Anisha Bilala from the IFoA Infrastructure Working Party argues that institutional investors will place a greater financial value on infrastructure projects if they demonstrate climate change resilience. In her paper ‘Climate change and infrastructure: investment implications for the next 20 years’ she also describes ways in which some investors are seeking to influence corporate climate strategies.
Over the coming 20 to 25 years, climate change will intensify. The most obvious risks are physical: flooding, heat stress, drought and storms. The UK’s Committee on Climate Change (CCC) finds that flooding remains the most significant hazard for infrastructure, with up to 50% of UK rail and road networks potentially exposed by 2050.
Adapting to a low-carbon economy will also create ‘transition risks’. For example, carbon regulation could make infrastructure with high emissions intensity or heavy energy demand obsolete, or it could necessitate retrofitting. Operators will also need to comply with the climate disclosure requirements of frameworks such as TCFD or ISSB.
The recent IFoA and University of Exeter report Parasol lost: Recovery plan needed warns that global temperatures are accelerating faster than predicted, with global warming likely to reach 2°C before 2050. This makes it ever more important to build climate risk mitigation into infrastructure projects.
The IFoA has encouraged NISTA, the National Infrastructure and Service Transformation Authority, to produce guidance on mitigating climate risk in all their major projects, especially when it comes to project design and construction materials. While the message was addressed to public sector sponsors it applies also to the private sector.
Infrastructure is an attractive long-term investment for institutions such as pension funds and insurers, since it offers stable, inflation-linked cash flows and low correlation with equities. However, infrastructure also has disadvantages that are accentuated by climate change: it is hard to exit, highly capital-intensive to adapt, and often regulated.
Investors therefore have an interest in making sure that climate resilience is a high priority for the infrastructure firms they invest in. This is not simply about managing downside risk. Resilience measures cost money, but this is potentially outweighed by how they can enhance a project as a potential investment.
For example, investing in physical resilience such as flood defences can improve operational stability and reduce insurance risk. Another example is that institutional investors are becoming more interested in urban developments that incorporate biodiversity and water-sensitive design.
Investor-driven climate governance is an emerging approach in which institutional investors actively steer corporate climate strategies. Methods for achieving this vary, including board engagement, stewardship and coalition actions.
Engagement with boards is important because they play a key role in risk oversight, capital allocation, management accountability, and long-term strategy. Large investors in infrastructure can seek influence on boards in several ways, including securing seats on the board or on important committees (such as risk, sustainability or audit) or nominating directors with climate expertise.
Recent research shows that more independent, more diverse and larger boards all tend to have stronger climate strategy adoption. This suggests that by influencing internal governance, investors can ultimately shape outcomes.
A key recommendation of my paper is that pension funds and insurers looking at infrastructure investments should prioritise climate-resilient assets. Such assets will demonstrate features like built-in adaptation, modularity, or nature-based design that show project sponsors have given careful thought to climate resilience.
Investors that seek to influence boards should raise the issue of governance rights (like board access or climate oversight roles) during contract negotiations. If the prospect of direct influence is limited, investors can still have an impact through voting or by participating in investor coalitions.
‘Climate change and infrastructure: investment implications for the next 20 years’
