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Written by: Marc Uy and Daniel Natale
Natural disasters such as the LA wildfires affect communities both immediately and over time. Current estimates suggest that over $70 billion in municipal credits are exposed to these events, with overall economic losses estimated to be as high as $275 billion. Recovery for low-income communities can be especially hard.
Los Angeles will rebuild, but what will that look like for under-resourced communities, and how can impact investors help?
Conditions Ripe for Catastrophe
The exact causes of the fires in Southern California are under investigation, but “weather whiplash”—extreme shifts between unusually wet and exceptionally dry seasons—contributed to the fires’ rapid spread and intensity. Weather whiplash has increased globally by 31% to 66% since the mid-20th century. Such conditions lead first to rapid vegetative growth, then to the drying of vegetation, making an area highly vulnerable to fires. Combined with high winds—above 100 mph—and densely packed housing, weather whiplash creates a recipe for fast-moving fires in the wildland-urban interface.
Compounding the disaster, trees and vegetation—once incinerated—no longer anchor hillsides, raising the odds of landslides and flash floods that could damage surviving structures and impair water quality. These could further aggravate income inequalities and increase the risk of future catastrophes.
How Impact Investors Can Help: Mitigating wildfire risk requires improved forest-management practices, such as prescribed fires and forest thinning. Investing in city and county governments responsible for erosion-control structures, drainage systems and monitoring technology is crucial, in our view. Additionally, investing in water utility companies that prioritize reducing wildfire risk and subsequent flash floods may be more cost-effective than repairing damaged infrastructure and treating polluted watersheds.
Rising Costs of Insurance and Rebuilding
According to Cal Fire, at least 12,300 structures have been destroyed. To streamline rebuilding, Governor Newsom and Mayor Bass have issued executive orders to temporarily suspend the California Environmental Quality Act and the California Coastal Act; expedited the building-permit review process; directed state agencies to identify permit requirements and building codes that can be safely suspended or made more affordable; and created task forces focused on debris removal and watershed hazards.
New homes will need to adhere to building codes designed to prevent fires—such as fire-resistant roofs and siding, and mesh screens over attic vents to stop the ingress of embers. We also expect the continuation of land-use policy that discourages increased housing density in areas with the highest wildfire risk. Meanwhile, rebuilding costs are expected to rise due to increased demand for materials and skilled labor. Estimates suggest rebuilding a home could cost $262,000 in Altadena and $947,000 in Pacific Palisades.
Insurance is also a major concern. Estimated insured losses range from $20 billion to $75 billion, surpassing the 2018 Camp Fire’s $10 billion in losses. Since 2018, state-imposed limits on premium increases have led to an exodus of traditional insurers. The California FAIR Plan Association, an insurance syndicate that provides basic fire coverage when it isn’t available through traditional carriers, may struggle to handle increased applications, leading to higher surcharges for policyholders and increased housing costs. Higher insurance premiums and rebuilding and recovery costs will likely add to municipalities’ financial strain, in our view.
Renters too face additional stresses. In the short run, we expect displaced housing demand, costly property insurance, and other barriers to homeownership to push more people into the rental market. But landlords also pass rising costs on to renters, and developers may struggle to finance new affordable housing projects in disaster-prone areas.
In turn, we think lack of affordable housing in the LA region—already a critical issue—will likely increase homelessness. The risk of another fire also remains an ongoing concern for residents.
How Impact Investors Can Help: In our view, investors can play a crucial role in funding infrastructure rebuilds through municipal bonds. However, finding investments in single-family and multifamily homes that exceed existing fire-resistant codes may be challenging, as developers aim to keep costs down. Further, additional building codes could increase costs and prolong the rebuilding process.
Assessing the Long-Term Effects
Rising housing costs from natural disasters may lead to climate gentrification. As costs increase, many middle- to low-income residents may not return because they can’t afford to. For example, after the 2018 Camp Fire, the median home price in Paradise, California, rose from $236,000 to nearly $440,000 in just five years, pricing out many survivors. Once vulnerable populations are permanently displaced, impacted communities show signs of gentrification—including higher education levels, fewer disabilities, a younger median age, fewer occupied rental units, and greater secondary home ownership than previously.
Vulnerable Californians also bear the brunt of health impacts, with lower-income areas suffering more than wealthy ones. Extreme heat and wildfire smoke raise the risk of hospitalization for cardiorespiratory causes by 7% and exacerbate preexisting health problems like cardiovascular disease, asthma and diabetes. Harmful emissions from burning household products can cause severe biological harm. Communities most at risk include those with lower incomes, less health insurance, less education, fewer cars, less tree canopy coverage, higher population density, and higher proportions of racial and ethnic minorities.
Job loss is another long-term impact. Research by the UCLA Latino Policy & Politics Institute found that up to 35,000 jobs held by Latinos are at risk of temporary or permanent displacement due to the fires. Latinos hold 36% of jobs in major evacuation zones but account for less than one-fourth of the population; in the Palisades fire area, Latinos hold 34% of jobs but account for only 7% of residents.
How Impact Investors Can Help: To address both short- and long-term effects, we think impact investors should focus on investing in hospitals and healthcare systems at the forefront in disaster zones. In addition, investors may look to city and county governments for potential debt issuance to fund wildfire cleanup efforts; individuals whose jobs are displaced by fires may find employment in such efforts.
Strategically Investing to Make an Impact
In the weeks, months and years ahead, we expect many challenges and choices on the path to rebuilding, and many opportunities to make a difference. We know how to build safer and smarter. The question is, will we? And how can we ensure that those hardest hit by the wildfires participate in the recovery?
Addressing California’s wildfire challenges will require coordinated efforts from federal, state and local entities. For municipal bond investors seeking to make a positive impact, we believe targeted investments in infrastructure, affordable housing, hospitals and community resilience projects can drive meaningful change and support equitable recovery.
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