Investors ‘Ignoring Climate Risks’

Infrastructure investors aren’t considering climate risk when building business models in areas that have yet to experience the effects of climate change and severe weather — but they should, says a report by UK insurance giant and risk adviser Marsh.

Sustainable Infrastructure — Weathering the Storms says the resilience of infrastructure assets needs to be enhanced and investors should assess sustainability not only at the inception stage of a project, but also throughout the asset’s life cycle.  The report details how key stakeholders involved in infrastructure development can implement best practices and manage the risks associated with the changing climate more effectively.

The chief suggestions:

• Broader due diligence for climate change, so as to improve resiliency and operational efficiency throughout the life-cycle. While there has been progress in environmental impact assessments before projects begin and efforts have been made to assess performance throughout the life-cycle, Marsh says more needs to be done because investors in hitherto unaffected areas act as if catastrophes planning is something for the future.

• More effective assessment and management of “Force Majeure” or act of God risks in the longer term, and in an economically sustainable way. Typically, such clauses are incorporated to limit liability. Marsh says physical loss and damage from such events is insurable, but the prolonged interruption of business may not be, so all stakeholders in a project need to recognize that and plan for it.

• Avoiding impacts to debt servicing capabilities by setting more robust risk pricing and improved risk mitigation. If lenders set risk pricing that falls short and a project fails, they have the most to lose, so accurate assessment is key to risk mitigation.

The warning and assessments from Marsh are echoed by other sources. Institutional investors should start measuring, disclosing and reducing greenhouse gas emissions associated with their investments and portfolios to reduce policy, regulatory and financial risks associated with these emissions, according to a United Nations Environment Programme Finance Initiative (UNEP FI) briefing published earlier this week.

UNEP FI co-developed the briefing with a group of investors including Allianz, Aviva, Hermes, HSBC, Eurizon Capital, Inflection Point Capital, Pax World Investments, Robeco SAM and Trillium Asset Management.

Earlier this month, the Center for Climate and Energy Solutions published a report that says nearly 90 percent of S&P Global 100 Index companies identify extreme weather and climate change as current or future business risks, across all industry sectors — but they lack the data and tools needed to effectively assess and manage these risks.