Several events went a step further, examining how resilience could be incorporated into financing structures and what evidence would be required for markets to recognise the credit benefits of investment in adaptation, a theme AFII has developed through resilience-linked debt structures.[i]
And while the transition remained firmly on the agenda, it was discussed largely through the lens of the AI boom and the unprecedented energy infrastructure buildout it is driving, rather than through the traditional lens of corporate responsibility.
Across both themes - resilience and transition - the US, with its deep capital markets and market driven culture has an opportunity to lead by improving how markets price exposure to climate impacts and the risks connected to physical hazards and uncertainty in transition.
Physical risk in the spotlight
Climate Week came hard on the heels of New York’s wettest summer for half a decade, and a year of extreme weather impacts that have rippled throughout the US economy.
Across events, investors made it clear that the impacts of climate-related hazards are increasing and can no longer be treated as a distant or externalised risk. That does not necessarily mean, however, that climate-vulnerable assets will experience a sudden, market-wide repricing.
What’s more likely is gradual deterioration. Repeated physical losses could become a persistent drag on highly exposed companies, municipalities and sovereigns, with the cumulative effect eventually reflected in asset valuations and borrowing costs. This would be less a short, sharp shock, than a chronic impairment of credit quality, one that some issuers and markets may struggle to reverse,
In fixed income, this trend could manifest via a widening dispersion of credit spreads between issuers with different levels of physical exposure, preparedness and financial capacity. The unresolved question is whether proactive, credible resilience measures can mitigate that outcome.
Better data on physical risks and the efficacy of adaptation and resilience measures could make a difference. The opportunity ahead is how we integrate this data flow across credit portfolios and within fixed income products, giving greater visibility on resilience performance.
AI is everywhere
Wherever Climate Week participants gathered, AI was part of the conversation. Underlying these discussions was a broader question - how should investors price the credit, market and social licence risks associated with the speed and scale of the AI build-out?
As with physical risk and resilience, transparency was the recurring concern. The hyperscalers have so far benefited from exceptionally strong access to capital markets this year, but the complexity of their financing arrangements can make it difficult to assess the underlying credit profile of individual issuers and projects.
For investors, the relevant questions are becoming more pointed. Who ultimately bears the risks associated with power procurement, construction delays, technology obsolescence and stranded capacity? How much additional leverage can the sector absorb before the market begins to differentiate more sharply between issuers? Can sustainability become the differentiating factor? These are issues that the Anthropocene Fixed Income Institute is examining, with the aim of bringing greater clarity to the credit implications of the AI infrastructure cycle, particularly through the lens of transition and resilience.
Lead on, USA
On both of these key themes, the US has an opportunity to lead. On financing climate resilience, the country boasts a $4.5 trillion municipal bond market well positioned to support a broad program of infrastructure upgrades and nature-based solutions. On AI-related debt issuances, Wall Street banks sit at the junction between the hyperscalers and public markets, primed to set conditions for transparency and engagement that would benefit all market participants.
Will the US pick up the gauntlet? This time next year we may have our answer.
[i] "Contingent Resilience-Linked (CORL) bonds: combining public and private capital for resilience", Ulf Erlandsson, 31 Mar 2023
