This article is sponsored by QIC
From forest fires to floods, the escalation of extreme weather events that we have witnessed all over the world in recent years is a clear indication that climate risk is intensifying. Not only must managers factor climate resiliency into the design of the new assets that they build, they must also invest in retrofitting existing infrastructure.
Despite the challenges that climate risk mitigation presents, however, there is also a huge opportunity to invest in resilient assets according to Ross Israel, head of global infrastructure at Australian alternatives asset manager QIC. These opportunities, he says, will continue to deliver stable long-term returns to investors and essential services to the communities they serve for many years to come.
How significant a risk does climate change pose to our current infrastructure and which sectors and geographies are most vulnerable?
Climate change poses a very significant risk. Just look at the climate events we have witnessed in recent years in their various guises, from bush fires through to flooding. Those events have really tested the limits of the assets that are providing our essential services. It is difficult to generalise about which sectors and geographies are most exposed because climate change drops into different regions with very different outcomes. But certainly, climate change resilience is now front and centre whenever new infrastructure is being developed.
Increasingly, retrofitting existing infrastructure to ensure it can withstand the shocks that are taking place due to the intensity of weather events has also become a priority for long-term owners, such as us. We have a fiduciary duty to deliver stable and predictable returns, typically matching pension liabilities over time. In that context, climate change undoubtedly represents one of two critical long duration risks that infrastructure investors are exposed to. It is vital that we take the necessary steps to ensure those risks are adequately mitigated.
What steps can be taken to retrofit existing infrastructure to ensure climate change resilience?
The first step involves hazard identification using dedicated climate tools and data analysis to understand exposures and vulnerability to climate risk. Asset owners can then address those findings through a combination of monitoring, engineering responses and emergency responses.
Collaboration with local stakeholders is critical to bringing local knowledge into the adaption planning, given the interdependencies often associated with infrastructure assets.
Communication and training are also extremely important in order to not only prepare for climate emergencies, but also to respond and recover from those significant climate events. A good example of that would be our New Zealand-based electricity and gas distribution company Powerco, which we first invested in back in 2009.
Data-driven exposure assessments highlighted particular aspects of physical resilience in the asset base which has been a key priority for the management team. Recently, however, Powerco has experienced more than its fair share of extreme weather events, culminating in Cyclone Gabrielle in February 2023, which was the most significant weather event to hit New Zealand in the past 20 years.
Powerco enacted its co-ordinated incident management system – or CIMS – in advance of the cyclone hitting. Around 100,000 of the company’s customers were impacted and Powerco demonstrated a series of preparation capabilities, responding safely and rapidly to the large-scale challenge of reconnecting those communities. In practical terms, that meant relocating field staff and generators to high-risk areas in advance; calling in all contracted fault support teams in anticipation of widespread outages; cancelling planned works; increasing network operation centre coverage in advance of the event hitting; deployment of drones and a range of creative solutions to relocate assets away from hazardous situations including tall trees.
It was a proactively driven response with communication at its heart. The company was able to provide up to date situation reports to the higher authorities dealing with the crisis, as well as to customers, to the media and to other stakeholders. This was a great example of the type of challenges that severe weather events can produce. It also highlights the way in which appropriate preparation and response is fundamental to an asset owner’s social licence to operate.
To what extent is the current macroeconomic environment impacting the ability and willingness to execute on this retrofit?
As responsible stewards of infrastructure providing essential services to communities, we cannot only be willing to execute on appropriate resilience measures when macroeconomic conditions are favourable or when the fundraising market is strong.
Obviously, high inflation and a cost-of-living crisis, makes passing costs on to household bill payers challenging. Asset owners must deal with those stakeholder sensitivities. Increasingly, however, automation means that there are steps that can be taken to mitigate climate risks without significant upfront cost.
What role does data play in your approach to combatting climate change and how are tech advancements supporting your efforts to mitigate climate risk?
Data-based decision making is only going to become more critical with time. That data needs to be accurate and it needs to be relevant. For example, we use a location risk intelligence solution, Munich Re, to help us understand current and projected exposure to physical risk for our portfolio companies. Meanwhile, digital twinning allows us to assess how an asset may be impacted by a particular climatic event.
One specific example of our use of data would be the Port of Brisbane, where we used a tool called NCOS Online, which provides near real time weather forecasting, as well as detail around the climate change risks impacting the physical infrastructure of the port.
Data also has a key role to play when assessing climate risk in prospective investments. The identification of potential exposures to climate perils forms an important part of our due diligence and in our plans to augment assets. We are also keenly interested in how climate vulnerability could impact pricing going forward.
Finally, it is important that there is interconnectivity between assets and other agencies. That could mean regulators, for example, or it could mean emergency response teams. Some data also needs to be accessible to customers and wider communities, as well as to suppliers.
The ability to understand how a disruption can be rectified is important for all stakeholders and so transparency will definitely be best practice going forward. Open access to data is critical to building net resilience.
How optimistic are you that the infrastructure industry is up to the challenge that climate change represents?
I am very optimistic. This is a long-term asset class and that is an enormous positive when it comes to investing behind the big mega-trends of our time including the energy transition, digitalisation, deglobalisation and decentralisation. It is also a positive when it comes to creating genuine climate resilience in the infrastructure that serves our societies.
In fact, I see a generational investment opportunity emerging for infrastructure as an asset class and a lot of that focus will be on delivering a more resilient world that can withstand the challenges of climate change, but also on the tech innovation that will hopefully deliver a win-win: providing jobs and better environments going forward.
In an increasingly urbanised world, we see infrastructure and the development of its resilience to climate change as a major focus for governments, communities and regulators. That is something that investors in the asset class can really take heart
We have an opportunity here to create a virtuous cycle, investing in assets that are fit for the future, while delivering good, stable, long-term returns to pensioners and reliable utility to the societies these assets serve.
What steps can and are being taken to mitigate climate change risk when it comes to developing new infrastructure?
Technology has a really important role to play here, in terms of the data analysis required to factor in future climate conditions when building infrastructure, and therefore to ensure it is fit for purpose in its design and designated location. An example of this would be the second runway that has recently been added to Brisbane Airport, which has been in our portfolio since 2007. The runway was built 1.5 metres above regulated requirements to ensure a sufficient buffer against potential storm tide events as the airport sits on Moreton Bay. The length of the runway also took future temperature increases into account.
Another example, in a very different location, would be our district energy platform, CenTrio, acquired in 2021. CenTrio, which provides heating, cooling and electricity solutions to more than 400 buildings in urban centres, has a facility in New Orleans which provides critical services to hospitals. Reliability is therefore critical and climate resilience was a key part of its design and operation.
For instance, the building was raised five feet above sea level and all of the critical systems were installed at least 20 feet above sea level. The structure was designed to withstand wind speeds of up to 150 miles per hour. Back up generating capabilities were incorporated and staff were given rigorous emergency response training.
Hurricane Katrina put all of these design features and systems to the test, and I am pleased to say that the facility was able to successfully operate throughout the storm, providing services to the hospital and wider community at a time when they were of course under huge strain as a result of the climatic event.