Infrastructure and the climate reality

Building assets that last

Posted by MIRA Funds

Sep 13, 2019



Overview

It is well understood that sizeable amounts of the world’s infrastructure networks are ageing, faltering, and in some parts of the developing world, missing altogether.

Overlay the effects of climate change, with floods washing away bridges and heatwaves buckling roads and forcing powerplant shutdowns, and it’s clear that infrastructure requires a resilience upgrade, putting it at the heart of the dialogue on climate adaptation.

Infrastructure assets bear the physical burden of climate change but are also uniquely suited to drive new climate resiliency solutions and preserve the integrity of crucial supply networks. The challenge for infrastructure developers and owners is twofold: support new infrastructure that decarbonizes the economy, including renewable energy, storage and transportation assets, and invest in enhancements to existing infrastructure to ensure their long-term sustainability and value proposition.


The adaptation imperative

Through actions such as switching to low-carbon energy sources, climate mitigation efforts that reduce greenhouse gas emissions have been underway for years. But knowing that by mid-century earth’s temperatures are projected to rise significantly above pre-industrial levels, infrastructure investors, governments and others are increasingly pursuing a second response — climate change adaptation. Adaptation calls for significant shifts in the way we plan, design and finance communities and related infrastructure, as well as how we assess risk and assign economic value to future-proofing efforts.

As a matter of both prudence and fiduciary duty, long-term infrastructure investors must closely analyse the sustainability of potential investments. “We invest in businesses for 10-20 years and infrastructure lasts much longer that, so you’re constantly rebuilding, replacing, enhancing and making things fit for purpose in this new world,” said Mary Nicholson, Managing Director and Chief Risk and Sustainability Officer, Macquarie Infrastructure and Real Assets (MIRA). “As you do that, if you don’t have an eye to adaptation, then you are not really investing responsibly.”

The Global Commission on Adaptation (GCA) advocates for infrastructure owners to assess and manage climate risk to their existing and new assets. In some cases, minor physical enhancements can be made to improve resilience to flooding, drought, fire, disease or wind. Resilience can also be enhanced through operational changes, such as improved monitoring and strengthened business continuity management.

In addition to the day-to-day essential services that people rely on, society becomes even more dependent on infrastructure assets when communities are under stress. Climate events can trigger cascading impacts that have interlinked consequences on multiple assets. To guard against a network of infrastructure failures, resilience can be enhanced by investing in nodes that can operate independently of each other.

“If you are truly planning and investing for the long term, then making sure that investments are resilient should be a natural part of the business plan.”


Positive developments are already underway

This new reality has already led to positive developments in adapting infrastructure across the globe. “It is hard to pinpoint the total dollar amount flowing into adaptation and resilience because it is often integrated into the overall project investment, as it should be,” said Andrew Chapman, Senior Managing Director at MIRA.

As part of the construction of the Indira Gandhi International Airport in Delhi, solar energy generation was integrated into the roof design to supply local power for times when the main grid was compromised. Today, onsite solar plants and third-party renewable purchases contribute 25 per cent of the total electricity needs of the airport.

As storms and sustained heavy snowfalls in Finland continued to challenge the reliability of power distribution in the country, Finnish utility Elenia integrated its power distribution and data systems into a comprehensive smart distribution grid. In the event of power outages, the Elenia network automatically isolates fault locations, directing power distribution to parts of the grid that are functioning normally. To improve network reliability, Elenia is using underground lines in new network construction and when renovating older sections of the existing power grid.

The GCA also highlights the role of improved gathering and use of data, particularly around early warning systems. Not only do these protect assets worth at least ten times their cost, they safeguard communities and ultimately save lives.1 Spending $US800 million on early warning systems in developing countries would avoid $US3-16 billion per year in losses alone.2

Energy Development Corporation (EDC), the Philippines’ largest renewable energy company, has taken steps to increase its resilience following Typhoon Urduja in December 2017, which saw 1,400mm of rainfall in four days, disrupting plant capacity by more than 50 per cent. EDC installed geohazard early warning systems and more robust modelling of potential slope failure and landslide risks. The business is also investing to reconfigure and reinforce pipelines and cooling towers to protect against seismic disruption.

 


 

Future solutions

While it is clear that public and private entities will need to form long-term infrastructure adaptation solutions, developing a system that recasts the costs and rewards for adaptation will be challenging. 85 per cent of private investors want to increase their infrastructure investment in the next five years3 but the investments will not occur without sufficient revenue streams and recognition that investment now preserves value later.

Asset owners, such as pension systems and sovereign wealth funds, and their constituents could play a vital role in influencing the course of climate change adaptation, Nicholson said. “Many pension investors are currently in their twenties and thirties, and care passionately about climate issues. They want their savings to be invested carefully with people who are attuned to resilience because it impacts the future in which they are going to retire.”

 

Macquarie Group CEO Shemara Wikramanayake is a founding Commissioner of the Global Commission on Adaptation.


Keywords: Renewable, Energy

Find out more about Macquarie Asset Management.

1 World Resources Institute Analysis, technical paper forthcoming, Sept. 2019

2 Hallegatte S. (2012). “A Cost Effective Solution to Reduce Disaster Losses in Developing Countries: Hydro-Meteorological Services, Early Warning, and Evacuation.” World Bank Policy Research Working Paper 6058

3 Global Infrastructure Hub

 

This market commentary has been prepared for general informational purposes by the authors, who are part of Macquarie Infrastructure and Real Assets (MIRA), a business division of Macquarie Group (Macquarie), and is not a product of the Macquarie Research Department. This market commentary reflects the views of the authors and statements in it may differ from the views of others in MIRA or of other Macquarie divisions or groups, including Macquarie Research. This market commentary has not been prepared to comply with requirements designed to promote the independence of investment research and is accordingly not subject to any prohibition on dealing ahead of the dissemination of investment research. Nothing in this market commentary shall be construed as a solicitation to buy or sell any security or other product, or to engage in or refrain from engaging in any transaction. Macquarie conducts a global full-service, integrated investment banking, asset management, and brokerage business. Macquarie may do, and seek to do, business with any of the companies covered in this market commentary.  Macquarie has investment banking and other business relationships with a significant number of companies, which may include companies that are discussed in this commentary, and may have positions in financial instruments or other financial interests in the subject matter of this market commentary. As a result, investors should be aware that Macquarie may have a conflict of interest that could affect the objectivity of this market commentary. In preparing this market commentary, we did not take into account the investment objectives, financial situation or needs of any particular client. You should not make an investment decision on the basis of this market commentary. Before making an investment decision you need to consider, with or without the assistance of an adviser, whether the investment is appropriate in light of your particular investment needs, objectives and financial circumstances. Macquarie salespeople, traders and other professionals may provide oral or written market commentary, analysis, trading strategies or research products to Macquarie’s clients that reflect opinions which are different from or contrary to the opinions expressed in this market commentary. Macquarie’s asset management business (including MIRA), principal trading desks and investing businesses may make investment decisions that are inconsistent with the views expressed in this commentary. There are risks involved in investing. The price of securities and other financial products can and does fluctuate, and an individual security or financial product may even become valueless. International investors are reminded of the additional risks inherent in international investments, such as currency fluctuations and international or local financial, market, economic, tax or regulatory conditions, which may adversely affect the value of the investment. This market commentary is based on information obtained from sources believed to be reliable, but we do not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in this market commentary. Opinions, information, and data in this market commentary are as of the date indicated on the cover and subject to change without notice. No member of the Macquarie Group accepts any liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this market commentary and/or further communication in relation to this market commentary. Some of the data in this market commentary may be sourced from information and materials published by government or industry bodies or agencies, however this market commentary is neither endorsed or certified by any such bodies or agencies. This market commentary does not constitute legal, tax accounting or investment advice. Recipients should independently evaluate any specific investment in consultation with their legal, tax, accounting, and investment advisors. Past performance is not indicative of future results.

 

This market commentary may include forward-looking statements, forecasts, estimates, projections, opinions and investment theses, which may be identified by the use of terminology such as “anticipate”, “believe”, “estimate”, “expect”, “intend”, “may”, “can”, “plan”, “will”, “would”, “should”, “seek”, “project”, “continue”, “target” and similar expressions. No representation is made or will be made that any forward-looking statements will be achieved or will prove to be correct or that any assumptions on which such statements may be based are reasonable. A number of factors could cause actual future results and operations to vary materially and adversely from the forward-looking statements. Qualitative statements regarding political, regulatory, market and economic environments and opportunities are based on the [authors’ // relevant MIRA team’s] opinion, belief and judgment.

 

Other than Macquarie Bank Limited ABN 46 008 583 542 (MBL), none of the entities noted in this document is an authorized deposit-taking institution for the purposes of the Banking Act 1959 (Commonwealth of Australia) or banking legislation in other jurisdictions. The obligations of these entities do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of these entities.