EDHEC: Transition risks could cost infrastructure investors $600bn before 2050

EDHEC: Transition risks could cost infrastructure investors $600bn before 2050

December 14, 2023

Energy Transition
Klimaat (11) duurzaam energietransitie windenergie

EDHEC Infrastructure & Private Assets Research Institute's latest research publication, entitled 'Highway to Hell', sheds light on the critical importance of addressing transition risks and physical risk in privately invested infrastructure.

This study, based on over two years of work from a dedicated research team, leverages a unique database and climate risk data to conduct a comprehensive analysis of the valuation of climate risks impacting global infrastructure investments. The study notably uses scenarios from the Network for Greening the Financial System (NGFS) to model different climate and macroeconomic conditions.

Due to the climate risk data used and the capacity to price infrastructure in any macroeconomic and climate scenario, this is the first study that has been able to quantify the loss in market value of infrastructure assets when considering the whole impact of climate risk on the asset class.

The numbers speak for themselves - a disorderly scenario could wipe nearly $ 600 bn off infrastructure investments, equivalent to 30% of the total invested value in infraMetrics' extensive portfolio of 9,000 infrastructure assets.

Commenting on the study, Frédéric Blanc-Brude, Director of the EDHEC Infrastructure & Private Assets Research Institute, said: 'We recommend that investors demand coordinated actions and that governments immediately implement carbon taxes to minimise the adverse financial effects of transition risk.'

Moreover, the study isolates the physical risk effect, revealing that the cost of physical risks within the 'Current Policies' scenario would represent, an average cumulative loss of $140bn in the reference database by 2050. Extreme climate events negatively impact all sectors, with potential losses of up to 54% of the portfolios invested in the most exposed assets to this risk in the hot house scenario.

Commenting on this result, Frédéric Blanc-Brude stressed 'the interest of an orderly transition that not only limits transition risk but also physical risk'.

This research not only serves as a wake-up call but also as a roadmap for stakeholders to navigate the challenges ahead, arming them with a profound understanding of the financial implications of transition and physical risks in the infrastructure sector.

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