Frédéric Blanc-Brude (EDHECinfra): “Extreme Climate risks for investors in infrastructure are enormous and largely remain unrecognise, but today they can be measured thanks to EDHEC research”
The EDHEC Infrastructure & Private Assets Research Institute has just published a study entitled "Highway to Hell" (Dec. 2023) (1) which highlights that infrastructure investors could lose up to 600 billion dollars by 2050 due to transition risks and as large as 50% of certain portfolios due to physical risk. We’ve asked a few questions to Frédéric Blanc-Brude, Director of the Institute and co-author of the study with five other researchers.
What is the motivation behind this colossal and pioneering work?
Unlisted infrastructure assets are the backbone of our current economies (think of airports, toll roads, power stations, seaports, pipelines etc.) and of our reshaping of future ones (solar and wind farms, geothermal and hydropower facilities etc.). Over the past few decades, institutional investors have increasingly allocated capital to these assets and will have to keep on doing so if we want to move quickly and massively to low carbon models.
But are they really and accurately aware of the threats posed by climate change to infrastructure and, consequently, to their own investments? That’s what has been driving us for years now: providing research, indices and benchmarks to investors all around the world.
This new report (1), in line with this motivation, follows another one (2) that had already caused a stir. It is based on over two years of work from a dedicated research team. We’ve managed to build this comprehensive analysis on a unique database with more than 9,000 infrastructure assets, while using Network for Greening the Financial System (NGFS) scenarios to assess the global impact of climate risks on infrastructure investments. To our knowledge, it’s never been done before.
Could you tell us what your main findings are?
Compared to a so-called ‘orderly’ transition to a low carbon economy (starting yesterday), a disorderly scenario - that is a delayed or uncoordinated transition - could wipe nearly US$600bn off infrastructure investments, equivalent to 30% of the total invested value in infraMetrics' extensive portfolio. The negative effects of transition risk will be felt across all sectors including low-carbon ones like the Renewables and Social Infrastructure sectors; but the highest impact would be experienced by the Energy and Water resources sectors with a 38% reduction in the Net Asset Value (NAV) on average.
Conversely, with no transition at all, it is the impact of physical risks on infrastructure investments that will matter: by 2050, the cost of physical risks could represent an average cumulative loss of US$140bn and when investors are exposed to the riskiest assets, losses could amount to 54% of their portfolio in this so-called “hot house” scenario (2) (3). And yet, due to a number of assumptions, notably in the NGFS scenarios, these future potential losses can be considered conservative estimates…
What are your main recommendations?
Investors’ main fiduciary responsibility is to manage the risk they take as best as possible to serve the interests of their members and clients. When it comes to climate risks, investors are faced with a large number of unknowns, which they find difficult to deal with or quantify.
While this is not an easy task, which is why EDHEC dedicates resources to developing this research, some progress are being made and it is now possible to put a number of some of the risk exposures created by climate change.
You could say that there is no good version of this story: either climate change is costly or it is very costly. This may be a reason why this knowledge is hard to integrate in annual reports and slide decks. But it is also an evolving story and these risks can be better managed (diversified, hedged or insured against) once they are understood and quantified.
We are convinced that managing climate risks is only possible with reliable measurements and benchmarks so that investors can both compare and estimate the exposures of their portfolio and make the most informed decisions possible. And this paper shows, I think, the huge potential of consistent measurements that accurately portray the impact of climate risks on infrastructure investments.
References
(1a) “Highway to Hell - Climate Risks will cost hundreds of billions to investors in infrastructure before 2050” (Dec. 2023), EDHECinfra Paper - Noël Amenc, Frédéric Blanc-Brude, Abhishek Gupta, Bertrand Jayles, Darwin Marcelo, Jeanette Orminski
(1b) Press articles (selection) about this report: Reuters, Financial Newswire, New Civil Engineer, Build in digital, SG Voice, WHBL, Insurance journal
(2 a) “It’s Getting Physical” (August 2023), EDHECinfra Paper - Noël Amenc, Frédéric Blanc-Brude, Abhishek Gupta, Bertrand Jayles, Nishtha Manocha, Darwin Marcelo
(2 b) Press articles (selection) about this report: Infrastructure investor, Capital Monitor, AI-CIO, Fast company, Benefits & Pensions, AM Watch, Real assets IPE, Funds Europe
(3) “Extreme weather could burn investment portfolios by mid-century” (Oct. 2023), The Conversation Europe - Noël Amenc, Frédéric Blanc-Brude, Qinyu Goh, Abhishek Gupta, Bertrand Jayles, Leonard Lum, Nishtha Manocha, Darwin Marcelo
