Before the Market Catches Up
In 2025, the Resiliency Co underwrote an independently authorized and reviewed article looking at the opportunity and the challenges for resilience and the municipal bond market.
Drawing on interviews with issuers, investors, rating agencies, insurers, and market experts, it examines why resilience remains underpriced—and what that means for communities, philanthropy, and investors.
Note to readers: This is the summary of a report underwritten to collect qualitative insights gathered through structured conversations with a range of U.S. municipal bond market participants. These observations reflect market sentiment and behavior as described by participants and do not necessarily represent the views of The Resiliency Company. However, these perspectives offer valuable insight into how the public finance marketplace is currently treating physical climate risk and resilience-related infrastructure.
Participants included issuer decision-makers (municipalities, state agencies, utilities), issuer advisors and intermediaries (financial advisors, attorneys, consultants), ratings agency professionals, institutional investors, insurance executives, analytics providers, and industry leaders. All interviews were anonymous, though a panel of respected market experts served as peer reviewers for this memo and are acknowledged in Appendix A.
Context
The Resiliency Company hypothesized that the U.S. municipal bond market may be materially underpricing extreme-weather risk and that this mispricing affects how and whether resilience infrastructure gets financed. To test this, Formidable Services conducted qualitative research consisting of semi-structured stakeholder interviews, review of municipal market commentary, and analysis of public reporting by industry institutions, climate research bodies, and insurers.
This memo assumes a working familiarity with the municipal bond market, the role of credit ratings in pricing, the increasing volatility of the U.S. property insurance market, and the growing body of research suggesting that future extreme weather impacts will likely differ materially from historical weather patterns. Importantly, this hypothesis is directly tied to the question of tax base viability. The foundation of municipal credit rests on the enduring ability of communities to generate revenue through property taxation, sales taxation, and associated economic activity. Weather risk challenges that assumption. If physical risk undermines the livability, insurability, or economic continuity of a community, revenue capacity can erode, gradually in some places, rapidly in others, even if market systems do not yet consistently recognize this risk.
Executive Summary
The central finding of this study is that the U.S. municipal bond market remains fundamentally backward-looking. It primarily prices climate risk only when losses have already materialized in financial or operational data rather than based on credible forward-looking climate projections. As a result, the market is likely underpricing foreseeable long-term physical climate risk for issuers facing increasing exposure to wildfire, flooding, extreme heat, and severe storms. In effect, the market assumes tax bases will remain intact until proven otherwise, despite mounting evidence that climate-driven disruption can fundamentally alter population patterns, investment decisions, and asset values.
Three cross-cutting structural dynamics emerged consistently across market participants.
First, incentive misalignment. No dominant actor in the municipal market is rewarded for accelerating the integration of forward-looking physical climate risk into pricing, disclosure, or credit evaluation.
Second, time horizon mismatch. Political decision cycles, investor holding periods, ratings reassessment timelines, and budget horizons are generally shorter than the period over which climate risks are expected to fully materialize.
Third, professional and institutional risk aversion. While acknowledging climate exposure is increasingly common, requiring deeper disclosure, binding credit incorporation, or explicit pricing differentiation introduces cost, scrutiny, and reputational exposure. Therefore, it is avoided unless required.
At the same time, several “blinking red lights” suggest rising potential for discontinuity among historical expectations and future reality. These include insurance market retrenchment, escalating disaster costs, emerging fiscal uncertainty around federal disaster support, and infrastructure systems increasingly stressed by recurring extreme heat, flooding, and storms. The interaction of these pressures creates significant long-term risk to municipal tax bases, particularly in communities where property values, insurability, and basic habitability are deteriorating. As physical risk escalates, value may leave, slowly at first, then rapidly, challenging both fiscal stability and long-term community viability.
Two implications are particularly important.
First, over time it is likely to become more expensive for high-exposure municipalities to borrow. Whether repricing happens gradually or abruptly will depend heavily on the trajectory of real-world events and policy responses.
Second, in the near term, many issuers are operating in an environment where the true forward risk profile of their communities is not yet fully reflected in borrowing costs. This creates a temporary window where capital remains relatively affordable to finance resilience investments.
Municipalities should recognize that insurance and federal backstops may not remain as stabilizing as they have historically been, and that delaying action may mean facing higher costs, shrinking revenue bases, and fewer external support in the future. Without proactive resilience investment, there is a credible risk that climate exposure evolves from an operational problem, to a fiscal problem, to an existential problem for some communities.
Findings: Market Mindset and Incentives
The following sections summarize stakeholder perspectives by participant category. While the municipal market is highly fragmented, several recurring behavioral and structural patterns were evident.
Issuers
Municipalities face expanding exposure to extreme heat, flooding, wildfire, and severe storms. Numerous studies have estimated fiscal implications, including risks to property tax bases, increased operating expenditures, and infrastructure deterioration. Yet most issuers do not systematically see higher borrowing costs directly tied to physical climate exposure. Credit evaluation and pricing largely remain anchored to historical financial performance and realized events rather than modeled forward risk.
At the same time, the fundamental linkage between climate exposure and fiscal capacity remains underdeveloped in issuer planning frameworks. Municipal budgets depend heavily on property taxation in many jurisdictions. If repeated disasters, escalating insurance costs, or uninsurable risk environments drive residents to relocate or discourage reinvestment, communities face erosion in assessed value and ultimately erosion in revenue. That dynamic is not theoretical as it is already observable in a number of vulnerable geographies, even if not yet widely integrated into financial risk systems.
Several behavioral and institutional dynamics help explain why issuers are generally not leading systemic change.
Climate mindset. Most issuers do not frame financial strategy and operational priorities through a structured climate risk lens. Leaders are focused on near-term service delivery, infrastructure backlogs, labor constraints, and economic development. Even where climate awareness exists, there is reluctance to voluntarily disclose detailed risk analysis that might complicate borrowing, draw political scrutiny, or introduce added cost.
Career risk. Elected officials and senior administrators rarely face political or professional consequences for not prioritizing resilience infrastructure. Where bonds require voter approval, constituencies tend to favor visible projects over preventative investments and maintenance.
Time horizon mismatch. Political and administrative planning cycles are typically two to four years. Perceived climate risks are often framed as ten- to thirty-year horizons. Even well-intentioned leaders often categorize resilience as important but deferrable.
Aversion to debt. Many public sector leaders maintain a conservative approach to debt. Even in favorable borrowing environments, hesitation persists, especially when voters must approve issuances. However, current data do not yet demonstrate widespread voter rejection of public borrowing; the more significant challenge is prioritization.
Ratings Agencies
Market participants broadly indicated that if meaningful systemic change were to occur, ratings agencies would likely need to explicitly incorporate forward climate exposure into core methodologies. Today, this is not occurring in a way that materially shifts outcomes.
Agencies acknowledge climate relevance but generally define their role as responding when risk has become financially demonstrable rather than forecasting its emergence. Because ratings are periodically reassessed, agencies argue they retain future flexibility to downgrade if material climate stress meaningfully affects financial performance. Their frameworks remain largely anchored to historical performance, legal security, and demonstrated resilience rather than speculative future exposure.
This approach, however, embeds systemic cliff risk. Today’s methodology assumes tax capacity exists. and will continue to exist, until clear degradation appears in fiscal data. That creates the likelihood that ratings do not gradually respond to emerging climate threats but instead move sharply only once population decline, lost assessed value, or service strain become inarguable. Recent communications, such as the Maui post-wildfire reassurances from major rating agencies emphasizing near-term liquidity and governance capability rather than long-term viability, illustrate how credit systems remain oriented to current stability rather than existential exposure.
Bond Investors
Investors consistently emphasized two dominant realities shaping behavior. First, performance benchmarks reward yield rather than prudence regarding physical climate risk. Second, the historically strong performance and low default rates of municipal bonds reinforce market confidence. Most portfolios also lack explicit mandates for resilience-linked investing, meaning portfolio managers are not rewarded for prioritizing climate prudence even if they believe the risk is real.
Some investors remain indifferent or skeptical regarding climate risk as an investment driver. Others accept its significance but believe the most severe disruptions will occur beyond their investing horizon—particularly when they can purchase shorter maturities. Many continue to assume robust federal stabilization capacity following disasters and believe that as long as legal and financial frameworks remain intact, revenues will follow.
However, this implicitly assumes enduring tax base viability. In reality, investors in municipal bonds are not only betting on government strength but on the long-term durability of the place itself. If places become unlivable, unaffordable, frequently disrupted, or repeatedly damaged, economic value erodes—and with it the foundation of municipal finance. That linkage is still not meaningfully reflected in most investor strategies.
Blinking Red Lights
Despite broad confidence in current market dynamics, several signals indicate emerging structural stress.
Weather modeling consistently indicates that future stress will diverge significantly from historical weather patterns. Risks include acute catastrophic events and persistent chronic stressors such as extreme heat impacts on infrastructure, recurrent flooding, and increasing water system strain.
Insurance markets serve as leading indicators. Retreat in high-risk regions, rising premiums, policy withdrawal, and greater reliance on state-backed insurers indicate deterioration in confidence by some of the most sophisticated risk modelers in the economy. Public insurance mechanisms cannot indefinitely override actuarial reality.
Federal disaster backstop sustainability is increasingly uncertain as disaster frequency increases and federal fiscal strain intensifies. Even supportive administrations may face cost constraints that reduce the scale or consistency of aid.
These dynamics collectively create a credible pathway to compounding fiscal exposure:
increasing disaster frequency and severity strain budgets
fewer FEMA disaster declarations shift more costs to states and localities
rising insurance costs and potential uninsurability burden households and businesses
some residents and businesses choose not to rebuild; others relocate
property values stagnate or fall
tax bases shrink
revenue capacity declines
service quality diminishes
quality-of-life declines accelerate out-migration
negative feedback loops escalate
at the margin, some communities risk eventual obsolescence
Examples already exist along this spectrum—from accelerated retreat in places such as Isle de Jean Charles, to heavily capitalized resilience strategies like Battery Park City, to regions in Florida, Louisiana, and California experiencing mounting tensions among risk, affordability, and fiscal sustainability. The lesson is not that all communities will fail; rather, it is that different communities are already diverging based on preparedness, capacity, and strategic action.
Conclusions
Several reasonable conclusions emerge.
First, all else being equal, it is likely to become more expensive for high-exposure municipalities to borrow in the future based on physical risk indications. Whether this occurs gradually or rapidly depends on climate trajectories, investor sentiment, policy responses, and the market’s eventual willingness to acknowledge risks currently being discounted.
Second, the present environment may represent a temporary window in which borrowing costs do not yet fully reflect expected future hazard risk. Issuers who act now may do so under more favorable conditions than will exist later, particularly if they are able to credibly articulate resilience investment strategies, demonstrate fiscal discipline, and build market confidence in their long-term viability.
Third, institutional stabilizers long viewed as dependable, private insurance markets and federal disaster finance, show increasing fragility. A prudent path forward assumes greater local responsibility for financial resilience, supported by smarter planning, clearer data, stronger governance, and more deliberate investment strategies.
Fourth, resilience should be framed first as financial stabilization rather than as a purely environmental undertaking. Sound resilience policy protects revenue capacity, preserves tax base vitality, stabilizes operating budgets, and sustains the long-term economic attractiveness of communities. It is fundamentally a matter of safeguarding public finance systems, protecting residents, and ensuring continuity of essential services.
Finally, meaningful change is unlikely to occur organically. The current incentive structure does not push issuers, investors, or rating agencies to move quickly or consistently. Progress will depend on creating credible pathways that allow local governments to understand their risk, translate it into actionable strategy, and build confidence among market participants that resources invested in resilience meaningfully reduce exposure and support long-term credit strength.
Strategic Implication
Organizations seeking to accelerate deployment of resilience infrastructure may find greater success by helping communities move from awareness to execution: shifting climate exposure from an abstract concern into a structured, financially grounded decision framework that directly informs planning, reserves, insurance strategy, and capital investment choices.
In practice, this means creating environments where local leaders have access to clear analysis of fiscal exposure; tools that translate risk into budgetary and capital planning decisions; support to structure investable, credibility-enhancing resilience projects; and mechanisms to communicate long-term strategy to stakeholders, taxpayers, and capital markets. Doing so not only strengthens local financial posture but also helps build a broader marketplace where resilient communities can demonstrate tangible value, support investor confidence, and maintain competitive access to capital.
Instead of relying solely on regulatory pressure, disclosure mandates, or investor activism to force repricing, approaches that primarily increase borrowing costs, progress is more likely to occur by building practical capability at the local level, clarifying risk in ways that are usable for governing and budgeting, and supporting jurisdictions in developing a coherent investment narrative grounded in fiscal prudence and community stability.
In short, the most effective strategy is to help communities become deliberate, data-informed, and market-ready: equipped not only to understand the scale of the challenge but to translate that understanding into disciplined financial governance, credible resilience investment strategies, stable tax bases, and sustained economic futures.
Appendix A: Reviewers
We thank the following industry professionals for serving as reviewers of this independent assessment and for contributing meaningfully to the evolving conversation about climate and public finance.
Sarah Frey, Director, The PFM Group
Natalie Whitesel, Kennedy School graduate
Zac Hill,President, Office of American Possibilities
James Pass, Principal, Pass Strategic Partners
James Mcintyre, Principal, Public Innovate
Steven Rothstein, Managing Director, Accelerator, Ceres Inc.
Arnaud Sahuguet, Machine Learning, Millennium, ex-CTO NYU’s Governance Lab
David Erdman,Managing Director, Baker Tilly
Allan Marks,Senior Advisor, SidePorch,
Jeff Hebert,Partner & Chief Executive Officer, HR&A
Igancio Montojo,Senior Principal, HR&A Advisors
Hannah Glosser, Director, HR&A
Shayne Kavanagh, Senior Manager – Research, Government Finance Officers Association
Francis Bouchard,Managing Director, Climate, Marsh McLennan
Nick Mastronardi, Chief Executive Officer, Polco
Hunter Maats, Chief Executive Officer, Resilience Investments
Nabig Chaudhry, Director of Climate Adaptation Strategy, Probable Futures
Beth Gibbons, Director, Resiliency Office, Washtenaw County