Municipal bond issuers tap climate defense projects as tax-exempt yields attract investors

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Municipal bonds and climate defense

Highlights

Municipalities have $63 billion of climate adaptation projects in development, including debt issuances for roads, utilities, and flood defenses, driven by rising disaster losses and shifting FEMA responsibilities.
Long-dated 5% AA-coupon municipal bonds now yield above 5%, offering taxable-equivalent yields near 10% for investors facing 50% combined tax rates.
Nuveen highlights Miami’s $400 million Miami Forever Bond and Battery Park City Authority’s $658 million flood barrier bonds as examples of credits already investing in climate defense infrastructure.

Climate adaptation borrowing gains momentum

As reported by CNBC, Nuveen says municipalities are issuing debt to reinforce roads, utilities and flood defenses as weather-related disasters become more frequent and governments face pressure to shoulder more of the cost of preparedness and recovery.

Dan Close, head of municipals at Nuveen, says about $63 billion of projects are in development, spanning general obligation bonds and revenue bonds tied to water, sewer and utility systems. He says proposals to overhaul the Federal Emergency Management Agency could shift more responsibility for disaster preparedness, response and recovery to state and local governments.

Climate-related losses have been rising over time. The National Oceanic and Atmospheric Administration’s National Centers for Environmental Information records 27 confirmed weather and climate disaster events in 2024 with losses above $1 billion each, compared with an average 3.3 events a year in the 1980s and average annual losses of $22 billion in that decade.

Credit selection shapes income potential

Close says municipal yields remain attractive, especially for higher-income investors because interest income is exempt from federal tax and may also be exempt from local taxes when the investor lives in the issuing state. He says long-dated 5% AA-coupon bonds are yielding more than 5% at a discount, implying taxable-equivalent yields of about 10% for investors facing combined taxes near 50%, while the 10-year part of the curve yields around 4%, or roughly 8% on a tax-equivalent basis.

Nuveen argues the municipal market is lagging other fixed-income sectors in pricing climate risk, which may create openings in credits that have already invested in stronger infrastructure. Close says investors need to assess both whether a community faces climate risk and how it is managing that exposure.

Among the examples highlighted by Nuveen are Miami’s $400 million Miami Forever Bond program, which finances projects including seawall replacement and flood-control pump stations, and Battery Park City Authority’s $658 million of investment-grade revenue bonds for a permanent coastal flood barrier at the southern end of Manhattan. The Nuveen All-American Municipal Bond Fund holds Miami bonds, while several of the firm’s New York-focused funds hold Battery Park City bonds.

In our earlier article, we looked at Kansas Development Finance Authority’s $128 million revenue bond sale, which received an AA rating with a positive outlook on the back of strong financial management and diverse revenue streams. We noted that the proceeds were earmarked for statewide development projects aimed at supporting economic growth and addressing infrastructure needs, while the positive outlook pointed to potential further credit momentum if current trends hold.

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