EDHECinfra Post
[infraStack] What do airspace closures, compound interest and aircraft manual subscriptions have in common?
Publication date: 2022-04-02

Answer: They are driving cost of international sanctions to investors in Russian airports

In this research note, we look at the potential loss of value of Russian airports due to the war in Ukraine. Drivers of impact include the closure of a number of national airspaces to Russian airlines as well as related sanctions that have been imposed since the start of the invasion. We find that the immediate impact on the cash flows of Russian airports so far remains very limited, and it is equity holders who will suffer most; the increase in the price of equity risk is many times more painful for investors marking to market. As a one-off immediate shock, the loss of value for investors exposed to Russian airports in March 2022 is estimated to be less than 5%. However,

we show that this cost will increase rapidly the longer the conflict and the sanctions continue. Domestic traffic will be quickly – and severely – reduced by Russian airlines’ inability to keep foreign-made planes flying and the compounded effect of higher discount rates will rapidly burn through the NAV of these assets.

Since Russia invaded Ukraine on 24 February 2022, several countries have closed their airspace to Russian airlines. In this note, we consider what the impact of these and other sanctions have been so far for investors in Russian airports, and what they might be in the future.

We use a sample of international airports to estimate the impact on the asset values of degraded revenues from cancelled flights on both Russian and non-Russian airports. We also consider the impact on Russian airports of a more-or-less permanent increase in the discount rate implied by the isolation of Russia from the international financial system.

Read it the full paper here. This is joint work by Frédéric Blanc-Brude, Fabien Nugier, Jack Lee, Abhishek Gupta and Tim Whittaker.

Further reading by Tim


As the release of TICCS® 2022* approaches, Tim returns to a classic question..

What is infrastructure? 

This is a seemingly easy question to answer, but increasingly we’re seeing more and more investments that push the traditional definition of infrastructure.  To be specific we are talking about investable infrastructure, that is infrastructure that the private sector can invest in and earn a return. The dry academic view of infrastructure, as mentioned by (Gómez-Ibáñez, 2003, p. 4) is the following:

–  Large capital investment that is durable and immobile

–  The firm possesses natural monopoly characteristics, through either increasing returns to scale or traffic network effects; and,

–  Some form of government regulation or input into the operations of the firm.

Why do we need these three arms to the definition? Well, there is a lot of investments that qualify for one of the arms, but not the others.  For instance, a large mine requires significant capital investment, and you cannot move the mineral deposit.  Does that make it infrastructure? Unlikely, as it produces a commodity which would mean it doesn’t possess natural monopoly characteristics.

From my first-year undergraduate economics, a natural monopoly is a company that has a lower cost of production, as production increases.  From a societal point of view, having more than one of these companies is not ideal, as you could have lower costs if there was just one (because of the magical unit cost decline, the greater the production). A good example of this is in the early days of electricity generation.  The US power companies discovered that by increasing the size of their generators, they could produce electricity at a cheaper unit cost (of course I’m massively simplifying here). As a result, they steadily built larger and larger generators, centralizing power production at several plants.  The increase in efficiency from these larger plants resulted in consolidation of the power network (well until the Great Depression and the passage of Public Utility Holding Company Act of 1935).

From the point of view of society, the services provided by infrastructure companies are important and having a company that can have that much power is undesirable.  It is for this reason Governments step in to regulate or contract with the private sector, to ensure the infrastructure is provided, but not at the costs of monopoly rents.  This is why the last arm for the definition of what is infrastructure is the government regulation.

So “What is infrastructure?” from a practical investors’ perspective.

I always like to ask several quick questions:

  • What is the source of revenue?

If there’s no revenue, then it’s not an investment, rather a donation.

If there’s not an established business model, then its venture capital (i.e., EV charging).

  • What is the source of monopoly power?

Has the government provided a monopoly? (In Australia this is done for toll roads, with the government banned from providing competing roads and in some cases required to funnel traffic to the infrastructure.)

Or is the monopoly provided through technology – in which case it is ripe for disruption.  I am interested to see what happens when the prices of energy storage and small scale solar decreases to a point that there is very little demand on electricity grids from consumers.  What happens to distribution revenues in that situation?

  • How long is the asset around for?

Infrastructure is a long lived asset – if the asset is only around for five years, it isn’t infrastructure.

  • What is the purpose of the financing?

This is a difficult one, but it is important to consider – asset-based financing is like infrastructure investment, but I take the view its not the same.  For instance, aircraft or ship leasing provides finance, securitised by the asset, similar to a project financed infrastructure investment.  But its not the same.  Project finance is bespoke and differs from asset to asset whereas from my experience asset financing can be generalised (to a point) and essentially commoditises the finance provision.  This makes it different from infrastructure finance.

Now this is a long note just to point out that we’re seeing more and more a stretching of the definition of infrastructure, my favourite is a major infrastructure investor buying theme parks for an infrastructure portfolio.  I am not sure how they convinced their LPs to accept this, but if I were one of them, I would not be happy – as it is anything but infrastructure…

TICCS® 2022 will be released in April 2022. Read on for the full definition of infrastructure under The Infrastructure Company Classification Standard here.

Further Reading

Grand Theft Aero (FT)

Lights Out: Profitable Utility Company Shut Off Electricity to Homes Hundreds of Thousands of Times(ProPublica)

Neoen writes down value of big solar farm in Australia due to falling prices (Renew Economy)

Wind and solar reach 10 per cent of global electricity production for first time (Renew Economy)

Note – Next month I’ll be off finding Nemo – so the April update will be delayed

Nishtha’s ESG Scrapbook


United States

  1. On March 21, 2022, the U.S. Securities and Exchange Commission released its long-awaited proposed ruleon the “Enhancement and Standardization of Climate-Related Disclosures for Investors,” which is intended to require “consistent, comparable, and decision-useful information” on climate-related disclosures. The SEC has requested comment on the Proposed Rule by May 20, 2022 or 30 days after publication of the rule in the Federal Register, whichever is later. The rules will be implemented in stages with an additional phase-in period for Scope 3 disclosures. That means companies may not have to file information on climate risk until 2024 at the earliest. In particular, the Proposed Rule requires domestic and foreign registrants to include the following information in their registration statements and periodic filings:
  • Greenhouse Gas Emissions. Registrants would be required to disclose their GHG emissions, including Scope 1 (direct) and Scope 2 (indirect) emissions, regardless of whether these Scope 1 and Scope 2 emissions are material. Most registrants must also disclose Scope 3 emissions of upstream and downstream activities if (i) these emissions are material or (ii) even if not material, registrants have set GHG emissions reduction targets or goals that include Scope 3 GHG emissions. Investors and the SEC itself would be able to challenge a company’s assessment of what counts as material information. Smaller companies would be exempted from reporting their Scope 3 emissions.
  • Impact of Climate-Related Risks on Business Outlook. Registrants would be required to describe how any identified climate-related risks have affected, or will likely affect, their business model, strategy and outlook.
  • Risk-Management Processes. Registrants would be required to describe their processes for identifying, assessing and managing climate-related risks, as well as whether those processes are integrated into the company’s overall risk management program.
  • Corporate Governance. Registrants would need to describe the oversight and governance of climate-related risks by the board and management.
  • Impact of Climate-Related Risks on Consolidated Financial Statements. The Proposed Rule would require disclosure of how any climate-related risks identified by registrants (both physical and transition) have had or are likely to have a material impact on the business and consolidated financial statements, which may manifest over the short, medium or long term.
  • Financial Statement Metrics (Regulation S-X Amendments). The Proposed Rule would require registrants to disclose information on the impact of climate-related risks on business and consolidated financial statements. This includes, among other requirements, information about how climate events will affect certain line items on consolidated financial statements and assumptions used in the financial
  • Public Climate Goals (If Any). If registrants have set climate-related targets or goals, the Proposed Rule would require disclosure of, as applicable, descriptions of: (i) the scope of activities and emissions included in the target; (ii) the unit of measurement, including whether the target is absolute or intensity based; (iii) the defined time horizon by which the target is intended to be achieved; (iv) the defined baseline time period and baseline emissions against which progress will be tracked; (v) any interim targets set by registrants; and (vi) how registrants intend to meet climate-related targets or goals. If applicable, registrants would be required to disclose certain information about their use of carbon offsets or renewable energy certificates to achieve set targets or goals.
  • Transition Plans. If registrants have adopted a transition plan, the Proposed Rule would require them (i) to describe the plan, including relevant metrics and targets used to identify and manage physical and transition risks; (ii) to discuss how they plan to mitigate or adapt to any physical risks identified in their filings; and (iii) to update their disclosures about their transition plans each year by describing the actions taken during the year to achieve the plan’s targets or goals.

More details available here

  1. The Taskforce on Nature-related Financial Disclosures (TNFD) on 15th March, published the first draft of its proposed framework which is due to be launched in 2023. The TNFD is the nature-related equivalent of the well known Task Force on Climate-Related Financial Disclosures (TCFD).  Press release available here.

This first beta version of the TNFD framework comprises three components:

o   Foundational guidance, including key science-based concepts and definitions, to help a wide range of market participants understand nature, and nature-related risks and opportunities;

o   Disclosure recommendations aligned with the approach and language of the climate-related guidance developed by The Task Force on Climate-related Financial Disclosures (TCFD); and

o   Practical guidance on nature-related risk and opportunity analysis for companies and financial institutions to consider incorporating into their enterprise risk and portfolio management processes.

o   Additionally, Dependencies and impacts on nature are inherently local which is why consideration of location is an important feature throughout the TNFD Framework. The beta release of the framework proposes a new location-specific disclosure and provides guidance on how market participants can begin to incorporate location-based nature-related dependencies, impacts and risks into their enterprise and portfolio risk management processes.

  • TNFD’s disclosure recommendations build on work done by the Task Force on Climate-related Financial Disclosures (TCFD), adopting the same four-pillars and aligning its high-level disclosure recommendations as much as possible.
  • The beta framework is also designed for future alignment with the global baseline for sustainability standards under development by the International Sustainability Standards Board (ISSB) while providing flexibility for those organisations that wish to, or need to, report to different materiality thresholds and regulatory requirements.

European Union

  1. On 30 March 2022, the Platform on Sustainable Finance (Platform) issued a report containing recommendations on the technical screening criteria for the four remaining environmental objectives of the EU taxonomy. The report principally contains recommendations relating to technical screening criteria for objectives 3 – 6 of the Taxonomy Regulation, as well as recommendations to improve the design of the taxonomy and the taxonomy criteria. The Platform has also published an annex. The annex contains technical screening criteria for economic activities contributing to all six environmental objectives of the Taxonomy Regulation, including the rationale for those criteria.
  2. On 9 March 2022, the European Commission adopted a Delegated Regulation amending Delegated Regulation (EU) 2021/2139 (the Taxonomy Climate Delegated Act) as regards economic activities in certain energy sectors and Delegated Regulation (EU) 2021/2178 (the Taxonomy Disclosures Delegated Act) as regards specific public disclosures for those economic activities. The Delegated Act amends the Taxonomy Climate Delegated Act by adding technical screening criteria for certain economic activities in the natural gas and nuclear energy sectors that have not been included in that Delegated Act.

See our post on the inclusion of natural gas in the Taxonomy here.