Extreme weather resilience: why it matters and how we’re building it

Tackling the $64 trillion question

With nearly $64 trillion of investment needed in infrastructure over the next 25 years,1 the sector, in our view, is one of the biggest and most compelling long-term opportunities of our time. Investors increasingly recognise this, but it comes with a defining question: how can we ensure these assets remain resilient?

Physical climate risk tends to affect financial performance across many sectors today. It influences valuations, insurance costs, credit assessments and the assumptions that underpin long-term cash flow projections. It’s a particular priority in infrastructure, where assets are often remote and the services they provide essential. And it’s still more important in emerging markets, where infrastructure is more exposed to extreme weather but is typically less equipped to adapt than that in developed markets.

The commercial and financial consequences of failing to mitigate against extreme weather can be significant. Beyond the costs of asset repair, operators face lost revenues and potential reputational damage from downtime and interrupted services. Insurers are also increasingly focused on physical climate risk: a recent survey found that 96% of insurers were very or extremely concerned about the long-term insurability of infrastructure projects in regions exposed to physical climate risk.2 A lack of action risks higher premiums – and even a refusal to insure assets.

Inaction can also expose infrastructure operators to legal liability risk, with implications that can undermine financial viability. Witness California-based utility Pacific Gas & Electric’s bankruptcy in 2019 after it was found liable for a series of forest fires between 2015 and 2018. The circumstances surrounding this case were the result of US state-level laws, but it is only a matter of time before regulators tighten their requirements elsewhere.

We believe that the costs of inaction far outweigh the investments needed to mitigate extreme weather. Natural disasters are estimated to cost $732 billion in damage and loss of infrastructure assets globally every year,3 with indirect economic impacts averaging 7.4 times direct infrastructure damage, a recent report by CDRI found.4

Physical climate risk could result in some infrastructure investor portfolios losing up to 54% of value by 2050, according to an EDHEC study.5 Meanwhile, research for the World Economic Forum (WEF) found that, absent evidence-based resilience strategies, listed companies could see an annual decline of 7.3% in average earnings by 2035 as a result of fixed asset losses. The researchers noted that if private businesses were included, the percentage would have been significantly higher.6

Yet actions to mitigate extreme weather event risks don’t just protect value; they can also create it. Every dollar invested in extreme weather adaptation in 10 emerging markets before 2030 could generate a $12 return from avoiding damage and lost economic growth, according to one study.7

Other research demonstrates a “triple dividend”, where every dollar invested in climate adaptation yields $10.50 in avoided losses, plus economic, social and environmental gains over a 10-year period.8

These are just some of the reasons why our approach at Actis treats resilience – including physical climate resilience – as a financial discipline. This shapes our investment decisions and underpins a systematic and rigorous approach to considering and acting on extreme weather exposures. We look to assess the risks at individual asset level, quantify the commercial consequences and then support targeted mitigation investments. It’s a holistic approach, which tends to result in more resilient assets and creates value that could increasingly underpin the exit case – our assets’ future buyers will likely apply similar scrutiny in this area.