Municipal Bonds And ESG: All Hat, No Cattle

Houston, we have an ESG problem. Or do we?

From an ESG-risk perspective, between the weather and petroleum-dependent economy, the City of Houston, Texas would appear to have some major problems. Of the two, the weather has been the most visible.

For Houston, on Galveston Bay off the Gulf of Mexico, geography is destiny. The city gets hit regularly by tropical storms. According to NOAA's National Centers for Environmental Information, there were 96 days with at least one report of flooding or flash flooding in Harris County from 1996 through 2015. This equates to an average of four to five days of flooding each year over that time period.

It’s been this way for the city since day one. Founded in 1836 by the Allen brothers, the town was established at the confluence of Buffalo and White Oak bayous. Shortly thereafter, every structure in the new settlement flooded. The issue hasn’t changed much since.

Recently, storm-related flooding only seems to be increasing in frequency and intensity. Since 2015 alone, Houston has been hit by six named hurricanes and tropical storms. One of the worst was Hurricane Harvey. Hitting in 2017, the storm was estimated to have caused over $70 billion in damages, although some have the number far higher.

Of Bonds and Hurricanes

On September 10, 2019, Houston finalized a $255.3 million tax-exempt bond issue secured by a pledge of ad valorem property taxes. The largest series was the $35.62 million 2030 maturity, priced with a 5.00% coupon at an initial yield of 1.59% ($129.883). According to data from IHS MarkitINFO 0.0%, the AAA-10-year tax-exempt yield was 1.35% the day the bonds were priced. The yield difference between the two is referred to as the credit risk spread, in this case, 24 basis points. A basis point is 1/100^th of 1%.

On September 17, 2019, Tropical Storm Imelda hit, producing historic rainfall totals of more than 40 inches over the next 48 hours, causing devastating flooding to Houston and other areas of southeastern Texas. Like Hurricane Harvey, it caused billions of dollars in damages.

With all this expensive environmentally driven damage, how did investors respond?