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1 August, 2022

Why adaptability cannot be ignored in sustainable infrastructure investing

Adaptability is the latest concept that Covid-19 and climate change are pushing to the top of infrastructure investors’ agendas, but what does it imply?

By Viola Caon

Sustainability is perhaps the most recurrent theme in the business and investment world at the moment. The increasing urgency of facing the challenges posed by climate change and meeting net-zero targets has played a key role in upgrading sustainability from a tick-box exercise to a necessary requirement in investors’ portfolios.

Recent disruptive and often unforeseen events such as the Covid-19 pandemic and increasingly recurrent climate disasters have pushed the debate further beyond sustainability only. Business plans across sectors are now no longer simply required to be sustainable from an economic and financial point of view but to also prove resilient and adaptable to unpredictable and disruptive events.

Infrastructure and the environment

Given their physical impact on the environment and their role in creating jobs and providing a wide range of essential services to the population, infrastructure projects offer an interesting lens to analyse these themes through.

Out of the three investment themes – sustainability, resilience and adaptability – sustainability is the most recurrent. It normally involves developing projects that can be sustained over the long term, where risks can be managed and mitigated. Sustainability needs to be considered at the project planning stage in order to make sure that it is financially viable.

“Are we building this so it can last longer than five years and thus return capital expenditure cost?” asks David Baxter, a public-private partnership consultant. “In the world of infrastructure, people are working with a 20 to 30-year horizon in mind and are looking at making profits, and it often focuses on brownfield infrastructure, i.e. developing existing infrastructure rather than building new ones.

“This applies well to the US and Europe, where we have reached a high level of development density in infrastructure and we are now mainly looking at maintenance work, which is where the sustainability element comes in.”

Building resilient infrastructure means taking this a step further and building infrastructure that can resist the next unexpected climate crisis or war. It involves planning using better technology, materials and site selection.

“Resilience has become more important for infrastructure investors as hurricanes, wildfires and earthquakes, especially in the US, have become a yearly occurrence,” says Baxter. “Planning for resilient infrastructure includes choosing a site that is not subject to rising sea levels or earthquakes, for instance.”

The outbreak of the Covid-19 pandemic and, in a different way, Russia’s invasion of Ukraine have made clear to investors and governments that the infrastructure of the future not only needs to resist so-called black swan events but needs to be built so that it is flexible and reactive to them.

This is where the term adaptability comes in and the role of government becomes key.

“When it comes to infrastructure planning and investing, adaptability means building infrastructure that is reactive to anything that can foreseeably happen,” says Baxter. “It means avoiding possible areas of drought or heavy rainfall. It means building new healthcare infrastructure based on future demographic trends, and it needs to happen at government policy level, before it hits the planning stage.

“Investors are not sentimental and are not going to invest in places that are at high risk of unforeseen climatic or geopolitical events.”

Investment opportunities in adaptable infrastructure

Such an evolution in the way of thinking about infrastructure creates a wide range of investment opportunities.

While sustainability normally ties into mega infrastructure projects such as large ports, bridges and airports, which need to stand the test of time and start paying off quickly to make up for the high costs they require, resilience is directed at projects further down the investment value chain, mainly including schools, houses, hospitals and so on.

“Adaptation encompasses those two,” says Baxter. “Governments need to be much more focused on adaptation and almost force contractors to implement it in their planning and building projects.”

As decarbonising the economy is front and centre of investors’ and governments’ agendas, there is no shortage of investment opportunities.

Lawrence Slade, CEO of the Global Infrastructure Investor Association, says that his organisation conducted a study with consultancy PwC two years ago that estimated, among other things, a required investment of £1.5bn ($1.83bn) per year for electric vehicles in the UK alone for the country to reach net zero.

Overall, the report estimated £40bn of investment was needed across power, digital, industrial and transport assets every year to ensure a credible pathway to net-zero decarbonisation.

“Electric vehicles alone were estimated to require £1.5bn investment every year in the UK,” says Slade. “The investment need is huge. While there is no shortage of capital, the problem is scaling up the projects.”

Challenges ahead, but will governments act?

Planning for more resilient and adaptable infrastructure is not as easy as it may sound as it is hard to estimate the real need.

“How many climate crisis and disruptive events are we budgeting for?” asks Slade. “This is very hard to predict and therefore hard to plan for, especially for new infrastructure.”

In his opinion, modelling and knowledge sharing is crucial in this respect. “We have to be able to take more into account,” adds Slade. “We need to understand the level of resilience, the impact on ongoing investment and work closely with regulators on regulatory models.”

The July 2022 heatwave in the UK is a good example of how there is an emerging issue with higher-than-normal levels of such events, which are likely to need to be catered for in the future – but the question is, to what extent?

“One hundred per cent resiliency is very expensive,” says Slade. “Investors and governments need to work out the right investment level and it is not an easy task. Another question that needs to be taken into consideration is how much are end-users willing to pay for more resilient and adaptable infrastructure?”

The role of government, industry experts agree, is crucial. As the main obstacle to the development of resilient and adaptable projects is scaling them up, Slade says that a new mindset is required.

“In order to deliver the investment pipeline, governments need to rejig their thinking at a more regional level,” he adds.

Another area that can play a pivotal role, and that also requires government support, is technology.

“Technology is bound to be key in this investment area,” says Slade. “However, more nascent technology will require government support or that of multilateral organisations such as the European Investment Bank or the UK Infrastructure Bank.”

The need for infrastructure that is not simply sustainable but resilient and adaptable too cannot be understated. The investment opportunities are plentiful and growing, but the role of government in spearheading the industry’s efforts to budget for and deliver it is likely to be essential in the coming years.

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