Rob Arnold (EDHEC-Risk Climate): "Investors are seeking more transparency on risk assessment and actions taken to improve the sustainability of infrastructure"

As Sustainability Research Director, you are leading the creation of a new body of knowledge on decarbonisation, climate resilience strategies, and alignment with sustainability goals in various infrastructure sectors. Could you explain why this knowledge is needed and whom it will benefit?

Rob Arnold: This work arose from a discovery made by EDHEC Infrastructure and Private Assets Research Institute, which monitors the financial performance of more than 9,000 infrastructure assets. The Institute realised that most asset owners are unclear about the exposure of their assets to the physical risks of climate change and the consequences these pose, as well as the financial risks that might arise from the need to reduce the greenhouse gas emissions of these assets. Ensuring owners have the information to make the right decisions is key to protecting the value of their investments and making investment decisions, as well as focusing efforts on achieving a successful transition to a low carbon economy.

Infrastructure assets such as roads, railways, airports, buildings and utilities are fundamental to our society and are major direct and indirect contributors to greenhouse gas emissions. We aim to help asset owners assess at a high level which strategies might enable them to protect their investments into infrastructure against climate-related losses and to reduce assets’ greenhouse gas emissions.

Better information on how infrastructure assets may be protected against physical risks and on how to reduce their climate impact and attendant transition risks can help improve investor due diligence and help them plan specific actions and spending. It can also help clarify which measures make a real difference to assets’ sustainability to help asset owners avoid ineffective actions that may result in accusations of them “greenwashing” their sustainability plans.

Could you give us an overview of this project? How is the production of this knowledge structured in terms of research lines and staging? Specifically, how does it address the decarbonisation and resilience of infrastructure assets to climate risks such as floods, storms, extreme heat, and extreme cold?

Rob Arnold: We divide infrastructure into eight key sectors in line with their main activity, such as transport, utility networks, renewable power, etc. This is done in accordance with The Infrastructure Companies Classification Scheme (TICCS®). TICCS® is an open-source taxonomy designed to capture the risk characteristics of infrastructure investments to group them in relevant and homogenous categories (1).

We identify the key strategies that can be used to decarbonise an asset or improve its resilience to extreme weather events and long-term climate changes – think of energy efficiency or of structural strengthening, for example.

We then identify the key measures (installing vehicle charging infrastructure, installing wind breaks, etc.), that can be used to deliver these strategies for each asset type and the technologies available to deploy them. Identifying technologies is important, as it enables us to estimate the effectiveness of a measure and its costs. This allows us to assess the cost effectiveness of a risk reduction measure and compare it to the value and running costs of a representative asset.

The outcome is an estimate of how much it may cost to protect each asset type from physical and transition risks and how that compares to the asset’s value.

Your team is currently working jointly with that of Dr Nishtha Manocha to produce taxonomies qualifying the sustainability of infrastructure investments. What, in your opinion, justifies prioritising these investments and what are the main challenges and implications of using these taxonomies for infrastructure investors?

Rob Arnold: Our work suggests that there is relatively little active research on environmental and financial sustainability risk to infrastructure investments, compared with research for other economic sectors, such as manufacturing industry or agriculture. This is both in terms of research into risks to assets’ value and in terms of research into their operational robustness and viability. These asset types tend to provide functions they are critical to the running of society, such as power, transport, drinking water and communications. Understanding the implications of these assets’ vulnerabilities to climate change and ways of reducing these is key to developing investor confidence to finance a successful transition to a resilient and low emissions economy.

The information needed to understand these risks is multidisciplinary in nature: partly financial and partly based on science and engineering. We aim to help overcome the barrier to investors of forming a coherent interpretation of these different types of information in a convenient manner that allows assets risks to be compared easily. We hope that this will help provide confidence in investing in sustainable infrastructure and highlight the types of infrastructure where sustainability investment brings the most impact.

How relevant is this knowledge to non-financial companies and to investors who do not primarily focus on infrastructure?

Rob Arnold: The relative paucity of information on physical and transition risks to infrastructure also suggests that a better understanding of the risks is useful to both public and private sector organisations in planning investments and managing real assets. There is a wide range of non-financial companies and organisations that are likely to find our research useful.

Correctly functioning infrastructure such as power, water, transport, goods delivery and healthcare supports many non-infrastructure businesses and reduces the costs of running society. The failure of this infrastructure can lead to a curtailment of these services and will have a negative impact on the companies and organisations that depend on it, potentially causing loss of value or even resulting in them going out of business. Understanding the reliability of supporting infrastructure is therefore a part of understanding risks to non-infrastructure companies. It is also of interest to the public sector, as curtailed infrastructure services can increase costs and challenges to governments of protecting the health and wellbeing of their populations. Information on infrastructure risk can thus be useful in understanding the risks to society and the wider economy.

At the OECD Infrastructure Forum, you discussed the significant challenges involved in collecting data on the exposure of infrastructure assets to climate risks. Could you share some insights on how these challenges can be addressed?

Rob Arnold: One of the key challenges to understanding these types of infrastructure risk exposure is the availability of data. This is often diffuse and hard to access: technical data on the costs and efficacy of the measures and technologies capable of reducing these risks is held across multiple organisations – from site managers, technical consultants and vendors of these technologies to institutional investors and governments. Everybody owns a little, and much of it is often too detailed to publish in publicly available reports. Bringing statistically significant amounts of data together in a form that is useful to investors, owners and strategic planners for infrastructure climate risk assessment may require collaboration and coordination across multiple organisations.

With your experience advising on engineering, science, and policy, especially in decarbonizing the economy, what do you think are the key ways to support the energy transition and resilience? What are the main challenges to address in Europe, the US, and elsewhere?

Rob Arnold: As mentioned above, a key lever would be facilitating the collection of data that allow investors, planners, and infrastructure managers to understand the costs and effectiveness of actions that reduce risks to infrastructure from physical weather risk and emissions mitigation policies. On both sides of the Atlantic, investors are seeking more transparency on risk assessment and/or actions taken to improve the sustainability of infrastructure, and this is becoming reflected in regulatory requirements – notably in the EU and the UK.

This is a helpful development, but any increased availability of data needs to be complemented by initiatives to compile and interpret this data in easily-comparable ways – both at national and global levels. This can help reveal the measures that asset owners and operators can take right now to protect their investments in a cost-effective manner. It can also reveal where there are absences of available measures that may be assisted by policy incentives or market interventions to accelerate the development of technologies and products that might fill these gaps. We aim to contribute to this effort.

(1) TICCS® was created in 2018 by EDHEC Infra & Private Assets Research Institute with the support of the industry.  Some of the largest infrastructure investors in the world use it as the default system to organise their portfolio according to four pillars: business risk, industrial activity, geo-economic exposure and corporate structure