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Think Tank - The Geneva Association: Investing in climate-resilient decarbonised infrastructure

Source: Asia Insurance Review | Feb 2020

Solving the global infrastructure challenge, with emphasis on climate resilience and decarbonisation, is fundamental not only to address socio-economic goals but also to drive towards the goal of 2°C warming or less as part climate-change targets. This requires coordination, alignment and engagement of governments at all levels as well as other stakeholders. Insurers, as risk managers and long-term investors, are a critical part of the solution. The Geneva Association’s Maryam Golnaraghi explains.
The world is facing an infrastructure investment gap challenge. Critical infrastructure constitutes the backbone of a functioning society. It provides basic services that are fundamental to improving quality of life, economic growth and productivity, commerce, trade and job creation.
Years of chronic under-investment in infrastructure systems has led to a decline in quality, hindrance of socio-economic growth and the perpetuation of a poor quality of life in some countries.
There is a need to mobilise capital for upgrading existing infrastructure and investing in new ones. Globally, the annual infrastructure investment needed to support socio-economic development until 2030 is estimated to be between $3.3tn and $3.5tn (McKinsey & Company, 2016; Global Infrastructure Hub (GIH), 2018). The GIH estimates that the annual investment gap would increase from $0.9tn to $4.4tn if climate resilience and decarbonisation were also factored in. These expenditures are particularly relevant to the highest emitting sectors and nations. 
According to the World Bank Group’s Global Infrastructure Facility, between 60-70% of global infrastructure investments are needed in middle- and low-income countries. Over the next 40 years, as urbanisation continues to progress, more investment in urban infrastructure such as schools, hospitals, road construction, water and sanitation, energy and transport systems will be required (Global Platform for Disaster Risk Reduction, 2017). The scale of the investment gap is well beyond the capacity of the public sector alone. To address this funding deficiency, there is a need to mobilise private capital.
Investors in infrastructure need to manage a multitude of political, regulatory, economic, financial and operational risks associated with fragmented infrastructure governance, long infrastructure life cycles and infrastructure jurisdiction. These risks need to be addressed to attract long-term capital.
Disruptions to infrastructure - such as those from weather-related extreme events – can have adverse effects on economies, both domestically and internationally, harming people’s well-being and impairing economic growth. The increasing frequency and severity of hazards linked to climate change, the growing concentration of people and assets in high-risk regions, such as coastlines and cities, as well as poor development planning and construction practices further exacerbate these impacts. Rapidly expanding urban areas and high-risk zones like coastal regions and flood plains are particularly vulnerable.
Highest carbon-emitting sectors and countries
Insurance sector can help to solve the challenge
As risk managers and underwriters, insurers assess, price, carry and transfer risk. Non-life insurers already underwrite infrastructure; however, the industry’s engagement varies by country and depends on specific national governance, policies and regulatory frameworks. There are a number of challenges that prevent the insurance sector from making a more powerful contribution to infrastructure risk management: 
  • Insufficient access to reliable data to assess and price risk across the infrastructure lifecycle, also reflecting inadequate consideration given to assessing the impacts of physical climate risks;
  • A lack of public spending in ex-ante risk-reduction measures;
  • Until recently, the preference of governments for self-insurance and post-disaster spending
As institutional investors, insurance companies engage in investment strategies that are liability driven and constrained by regulations, fiduciary responsibility and other factors. Institutional investors - especially those with a long-term horizon, such as life insurers and pension funds - consider infrastructure projects as attractive investments because of their risk-return profile, diverse and long-term exposure and improved diversification across asset classes and geographies. 
However, they require a stable and predictable regulatory and political framework, a pipeline of investment-grade projects and an efficient market. Taxonomy, asset classification, risk-based capital requirements for long-term investments, different contractual requirements and related high due diligence costs are among the obstacles to scaling up investments. With the emergence of sustainable finance frameworks to enable long-term investing in transitioning to resilient net-zero economies, increasingly, institutional investors are joining coalitions, such as the G7 Investor Leadership Network. 
Members of these coalitions aim to leverage each other’s resources and expertise, particularly in emerging economies, to enable long-term investment in areas such as infrastructure with a focus on climate resilience and decarbonisation.
The scale and complexity of the investment gap challenge require a concerted multi-stakeholder effort, involving the public sector and the insurance industry as experts in risk management and long-term investing.
Five recommendations to tackle the global resilient low-carbon infrastructure investment challenge at scale:
  1. Governments need to establish clear and aligned public policy, supported by effective legislative and regulatory frameworks, to mandate climate resilience requirements as a pre-requisite for the entire infrastructure life cycle. Examples include land zoning, updated standards and building codes and investments in other risk-reduction measures, such as natural infrastructure as buffers (e.g. wetlands, mangroves).
  2. Infrastructure data policies are needed to enable access to reliable data for the entire infrastructure life cycle. Data is critical for assessing and pricing risks, identifying sensitive ecosystems, evaluating the overall resilience of infrastructure projects, anticipating failures and conducting proactive maintenance and preventive retrofits.
  3. Advanced technologies should be leveraged to improve and even transform the delivery of infrastructure systems. Examples include ‘smart green’ infrastructure systems and new opportunities for data collection and predictive risk analysis on the back of digitisation, cloud platforms, sensors and AI.
  4. Collaboration between governments and (non-life) insurers from an early stage could be instrumental in assessing, pricing and allocating risks between governments and the private sector. This is fundamental for mobilising long-term capital from institutional investors. Building on advanced risk analytics, insurers could consider innovative products and services that incentivise risk-sharing mechanisms, responsive project management, preventive maintenance and proactive retrofits.
  5. Long-term institutional investors, such as life insurers and pension funds, could engage with governments to make climate resilience and decarbonisation a pre-condition for their investments in infrastructure. These pre-conditions need to be integrated in their investment strategies and decision-making. A 
Ms Maryam Golnaraghi is director, climate change and emerging environmental topics with The Geneva Association.
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