate change disclosure should look like. In our view, the corporate disclosure rule can be divided into two parts. The first part is mainly how the SEC (primarily drawn from industry sources) defines climate change disclosure and the basic disclosures of risks, governance, risk management, and other areas that related to that definition. The second part represents affirmative data that the SEC would obligate corporate registrants to disclose. In general, this consists of greenhouse gas (GHG) emission data and specific new line items that corporate registrants would be required to add to their financial statements. This second part is where most of the controversy of the rule is targeted, and the SEC staff itself has been very clear that this second part of the rule is not something that should be a focus of the municipal securities market. But the first part of the rule represents the most detailed framework that we have seen that explains the general topic of climate change disclosure in securities offerings.

The corporate climate change rule defines “climate-related risk” by focusing on two kinds of risks: physical risks, or risks to issuers as a direct result of a changing climate (like rising sea levels, droughts, wild fires, stronger storms, etc.), and transitional risks, which are risks associated with a potential transition to a low carbon economy.

Physical Risks. The rule defines “physical risks” as “both acute and chronic risks to a registrant’s business operations and the operations with whom it does business.” “Acute risks” are “event-driven risks related to shorter-term extreme weather events, such as hurricanes, floods, and tornadoes.” “Chronic risks” are “risks that the business may face as a result of longer term weather patterns and related effects, such as sustained higher temperatures, sea level rise, drought, increased wildfires, as well as related effects such as decreased arability of farmland, decreased habitability of land, and decreased availability of fresh water.”

Transitional Risk. The second type of risk the SEC defines in the rule is “transitional risks.” Transitional risks are defined as “the actual or potential negative impacts on a registrant’s consolidated financial statements, business operations, or value chains attributable to regulator, technological, and market changes to address the mitigation of, or adaptation to, climate-related risks.” These risks include “increased costs attributable to climate-related changes in law or policy, reduced market demand for carbon-intensive products leading to decreased sales, prices, or profits for such products, the devaluation or abandonment of assets, risk of legal liability and litigation defense costs, competitive pressures associated with the adoption of new technologies, reputational impacts that might trigger changes to market behavior, changes in consumer preferences or behavior, or changes in a registrant’s behavior.”

Required Disclosures. The SEC’s corporate climate change rule specifically requires a number of disclosures related to climate change risks, including: (1) governance matters—such as how management is approaching those risks and how it is set up to provide oversight, (2) strategy —such as how climate change risks impact the business and strategy of the corporate issuer, (3) risk management—such as how the issuer manages the risks of climate change, and (4) scenario analysis if used—which requires the corporate issuer to disclose scenario analyses if it uses them so that investors know how the corporate issuer is managing these risks.

The SEC’s climate change disclosure framework is helpful for the municipal securities market for a couple of reasons. First, the SEC defines the topic of climate change disclosure. Before the SEC’s climate change rule, we are not familiar with efforts in the municipal securities market to define the topic for our market. The definition for our market will differ from the corporate market but the rule is a helpful starting place. Second, the SEC provides an inventory of facts that corporate issuers can know that help to explain what facts and information we are looking for. For example, the SEC sets out a number of topics like governance matters, scenario analyses if used, and risk management matters that represent information that may actually exist and could aid investors understanding the perspective of management on its climate change risks—even in the municipal securities market.

What should we consider good climate change disclosure in the municipal securities market?

Since the SEC first formally ventured into the question of developing formal rules and guidance for climate change disclosure in 2021, our market has discussed and developed a number of areas that have guided our approach to climate change disclosure in the municipal securities market. Much of this is based on how the SEC defines climate change risks in its corporate climate change rule but it also places appropriate emphasis where those issues will matter for most of our credits. It is important to note that municipal issuers are structurally different from corporate issuers. We focus on four key distinctions between municipal credits and corporate credits. First, investors in municipal bonds will naturally focus on a much longer time frame over which the investment will matter. Second, municipalities are political entities, which means its governing body, citizens, or others can impose policy decisions that are not necessarily financially motivated. Third, municipalities can be much more balkanized into silos that can prevent all of the information from being effectively known throughout the organization. Finally, municipal issuers have a variety of different credits that climate change can impact very differently. Based on these distinctions, here are some of the key areas we focus on.

Due Diligence.

Of all of the areas we have focused on, the most important area is that of due diligence. Dave Sanchez, in his comments, has noted his concern that municipal issuers tend to use disclosure for many years without revaluating it. In this area, many municipal issuers have used generic climate change disclosure that does not substantively say much other than the municipal issuer does not know how climate change may impact its finances and operations. However, as climate change is evolving, some municipal issuers who say this may later find out that other departments within its municipality had conducted studies and reports and were able to know some of the information that the municipal issuer has been saying that it does not know. Accordingly, as we seek to guide climate change disclosure, internal due diligence of what the whole municipal issuer knows is perhaps the most important aspect to climate change disclosure in the municipal securities market.

In addition, while third-party reports do not represent information the municipal issuer “knows,” it is helpful for the municipal issuer and the bond working group to be aware of studies and reports that exist that may become material. In his comments over the last couple of years, Dave Sanchez has said that his office has noted that disclosure across regions with comparable risks varies in ways that may suggest inadequate due diligence and understanding of the issues. Thus, at some level we do think it is important for municipal issuers and bond working groups to be aware of key third-party studies and reports as well as what other similarly situated issuers affected by common climate change circumstances are disclosing regarding those risks.

Physical vulnerabilities.

The second area we focus on is whether the credit supporting the bonds is exposed to a material physical vulnerability. In California, for example, water credits are exposed to droughts, wastewater credits have conveyance systems that can be exposed to climate change events, and credits along the coast can be exposed to sea level rise. In Florida, a host of operations are exposed to hurricanes.

Potential impact to capital improvement plan.

The third area we focus on is how the municipal issuer has prepared its capital improvement plan. Sometimes those plans are using dated assumptions and, if climate change proceeds past a certain point, the plan may need to be revisited and more expensive infrastructure included. In some instances, capital planning departments may already be considering whether plans need to change that would make capital projects more expensive and more likely the municipal issuer will incur debt to finance the projects.

Policy decisions.

The fourth area we focus on is whether the municipality is making policy decisions that require expensive adaption to address climate change concerns. Regardless of the physical impact of climate change, if the municipality will spend considerable capital to bring its operations within climate change policy objectives, that will matter to investors either because of the significant capital outlay or the additional debt necessary to finance that adaption.

Transition Risks, if applicable.

Transition risks can also apply to the municipal securities market, but perhaps not as commonly as many public companies. Some issuers, such as public power issuers, have faced transition risks for several decades as environmental regulatory developments have required them to transition their operations. Part of climate change disclosure, just like the SEC’s definition of climate change disclosure, is to evaluate whether rules and regulations will change that impose significant capital burdens or operational restraints that may impact an investor’s position in the bonds.

So where do we go from here?

In the municipal securities market we are regularly facing disclosures that have political implications, and climate change disclosure is no different. The Los Angeles wildfires are a reminder that the matter of climate change disclosure is not going away and will only increase as we move into the future if climate change realities continue to materialize. Accordingly, here are some points we have considered when evaluating how to approach climate change disclosure now.

Climate change data is improving and so must disclosure where appropriate.

The number of studies and reports that are published both by states and local governments as well as by third parties have proliferated. With those reports have come more information and facts that may matter to investors. In addition, as major natural hazard events occur, such as the Los Angeles wildfires, data about how other municipalities face risks increases as well. For example, after the major California wildfires of the last several years, the data about wildfire risk has increased substantially. As the data is improving, we need to be sure we are current with the best-informed disclosure based on what is available.

Related to this is the importance of not allowing climate change disclosure to become stale. Disclosure should consider what new studies and reports have emerged and, hopefully, can incorporate changes other similarly situated issuers have discovered as well.

Don’t be confused by the politicalization of the issue—either from the left or from the right.

As with any topic in the municipal securities market, there is a risk that the political elements of the topic can obfuscate what matters to investors. We have seen this with climate change from all angles of the political spectrum. The current effort by the federal administration to distance itself from climate change policies does not really pertain to the issues we are dealing with in climate change disclosure in the municipal securities market. Where physical vulnerabilities are known, where capital improvement plans do not incorporate current resiliency models, or where regulation imposes burdens on municipal issuers, these are facts that investors need to know and are not related to the policy debate, as such. We also note that the label “climate change disclosure” is not what matters so much as the facts that investors need to know. Where the label “climate change disclosure” becomes a problem, we can use other labels like natural hazard risk disclosure or even specific labels like hurricane or drought risk.

In addition, we have found situations where municipal issuers believe they have fully disclosed climate change risks because of the strong climate change policies of their municipalities. As we discuss above, policies can matter for investors but in the end it is primarily a question of the physical vulnerability of the operations and how the municipal issuer will approach its infrastructure accordingly. Therefore, it is important with climate change disclosure, like any other area of disclosure, to not allow the policy debate to confuse the facts investors are seeking to know.

Focus on facts and facts that are known.

Too much of the barrier to effective climate change disclosure centers on what is unknown about climate change. But disclosure is not about the unknown but the known. Where there are known natural hazard risks, capital improvement plan deficiencies, and other known facts, those are the items that need to be disclosed. Municipal issuers should never speculate but they also should not seek to be generic. By focusing on what risks are known, what is known about those risks, and what management is seeking to do to address those risks, that keeps the disclosure factual and known, and provides investors with key factual information.

¹ See, What Investors and the SEC Can Learn from the Texas Power Crises, The Brookings Institution (June 2021).