Lenders’ Guide for Considering Climate Risk in Infrastructure Investments

Climate change poses multifaceted physical risks for infrastructure investors, affecting revenue, maintenance costs, asset value and liability. According to the New Climate Economy report, global demand for new infrastructure investment could be  over US$90 trillion between 2015 and 2017. It is becoming increasingly clear that climate change must be considered in all infrastructure investment and construction.

Four Twenty Seven, in collaboration with our partners Acclimatise and Climate Finance Advisers, published a “Lenders’ Guide for Considering Climate Risk in Infrastructure Investments” to explain the ways in which physical climate risks might affect key financial aspects of prospective infrastructure investments.

Climate Change and Infrastructure

The guide begins with a discussion of climate risk, acknowledging that climate change can also open opportunities such as improving resource efficiency, building resilience and developing new products. It provides a framework for questioning how revenues, costs, and assets can be linked to potential project vulnerability arising from climate hazards.

Revenues: Climate change can cause operational disruptions that lead to a decrease in business activities and thus decreased revenue. For example, higher temperatures alter airplanes’ aerodynamic performance and lead to a need for longer runways. In the face of consistently higher temperatures, airlines may seek airports with longer runways, shifting revenue from those that cannot provide the necessary facilities.

Costs/Expenditures: Extreme weather events can cause service disruptions, but can also damage infrastructure, requiring additional unplanned repair costs. For example, storms often lead to downed power lines which disrupts services but also necessitates that companies spend time and money to return the power lines to operating conditions.

Assets: Physical climate impacts can decrease value of tangible assets by damaging infrastructure and potentially shortening its lifetime. Intangible assets can be negatively impacted by damages to brand image and reputation through repeated service disruptions.

Liabilities: Climate change is likely to pose increasing liability risk as disclosure and preparation requirements become more widespread. As infrastructure is damaged and regulations evolve, companies may face increased insurance premiums and costs associated with retrofitting infrastructure and ensuring compliance.

Capital and Financing: As expenditures increase in the face of extreme weather events, debt is also likely to increase. Likewise, as operations and revenues are impacted and asset values decrease, capital raising may become more difficult.

The guide also draws attention to the potential opportunities emerging from resilience-oriented investments in infrastructure. There are both physical and financial strategies that can be leveraged to manage climate-related risks, such as replacing copper cables with more resilient fiber-optic ones and creating larger debt service and maintenance reserves.

Climate Risks and Opportunities: Sub-Sector Snapshots

The guide includes ten illustrative “snapshots” describing climate change considerations in the example sub-industries of Gas and Oil Transport and Storage; Power Transmission and Distribution; Wind-Based Power Distribution; Telecommunications; Data Centers; Commercial Real Estate; Healthcare; and Sport and Entertainment. Each snapshot includes a description of the sub-sector, an estimation of its global potential market, examples of observed impacts on specific assets, and potential financial impacts from six climate-related hazards: temperature, sea-level rise, precipitation & flood, storms, drought and water stress.

Commercial real-estate, for example, refers to properties used only for business purposes and includes office spaces, restaurants, hotels, stores, gas stations and others. By 2030 this market is expected to exceed US $1 trillion per annum compared to $450 billion per annum in 2012. Climate impacts for this sub-sector include hazard-specific risks and also include the general risk factor of climate-driven migration which drives shifts in supply and demand in the real estate market.

As heat waves increase in frequency, people will likely seek refuge in cool public buildings, leading to increasing property values for those places such as shopping malls that provide air-conditioned spaces for community members. Increasing frequency and intensity of storms may damage commercial infrastructure, leading to recovery costs and increased insurance costs. Real estate managers may have to make additional investments in water treatment facilities to ensure the viability of their assets in regions faced with decreased water availability. An example of the financial impacts of climate change on this sub-sector can be seen in Houston after Hurricane Harvey. After the hurricane hit Texas in August 2017, approximately 27% of Houston commercial real estate was impacted by flooding and these 12,000 properties were worth about US$55 billion.

Download the Lenders’ Guide. 

For more guidance on investing for resilience, read the Planning and Investing for a Resilient California guidance document and the GARI Investor Guide to Physical Climate Risk and Resilience.