Climate risk in unlisted infrastructure investments may cause investors increased financial loss

More than half of the value of infrastructure portfolios may be lost before 2050

Climate risk in unlisted infrastructure investments may cause investors increased financial loss

École des hautes études commerciales du Nord (EDHEC), a French business school, recently sent an open letter to the European Insurance and Occupational Pensions Authority (EIOPA) regarding the growing concerns about climate risk when it comes to unlisted infrastructure investments, as reported by Chief Investment Officer.

EIOPA is an independent body that is responsible for helping in maintaining the stability of the financial system, ensuring the transparency of markets and financial products, and protecting insurance policyholders, pension scheme members, and beneficiaries.

Signed by Frédéric Blanc-Brude, director of the EDHEC Infrastructure Institute, and Noël Amenc, an associate professor of finance, the letter detailed EDHEC’s warning that the physical climate risk in unlisted infrastructure investment was “not limited to a distant future.”

The EDHEC said that physical climate risk was typically minimized as the negative effects were expected to occur only after 2050 which is beyond the time horizon of most investors. There was also an idea that came with it that said only those economies who were less advanced will suffer the physical consequences of climate change. EDHEC heavily criticized this view.

“This materiality in advanced economies, which are mostly in the northern hemisphere, challenges the intuition of many investors and economists that these economic risks impact first and foremost the poorer populations of the global south,” EDHEC said in its report.

“Instead, the reverse is true: more value will be destroyed in places where more valuable assets exist.”

Should there be an instance of runaway climate change, EDHEC said that there could be a loss incurred by some institutional investors with their infrastructure portfolio, with them losing more than half of its value before 2050.

EDHEC stated that there are many asset allocators who invest in infrastructure as limited partners in funds which are not traded publicly and there are only very few data surrounding the impact of climate risk to private assets.

“It should nonetheless be recognized that regarding climate risk, and notably physical climate risk, the data on the exposure and the financial materiality of this risk being realized for private assets is fairly limited,” said EDHEC.

To compensate for this limitation in the data, EDHEC conducted a survey regarding the risk for unlisted infrastructure investment.

Within the scenario of current policies, the research revealed that the cost of physical risks averages 4.4% of the total net asset value of assets that are in its reference database until 2050. At most, the average maximum loss is 27%.

The findings showed that investors will suffer great financial losses from physical risks as it would be twice as high in comparison to a low carbon scenario if there are no moves made to mitigate the issue.