Infrastructure development has the power to enrich communities, providing critical public services such as electricity, transport and water. However, it also possesses the potential to be very disruptive to the communities that it serves. Such disruptions include loss of amenity, increased pollution (both noise and air) as well as impacts on the local wildlife. These effects might be considered be minor for society at large but, for the local community, they can be very significant, creating negative sentiment and diminishing public support for the infrastructure development. As a result, a failure to identify and react to deteriorating public endorsement towards infrastructure projects has the potential to lead to delays or even project cancellation.
In this paper, we develop a measure of social sentiment for wind farms. This is a timely approach for analysis amid the current push towards cutting emissions from electricity production, especially given that wind power is a relatively mature renewable technology.
Transition risk assessment using traffic and geospatial data.
In this paper, we develop a methodology to estimate the carbon footprint of thousands of airport infrastructures around the world and test for the existence of a relationship between carbon emissions and realised or expected returns in the private airport investment sector.
We propose a consistent methodology to assess the scopes 1, 2 and 3 of infrastructure companies (in this case Airports) and implement it for several thousands entities around the world. We use detailed geospatial and traffic data to predict scope 1 and 2 emissions several thousand airports
across the globe. We also derive scope 3 emissions from highly granular cruise and landing and take-off (LTO) data.
We then analyse the link between carbon emissions and financial performance: we build a so-called factor replicating portfolio of high minus low carbon intensity using monthly price return data for private airports provided by infraMetrics® and attempt to determine whether this potential ‘factor’ has predictive power in terms of the returns of airports equity returns.
Flood damage factor estimation and bond yields in U.S. airports.
In this paper, we develop a methodology to calculate the potential damage associated with different types of physical risks at the asset level, and conduct a practical implementation for flood damages in the airport sector in the United States. We then use these results to analyse the relationship between airports’ capital costs and exposure to physical climate risk.
Using a new dataset of 470 airports, including over 1,000 runways and more than 800 terminal buildings, we use a 30-meter resolution flood model for a 50- year return period (2% probability) and an airport-specific damage function to calculate damage factors at the airport level.
Next, we look at the impact of physical risks on the cost of debt of infrastructure companies and whether investors in revenue bonds issued by airports price physical climate risks. Using a hand-collected dataset of 2,000+ revenue bonds issued by US airports, our analysis concludes that physical climate risk is not currently priced in the cost of debt of US airports.
Insights from 20 years of energy transition in the UK.
This EDHECinfra Research Note examines the impact on the risk profile of wind and solar power investments of the increasing dominance of renewables in the energy mix of a given country.
As green power sources that are intermittent become central to a power system, without commercially viable medium- and long-term storage options, what is the likely impact on the electricity market and system as a whole and do wind and solar investments, which have historically benefited from a safer, privileged position in the power sector, become riskier?
We use the case of the UK as an example of an economy that has made a rapid transition to renewables and away from coal, while relying on very limited hydro and nuclear capacity i.e., the typical transition required of most advanced economies.
Using asset- and fund-level data, we highlight important differences between infrastructure assets and funds, and compare their historical performance and cash flow characteristics with both public and other private investments. An infrastructure asset’s age, sector, business risk and corporate structure all influence the asset’s risk-return profile. We examine the sensitivity of infrastructure asset and fund performance to public markets by regressing infrastructure returns (at the aggregate, sector and age group level) on public asset market returns.
We then develop a method to estimate infrastructure equity assets’ income returns and cash flows depending on their age and sector. With measures defined that capture both idiosyncratic and time-series income return volatility, we highlight that a CIO cannot ignore the high idiosyncratic risk of infrastructure assets when evaluating their future performance and cash flow risk. To reduce a portfolio’s idiosyncratic income return risk, we find that adding assets from the same sector may be as efficacious as adding the same number of assets from different sectors. We show how many assets are needed before idiosyncratic income return risk starts to level off.
In this report that was produced in collaboration with Ares Asset Management, we illustrate that private infrastructure assets can provide resilience in the current rising rate and high inflation macroeconomic environment. The primary structural reason for this resilience is the ability of private infrastructure assets to increase revenues along with inflation.
We believe this report will serve to remind readers of the fundamental drivers that have underpinned the development of this asset class and that it will illustrate the widening opportunity set that we believe will unfold in both the primary and secondary markets in the years to come.
The realised and expected financial performance of green power infrastructure investment, 2010-2021
In this paper, we reviewed the empirical evidence of historical outperformance of green infrastructure investments and consider whether this finding implies continued future outperformance.
• Historical performance of the infraGreen® index in comparison with the Core and Core+ segments of the unlisted infrastructure universe
• Comparative analysis of a green and a brown power infrastructure portfolio
• The presence of a systematic green effect in the valuation of green power infrastructure investments
• The role of excess demand in explaining the historical performance of green power investments
• The evolution of the cost of capital of green vs. brown power infrastructure
• How the current green price premium implies that future investors in greener infrastructure should expect lower returns
In this paper, we compare the behaviour of unlisted infrastructure equity investments with that of traditional assets, with a focus on the effects of shocks such as recessions, financial market crises and policy shocks. We compare the return correlations and drawdown characteristics of geographically comparable indices of unlisted infrastructure equity, listed equity, treasuries and corporate bonds. We then examine their return drawdown and co-variance, as well as higher co-moments of returns (co-skewness and co- kurtosis), to determine the presence or absence of joint extreme risks.
In this infrastructure ESG survey, we asked a large sample of investors in infrastructure why they need to have access to ESG data i.e., non-financial data, for the assets they hold or want to hold. We examine three main questions:
1. What is the main purpose or use-case of non-financial (ESG) data for investors in infrastructure?
2. What risks most require non-financial data to make better investment decisions in infrastructure?
3. What kind of data is the most useful and relevant to make such decisions?
In summary, with this survey we have shown that investors in infrastructure have clear priorities and preferences when it comes to non-financial or ESG data.
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.