Infrastructure will be the first asset class covered in both the Net Zero Investment Framework (NZIF) and Climate Resilience Investment Framework (CRIF). IIGCC Investor Practices Programme Director, Mahesh Roy outlines the methodology and what it means for investors.
The net zero transition is a race against the physical risks that come from anthropogenic (human-made) climate change. The Paris Agreement acknowledges that increasing risks are already apparent and that we must take bold action together.
It is with this in mind that infrastructure, the glue that holds humanities’ systems together, will be the first asset class to be covered in both our net zero and climate resilience guidance for investors.
For climate resilience, we will also lead the second phase of the Physical Climate Risk Assessment Methodology, otherwise known as ‘PCRAM 2.0’. This builds on work conducted by members of the Coalition for Climate Resilience Investment (CCRI).
PCRAM 1.0highlighted the importance of properly quantifying and integrating physical climate risks into infrastructure projects and we look forward to building on this progress.
IIGCC will take forward CCRI’s investor solutions groupfrom April, with support from key partners.
A new infrastructure component
The release of this fifth NZIF asset class component comes after consultation with our infrastructure working group in August 2022. The guidance is already used by several leading industry investors in theirNet Zero Asset Managers(NZAM) target disclosures, showing strong uptake by key players.
Almost all of those infrastructure assets under management are included in target scope, highlighting the practical relevance and utility of this guidance.
The main target setting approach emphasised is the ‘portfolio coverage approach’, where investors assess an assets’ alignment with net zero goals via a multi-criteria approach which include:
-Targets over multiple horizons – Net zero transition plans – GHG emissions – Specific criteria relating to greenfield assets
NZIF also provides implementation guidance, particularly around engagement – the key mechanism for investors to help assets transition and contribute to real-world emissions reductions. It remains the most widely utilisednet zero methodologyfor investors globally.
This element covers both listed and private infrastructure assets. Supplementary guidance for private equity investors will be released later this year.
PCRAM 2.0 and the Climate Resilience Investment Framework
After outlining our climate resilience approach in adiscussion paperin September 2022, IIGCC and our adaptation and resilience working group selected infrastructure as the first asset class to be covered by the new framework.
The successful development of PCRAM 1.0 supported this decision. The methodology aims to properly quantify physical climate risks and the benefits of resilience so that they can be integrated into infrastructure investment decisions.
Initial work, led by CCRI, was developed collaboratively by engineering firms, investors, data providers and credit ratings agencies. It showed that by comprehensively integrating resilience measures and physical climate risks into infrastructure project cashflow models;
the increase in initial investment for resilience is less than anticipated, and;
the benefits in future cashflows are substantial.
PCRAM provides a clear way of integrating physical climate risk into project and asset valuation, and of outlining measures to mitigate climate-related valuation risk.
We look forward to leading the PCRAM 2.0 workstream, collaborating with CCRI partners leading the systemic resilience metrics and capital mobilisation streams. This work will integrate into overall guidance for infrastructure in CRIF throughout 2023 and 2024.
Net zero to build effective resilience
It is important to remember that resilience coupled with net zero is not an ‘and/or’ equation: both seek the same goal in combating the worst effects of climate change.
PCRAM assessments to date have shown that the further out in time, plus the higher the temperature scenario used, the less feasible an infrastructure project is from a financial perspective when accounting for increased expenditure on resilience.
Crucially, the best way to ensure assets (and hence their valuations) are more resilient to temperature rise is to reduce GHG emissions as quickly as possible, limiting temperature rise to below 1.5C by 2050.
By demonstrating this through a growing number of case studies and investor tools, we hope investors will be able to clearly articulate the relation between net zero efforts now and preserving value for the future in concretely financial terms, backed up by the best available science.
Successful work in infrastructure will be followed by other assets like real estate, then translating into corporate and government assets such as listed equities and bonds.
Together, this should assist us with the goal of integrating holistic climate considerations into every investment decision.
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