Washington, DC 2020: Integrating climate risk management across infrastructure and real estate assets

Recently released research from the McKinsey Global Institute suggests that physical risks may increase the operating costs and climate related damages of some assets by as much as 10 times, indicating potential for significant variations in asset values in the coming decades. Investors and asset operators will increasingly need to incorporate climate intelligence into how they select assets, underwrite deals, operate and manage individual assets and portfolios over time.

On March 5th, we hosted a peer-to-peer roundtable with leaders from across the value chain from the real estate, transportation, public infrastructure, and utilities sectors. The goal was to explore how to integrate climate risk management across the full asset lifecycle. We looked at the barriers, opportunities, and actionable steps to mitigate risk from front-end development through to operation. The key themes that surfaced during the discussion are summarized below:

  • Engage in a climate strategy for your assets now. Climate impact is already happening across asset classes globally and is likely to accelerate. Polling the room, 58 percent of participants stated that climate risk was the top priority on their organization’s agenda. However, many organizations still see climate risk as an ESG issue or only prioritize it when demanded by clients, which is not consistently the case.
  • Prepare for increasing physical and transition risks. The public and private sector need to prepare for both physical risks (e.g. floods, droughts, sea-level rise) and transition risks (e.g. regulatory change, legal claims). Physical risks will increase and the impacts on human and natural systems will be non-linear. For example, repetitive flooding events in a region could reduce property values, make properties uninsurable, and decrease State revenues due to decreased property taxes and fewer new investments in the region.
  • Financing climate-ready infrastructure will require public-private coordination, robust data, and innovation. There simply are not enough public resources available to future-proof the world’s infrastructure. Private asset owners, investors, and ratepayers will have to bear some of the costs and work together to allocate risk. Private capital is available to be deployed for climate-ready infrastructure, but it does require tangible revenue streams which can emerge from government action (e.g. taxes, incentives) and from the improved valuation of the risk and the benefits of climate-ready infrastructure and ecosystem services.
  • Decarbonize, manage risks, and capture the opportunities. Mitigation of and adaptation to climate risk requires both a massive global effort to decarbonize and regionally focused efforts to manage the risk and impacts on people, assets, and the environment. Understanding the barriers to action and identifying the opportunities to accelerate the adoption of climate-ready infrastructure are essential tools for managing the risk, acting, and capturing the upside.
  • Tackle the barriers to integrating climate risk into assets. Key barriers identified:
    • Limited knowledge of how to create bankable projects in sustainable and climate-resilient infrastructure.
    • Procurement does not require or incentivize sustainable infrastructure and there is a premium to integrating climate risk.
    • Insufficient financial evaluation of climate risk, resulting in risk not being priced into assets.
    • Lack of institutional capabilities (public and private) to evaluate and manage climate risk.
    • Inconsistent or lack of regulation to incentivize sustainable infrastructure, coupled with a lack of standards and information to determine whether assets are climate-ready.
  • Seize the opportunities to accelerate climate-ready infrastructure. Opportunities identified:
    • Implement a carbon tax to drive sustainable infrastructure design and provide a revenue source for future-proofing assets.
    • Make climate risk information available to all stakeholders.
    • Harden the power grid systems, including investing in storage, decentralized energy, and renewables.
    • Create standards and retrofit buildings for energy efficiency and climate events.
    • Electrify transport and related infrastructure assets.
    • Engage in cross-sector collaboration to drive long-term climate-ready infrastructure planning.
    • Invest in natural capital, both for carbon sequestration and to secure key ecosystem services. For example, Nairobi invested in their water catchment by working with upstream landowners and have dramatically improved water supply and quality while reducing the cost.
  • Prioritize action where it makes long-term sense. Based on the science, certain assets in certain regions will be unsalvageable, making it questionable as to whether it is worth continuing to invest in these regions e.g. assets in low-lying areas with significant risk to sea-level rise and flooding. In this instance, the public and private sector might be better off encouraging a relocation strategy and investing in lower risk regions and assets.
  • Integrate climate risk evaluation throughout the asset project lifecycle. Starting the climate risk dialogue early in the development cycle (pre-financing) would dramatically reduce the risk of stranded assets down the line. Owners should mandate climate risk analytics into the project development phase, as Crossrail did in London. As one participant stated, “Consequence is not a part of engineering practice.” For existing assets, a climate resilience rating through a ratings agency would go a long way to helping countries and investors manage and price-in the risk.