NEWS: Building climate-resilient infrastructure in the post-pandemic world

Volatility in the earth’s climate and an unprecedented global transition toward low-carbon energy and consumption is presenting new risks, and the private sector will not be able to effectively protect against these risks alone

With the global economy facing its deepest economic contraction since the Second World War, many governments are looking to infrastructure development to reinvigorate growth. Investments in infrastructure have the potential to boost productivity, facilitate trade and generate widespread multiplier effects that can aid economic recovery. As public sector support for infrastructure development and adaptation grows, new opportunities are likely to emerge for private infrastructure owners and operators — both in the construction of new infrastructure, as well as in the enhancement of existing assets.

However, the risk profile of infrastructure assets is shifting: Climate change is imposing new pressures on the long-term and stable returns traditionally promised by the infrastructure sector. Volatility in the earth’s climate and an unprecedented global transition toward low-carbon energy and consumption is presenting new risks, and the private sector will not be able to effectively protect against these risks alone.

Instead, to truly build resilience against the risks presented by the climate challenge, private owners and operators of infrastructure will need to employ a stakeholder engagement-focused approach. As the complexity of the climate challenge intensifies, proactive engagement across a diverse range of stakeholders relevant to an asset will become crucial for both identifying climate risks and for building resilience against them. This will include both communication and collaboration with the public sector, industry peers, local communities and shareholders.

Public sector engagement

Valuing resilience and sustainability: Government engagement can be instrumental in ensuring that climate resilience is valued appropriately and priced into each asset. Currently, for example, not all public-sector procurement processes recognize the importance of Life Cycle Cost Analysis in evaluating bids for new assets. This can result in higher-cost bids embedded with greater levels of climate-resilience going unbuilt. Enhancing existing assets with new resilience measures also often requires regulators to renegotiate price determinations — many regulatory settlements on pricing, however, tend to emphasize short-term consumer price cuts at the expense of long-term resilience.

Engaging with the relevant public sector entities early to communicate the broader positive externalities and lifetime saved-costs from resilience-building can encourage that resilience and sustainability are priced and valued appropriately.

Crowding in private investment: In a survey of 230 economists and policymakers on the pathways to economic and climate recovery following the pandemic, investments in "clean energy" and "connectivity" infrastructure emerged as highly ranked policy instruments with widespread potential benefits. Stimulus packages for green infrastructure indeed are increasingly identified as a potential recovery mechanism by academics and policymakers alike and could provide investors with new opportunities.

However, although some programs may support private investment in infrastructure, investors must be prepared for packages that may crowd out or compete with private investments for green infrastructure projects. Opening up channels of dialogue with governments on this issue can provide investors with an opportunity to influence stimulus package structures and ensure that public and private funding are more complementary than they are competitive.

Identifying the key stakeholders relevant to an infrastructure asset and collaborating with those stakeholders will be a crucial method of building lasting climate resilience.

Partnering with industry associations: Industry associations such as the Global Infrastructure Investor Association (GIIA) can provide unique opportunities for the forms of public sector engagement described above. The GIIA has been engaged with senior public officials in the United Kingdom, European Union and United States to explore how private sector investors can help support post-COVID-19 economic stimulus while also delivering on other important policy goals, such as climate resilience. The GIIA serves as an advisory council member for the U.S. National Governors Association’s infrastructure initiative, for example, and has hosted workshops and roundtables for both senior European Commission officials regarding the European Green Deal and the U.K.’s minister of state for investment on the U.K. transition to net zero. Such advocacy and stakeholder engagement on behalf of the private investment community can be an impactful accelerant for measures that encourage greater levels of private investment in climate resilient infrastructure.

Peer engagement

Information- and data-sharing: The interweaving of global supply and value chains, the integration of technologies into the built environment and the expansion of urbanization is intensifying interconnections and interdependencies between infrastructure assets. These links are giving rise to interdependent risks: risk events that do not affect an asset directly, but that affect an adjacent community or linked infrastructure network, rippling into the asset in question. A port that suffers no direct damage from a storm may find its throughput nevertheless diminished, for example, by a storm that severely disrupts the railways and roads that supply its cargo.

Information-sharing between infrastructure owners, therefore, can be instrumental in building resilience for a larger system of assets. Data-sharing between private-sector peers can contribute to early-warning signals based on information drawn from diverse sources. This may require building trust and establishing security protocols between firms or a public sector body to act as an intermediary for the collection of sensitive data and the hosting of information-sharing workshops and events.

Collaborative resilience building: Collaborating with infrastructure or non-infrastructure firms facing similar climate risks can enable investment in much-needed multi-asset protective measures such as flood barriers/levees or pooled access to cooling facilities and agents. The United Kingdom’s major High Speed 2 (HS2) railway, for example, plans to use collaborative working arrangements with local infrastructure operators along the railway’s network to ensure protection from a variety of interdependency-based climate risks: This will include risks of flooding, overheating and ICT or electricity failures from climate events.

Local community engagement

Identifying risks: Early engagement with relevant communities can reveal localized risks that are often challenging for firms to uncover without being privy to the local context. Establishing communication channels with local communities can uncover specific climate risks that a new asset may exacerbate and can highlight subcommunities that may be disproportionately affected by the fallout (such as racial or low-income groups). This engagement can also provide an owner-operator insight into market trends that may be generated by the climate transition in a specific community. Changing preferences around energy consumption or transportation use can have significant impacts, ultimately on revenue and use, for example.

Collaborating on environmental protection: Engagement with local communities additionally can provide opportunities for infrastructure owners and operators to collaborate on initiatives to prevent environmental damage. In Australia, for example, water infrastructure managers and local aboriginal and other community organizations are working to improve the quality of wetlands by negotiating agreements for shared water use. Engaging with local NGOs and community groups with an interest in environmental preservation also can provide opportunities and expertise for investing in natural infrastructure development, such as mangrove management that can provide impactful forms of flood protection.

Shareholder engagement

Establishing trust and attracting investment: Disclosure on climate risks is a growing requirement for establishing the trust of investors. Climate risk disclosure can include scenario-based stress testing results, a written recognition of a variety of climate risks and commitments to adaptation or mitigation, or published disclosure forms from established standards such as those from Global Real Estate Sustainability Benchmark or the Task Force on Climate-Related Financial Disclosures. Proactively including this material in investor relations communications or in engagement documentation can prevent the shifting requirements for climate disclosure from eroding investor confidence or from alienating climate-risk minded investors.

Identifying the key stakeholders relevant to an infrastructure asset — that is, stakeholders that stand to either significantly benefit or be harmed by the asset’s construction and operation — and collaborating with those stakeholders will be a crucial method of building lasting climate resilience. This approach establishes a dynamic method of resilience-building: one that leverages changing perspectives from a diverse base of sources to help navigate the ever-evolving landscape of the climate challenge. "Global Risks for Infrastructure: The Climate Challenge," a recent report from Marsh & McLennan Companies and the GIIA, explores particular applications of this approach as well as a broader framework of resilience-building that can aid infrastructure owners and operators in navigating this landscape.

Source: Greenbiz