Introduction

This study examines how climate change creates physical and financial risks for municipal drinking water utilities in the United States and whether these risks are reflected in municipal bond disclosures. It develops a comparative climate risk index combining climate hazards, exposure and vulnerability for 1,455 medium and large municipal utilities that have issued bonds in the past decade. The analysis links climate risk with financial disclosure practices to identify gaps in climate awareness and preparedness.

Results

Drinking Water Climate Exposure And Vulnerability Indexes

The study constructs separate exposure and vulnerability indexes using nine indicators drawn from public datasets. Vulnerability captures financial health, infrastructure condition and social factors, while exposure reflects workforce, infrastructure scale and financial exposure. Around 70% of the most vulnerable utilities are located in the Upper Midwest, Ohio Valley and Northeast, largely due to ageing infrastructure, higher non-compliance scores and weaker financial indicators. Exposure varies less across utilities, but highly exposed systems exist in all regions, with Texas notable for utilities with large service areas and connections per capita.

Combined Climate Risk Scores

The combined climate risk index integrates exposure, vulnerability and mid-century climate hazard projections. The distribution is right-skewed, with a smaller number of utilities facing significantly higher risk. The Northeast and West show the highest average risk, driven by different factors: large projected hazard changes in the West, and existing vulnerabilities in the Northeast, Midwest and Ohio Valley. Utilities with moderate or high climate risk serve approximately 67 million customers. Surface water systems and very large utilities show slightly higher average risk, although differences by population size are generally limited.

Gaps In Water Utility Climate Risk Understanding

Municipal bond disclosures were analysed to assess climate risk awareness. Only 23% of analysed bond official statements mentioned climate change, despite 36% of bonds being issued by utilities classified as high risk. Disclosure is more common in revenue bonds than general obligation bonds and is increasing over time, reaching around 30% in 2023–2024. There is no clear relationship between bond ratings and climate risk disclosure, indicating that physical climate risk is not yet consistently priced into municipal bond markets.

A prioritisation framework combines climate risk scores with disclosure behaviour. High Priority utilities are those with moderate or high climate risk that do not mention climate change in bond disclosures, representing 36% of the sample. These utilities are concentrated in the South, Midwest and Ohio Valley and often serve smaller populations, suggesting lower adaptive capacity.

Discussion

The findings show that climate risk affects drinking water utilities across all regions, sizes and source water types. The climate risk index provides a screening tool for identifying utilities that may require targeted assistance in climate adaptation and resilience planning. Utilities are encouraged to use the index framework to assess their own exposure, vulnerability and projected hazards, and to improve transparency in financial disclosures.

The results highlight a misalignment between technical climate risk and financial disclosure, particularly among smaller and less resourced utilities. This creates potential financial liabilities for bondholders and communities dependent on long-term water system reliability. The study suggests that federal and state agencies could use the index to prioritise funding and technical assistance, including through mechanisms such as Drinking Water State Revolving Funds. Bond purchasers and rating agencies are encouraged to more explicitly consider physical climate risk in credit assessments.

Limitations

The analysis is limited to municipal utilities serving more than 10,000 customers that have issued bonds recently, excluding smaller systems that may face high risks but have lower adaptive capacity. The index does not fully distinguish between surface water and groundwater systems, and disclosure analysis may underestimate risk awareness where utilities address climate risk outside formal bond statements.

Methods

The climate risk index combines normalised indicators of exposure and vulnerability with a previously developed climate hazard index based on mid-century projections under a moderate emissions scenario. Indicators are equally weighted, following established composite index practices. Sensitivity analyses confirm that results are robust to the exclusion of individual indicators, with infrastructure age showing the strongest influence on overall risk.