Posted by Macquarie Asset Management
Sep 13, 2019
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.
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.
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.
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.
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
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