IDEAS home Printed from https://ideas.repec.org/a/spr/climat/v171y2022i1d10.1007_s10584-022-03329-8.html
   My bibliography  Save this article

Signaling climate resilience to municipal bond markets: does membership in adaptation-focused voluntary clubs affect bond rating?

Author

Listed:
  • Inhwan Ko

    (University of Washington)

  • Aseem Prakash

    (University of Washington)

Abstract

This paper examines whether US cities’ membership in voluntary climate clubs improves the municipal bond ratings issued by S&P, Moody’s, and Fitch. We suggest that only clubs focused on climate adaptation could help cities signal their resilience to climate risks and their ability to service their municipal bonds. Yet, club membership is only a signal of intent. By itself, it does not offer concrete evidence that cities have adopted adaptation policies or enhanced their resilience to climate risks. We examine three climate clubs: ICLEI, whose membership obligations cover climate and other environmental issues; C40, whose scope covers both climate mitigation and adaptation; and 100 Resilient Cities (100RC), which focuses on adaptation only. Employing a two-way fixed effects model for a panel of 80 US cities from 1995 to 2018, we find that 100RC membership leads to a small improvement in bond ratings. This has important policy implications: Assurances about implementing adaptation policy, as opposed to evidence about how adaptation reduces climate risks, could have spillover effects on municipal finance. In such cases, climate adaptation could have tangible implications for city-level finances.

Suggested Citation

  • Inhwan Ko & Aseem Prakash, 2022. "Signaling climate resilience to municipal bond markets: does membership in adaptation-focused voluntary clubs affect bond rating?," Climatic Change, Springer, vol. 171(1), pages 1-19, March.
    • Handle: RePEc:spr:climat:v:171:y:2022:i:1:d:10.1007_s10584-022-03329-8
    DOI: 10.1007/s10584-022-03329-8
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s10584-022-03329-8
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s10584-022-03329-8?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Gordon,David J., 2020. "Cities on the World Stage," Cambridge Books, Cambridge University Press, number 9781107192331.
    2. Magali Delmas & Arturo Keller, 2005. "Free riding in voluntary environmental programs: The case of the U.S. EPA WasteWise program," Policy Sciences, Springer;Society of Policy Sciences, vol. 38(2), pages 91-106, September.
    3. Mikael Karlsson & Eva Alfredsson & Nils Westling, 2020. "Climate policy co-benefits: a review," Climate Policy, Taylor & Francis Journals, vol. 20(3), pages 292-316, March.
    4. Jon Hovi & Detlef F Sprinz & Håkon Sælen & Arild Underdal, 2016. "Climate change mitigation: a role for climate clubs?," Palgrave Communications, Palgrave Macmillan, vol. 2(1), pages 1-9, December.
    5. Moon, Choon-Geol & Stotsky, Janet G, 1993. "Testing the Differences between the Determinants of Moody's and Standard & Poor's Ratings: An Application of Smooth Simulated Maximum Likelihood Estimation," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(1), pages 51-69, Jan.-Marc.
    6. Cribari-Neto, Francisco, 2004. "Asymptotic inference under heteroskedasticity of unknown form," Computational Statistics & Data Analysis, Elsevier, vol. 45(2), pages 215-233, March.
    7. repec:bla:glopol:v:8:y:2017:i::p:66-77 is not listed on IDEAS
    8. John C. Driscoll & Aart C. Kraay, 1998. "Consistent Covariance Matrix Estimation With Spatially Dependent Panel Data," The Review of Economics and Statistics, MIT Press, vol. 80(4), pages 549-560, November.
    9. Joshua D. Angrist & Jörn-Steffen Pischke, 2009. "Mostly Harmless Econometrics: An Empiricist's Companion," Economics Books, Princeton University Press, edition 1, number 8769.
    10. Mikael Omstedt, 2020. "Reading risk: The practices, limits and politics of municipal bond rating," Environment and Planning A, , vol. 52(3), pages 611-631, May.
    11. Prakash,Aseem & Potoski,Matthew, 2006. "The Voluntary Environmentalists," Cambridge Books, Cambridge University Press, number 9780521677721.
    12. Jun Peng & Peter Brucato, 2004. "An empirical analysis of market and institutional mechanisms for alleviating information asymmetry in the municipal bond market," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 28(2), pages 226-238, June.
    13. James Honaker & Gary King, 2010. "What to Do about Missing Values in Time‐Series Cross‐Section Data," American Journal of Political Science, John Wiley & Sons, vol. 54(2), pages 561-581, April.
    14. Hanna Hilbrandt & Monika Grubbauer, 2020. "Standards and SSOs in the contested widening and deepening of financial markets: The arrival of Green Municipal Bonds in Mexico City," Environment and Planning A, , vol. 52(7), pages 1415-1433, October.
    15. Dario Cestau & Burton Hollifield & Dan Li & Norman Schürhoff, 2019. "Municipal Bond Markets," Annual Review of Financial Economics, Annual Reviews, vol. 11(1), pages 65-84, December.
    16. John Dove, 2017. "Local government type and municipal bond ratings: what’s the relationship?," Applied Economics, Taylor & Francis Journals, vol. 49(24), pages 2339-2351, May.
    17. Agliardi, Elettra & Agliardi, Rossella, 2021. "Pricing climate-related risks in the bond market," Journal of Financial Stability, Elsevier, vol. 54(C).
    18. Hand, John R M & Holthausen, Robert W & Leftwich, Richard W, 1992. "The Effect of Bond Rating Agency Announcements on Bond and Stock Prices," Journal of Finance, American Finance Association, vol. 47(2), pages 733-752, June.
    19. Keele, Luke & Kelly, Nathan J., 2006. "Dynamic Models for Dynamic Theories: The Ins and Outs of Lagged Dependent Variables," Political Analysis, Cambridge University Press, vol. 14(2), pages 186-205, April.
    20. Vogelsang, Timothy J., 2012. "Heteroskedasticity, autocorrelation, and spatial correlation robust inference in linear panel models with fixed-effects," Journal of Econometrics, Elsevier, vol. 166(2), pages 303-319.
    21. Irene Henriques & Bryan W. Husted & Ivan Montiel, 2013. "Spillover Effects of Voluntary Environmental Programs on Greenhouse Gas Emissions: Lessons from Mexico," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 32(2), pages 296-322, March.
    22. Cornes,Richard & Sandler,Todd, 1996. "The Theory of Externalities, Public Goods, and Club Goods," Cambridge Books, Cambridge University Press, number 9780521477185.
    23. Holthausen, Robert W. & Leftwich, Richard W., 1986. "The effect of bond rating changes on common stock prices," Journal of Financial Economics, Elsevier, vol. 17(1), pages 57-89, September.
    24. Biglaiser, Glen & Staats, Joseph L., 2012. "Finding the “Democratic Advantage†in Sovereign Bond Ratings: The Importance of Strong Courts, Property Rights Protection, and the Rule of Law," International Organization, Cambridge University Press, vol. 66(3), pages 515-535, July.
    25. Taedong Lee, 2013. "Global Cities and Transnational Climate Change Networks," Global Environmental Politics, MIT Press, vol. 13(1), pages 108-127, February.
    26. Taedong Lee & Susan Meene, 2012. "Who teaches and who learns? Policy learning through the C40 cities climate network," Policy Sciences, Springer;Society of Policy Sciences, vol. 45(3), pages 199-220, September.
    27. Prakash,Aseem & Potoski,Matthew, 2006. "The Voluntary Environmentalists," Cambridge Books, Cambridge University Press, number 9780521860413.
    28. Mayrhofer, Jan P. & Gupta, Joyeeta, 2016. "The science and politics of co-benefits in climate policy," Environmental Science & Policy, Elsevier, vol. 57(C), pages 22-30.
    29. King, Gary & Honaker, James & Joseph, Anne & Scheve, Kenneth, 2001. "Analyzing Incomplete Political Science Data: An Alternative Algorithm for Multiple Imputation," American Political Science Review, Cambridge University Press, vol. 95(1), pages 49-69, March.
    30. Wilkins, Arjun S., 2018. "To Lag or Not to Lag?: Re-Evaluating the Use of Lagged Dependent Variables in Regression Analysis," Political Science Research and Methods, Cambridge University Press, vol. 6(2), pages 393-411, April.
    31. Lawrence J. White, 2010. "Markets: The Credit Rating Agencies," Journal of Economic Perspectives, American Economic Association, vol. 24(2), pages 211-226, Spring.
    32. Seema Arora & Timothy N. Cason, 1996. "Why Do Firms Volunteer to Exceed Environmental Regulations? Understanding Participation in EPA's 33/50 Program," Land Economics, University of Wisconsin Press, vol. 72(4), pages 413-432.
    33. repec:pal:palcom:v:2016:y:2016:i:palcomms201620:p:16020- is not listed on IDEAS
    34. Richard Cantor & Frank Packer, 1996. "Determinants and impact of sovereign credit ratings," Economic Policy Review, Federal Reserve Bank of New York, vol. 2(Oct), pages 37-53.
    35. Luc Fransen & Brian Burgoon & Sijeong Lim & Aseem Prakash, 2017. "From Quality Control to Labor Protection: ISO 9001 and Workplace Safety, 1993–2012," Global Policy, London School of Economics and Political Science, vol. 8(s3), pages 66-77, May.
    36. Ang, James S & Patel, Kiritkumar A, 1975. "Bond Rating Methods: Comparison and Validation," Journal of Finance, American Finance Association, vol. 30(2), pages 631-640, May.
    37. William Nordhaus, 2015. "Climate Clubs: Overcoming Free-Riding in International Climate Policy," American Economic Review, American Economic Association, vol. 105(4), pages 1339-1370, April.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Mary Gugerty, 2009. "Signaling virtue: voluntary accountability programs among nonprofit organizations," Policy Sciences, Springer;Society of Policy Sciences, vol. 42(3), pages 243-273, August.
    2. Gaurav Dawar & Shivangi Bhatia & Jai Parkash Bindal, 2023. "Does Credit Rating Revisions Affect the Price of Common Stock: A Study of Indian Capital Market," Business Perspectives and Research, , vol. 11(2), pages 190-209, May.
    3. Charlotte Unger & Kathleen A. Mar & Konrad Gürtler, 2020. "A club’s contribution to global climate governance: the case of the Climate and Clean Air Coalition," Palgrave Communications, Palgrave Macmillan, vol. 6(1), pages 1-10, December.
    4. Seong‐gin Moon, 2008. "Corporate Environmental Behaviors in Voluntary Programs: Does Timing Matter?," Social Science Quarterly, Southwestern Social Science Association, vol. 89(5), pages 1102-1120, December.
    5. Böninghausen, Benjamin & Zabel, Michael, 2013. "Credit Ratings and Cross-Border Bond Market Spillovers," Discussion Papers in Economics 21075, University of Munich, Department of Economics.
    6. Helmut Reisen & Julia Maltzan, 1998. "Sovereign credit ratings, emerging market risk and financial market volatility," Intereconomics: Review of European Economic Policy, Springer;ZBW - Leibniz Information Centre for Economics;Centre for European Policy Studies (CEPS), vol. 33(2), pages 73-82, March.
    7. Valentina Bruno & Jess Cornaggia & Kimberly J. Cornaggia, 2016. "Does Regulatory Certification Affect the Information Content of Credit Ratings?," Management Science, INFORMS, vol. 62(6), pages 1578-1597, June.
    8. Drago, Danilo & Gallo, Raffaele, 2016. "The impact and the spillover effect of a sovereign rating announcement on the euro area CDS market," Journal of International Money and Finance, Elsevier, vol. 67(C), pages 264-286.
    9. Andreas Fuchs & Kai Gehring, 2017. "The Home Bias in Sovereign Ratings," Journal of the European Economic Association, European Economic Association, vol. 15(6), pages 1386-1423.
    10. Bedendo, Mascia & Cathcart, Lara & El-Jahel, Lina, 2018. "Reputational shocks and the information content of credit ratings," Journal of Financial Stability, Elsevier, vol. 34(C), pages 44-60.
    11. Baron, David P., 2011. "Credence attributes, voluntary organizations, and social pressure," Journal of Public Economics, Elsevier, vol. 95(11), pages 1331-1338.
    12. Creighton, Adam & Gower, Luke & Richards, Anthony J., 2007. "The impact of rating changes in Australian financial markets," Pacific-Basin Finance Journal, Elsevier, vol. 15(1), pages 1-17, January.
    13. Jessica F. Green, 2017. "The strength of weakness: pseudo-clubs in the climate regime," Climatic Change, Springer, vol. 144(1), pages 41-52, September.
    14. Böninghausen, Benjamin & Zabel, Michael, 2015. "Credit ratings and cross-border bond market spillovers," Journal of International Money and Finance, Elsevier, vol. 53(C), pages 115-136.
    15. Robert Falkner, 2015. "A minilateral solution for global climate change? On bargaining efficiency, club benefits and international legitimacy," GRI Working Papers 197, Grantham Research Institute on Climate Change and the Environment.
    16. Fathi Nakai & Tarek Chebbi, 2023. "The informational content of sovereign credit rating: another look," Journal of Asset Management, Palgrave Macmillan, vol. 24(5), pages 353-373, September.
    17. Chen, Sheng-Syan & Chen, Hsien-Yi & Chang, Chong-Chuo & Yang, Shu-Ling, 2013. "How do sovereign credit rating changes affect private investment?," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 4820-4833.
    18. Jun Zhang, 2019. "Is options trading informed? Evidence from credit rating change announcements," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(9), pages 1085-1106, September.
    19. Hooper, Vince & Hume, Timothy & Kim, Suk-Joong, 2008. "Sovereign rating changes--Do they provide new information for stock markets?," Economic Systems, Elsevier, vol. 32(2), pages 142-166, June.
    20. Nicole Darnall & Hyunjung Ji & Matthew Potoski, 2017. "Institutional design of ecolabels: Sponsorship signals rule strength," Regulation & Governance, John Wiley & Sons, vol. 11(4), pages 438-450, December.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:climat:v:171:y:2022:i:1:d:10.1007_s10584-022-03329-8. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.