Sustainable infrastructure – the time is now
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We will remember 2020 as the year the world came to a halt. But the break in relentless momentum has given us pause for thought, and a chance to redirect our efforts towards a more sustainable and resilient future.
Infrastructure has a huge role to play in that.
The infrastructure we build needs to be environmentally sustainable and resistant to the rising frequency and severity of natural hazards. The insurance industry has a role here, taking these factors into account in pricing and risk calculations.
“We truly believe infrastructure has the power to be transformative,” Veronica Scotti, Chairperson of Public Sector Solutions at Swiss Re, says. “But we are at a crossroads and need to make a decision. It is a race against time, but it’s like the hare and the tortoise – it’s not just about running really fast, but about getting to the finishing line.”
That will mean taking a more systematic and data-driven approach, she adds. The insurance industry is doing well and getting better at this way of working and should now apply it to support and drive forwards infrastructure projects.
“Key now is the post-crisis recovery and building economic resilience,” says Jerome Jean Haegeli, Swiss Re Group Chief Economist. “At the core of it is the need for more long-term and sustainable infrastructure. And now is the year for ensuring a green recovery – COVID-19 has an expiry date, climate change doesn’t.”
Much of the infrastructure opportunity and need is in emerging markets – Swiss Re forecasts there could be USD 66 trillion of infrastructure investment opportunities in the next 20 years, 66% of which will come from emerging markets. And making these projects a reality becomes difficult without regulatory certainty, harmonisation and an investment framework.
“The question is how to bring the tremendous amount of money we have under management in the advanced economies to the emerging markets, where the projects are located,” says Franco Ciamberlano, Co-Head EMEA Engineering at Swiss Re.
“We need a transparent and harmonised type of infrastructure asset class.”
There is wide agreement that existing policy approaches are unable to deliver a sustainable framework for long-term investment. Things need to change. For example, investment cycles for environmental projects need to be viewed in 30-year terms, not 10-15 years as is currently the case.
Insurers and reinsurers have three distinct roles that can each prove critical towards creating a more stable long-term investment framework, says Christian Wertli, Head Infrastructure Solutions at Swiss Re. These are: as investors, as de-riskers and as users of big data.
“Globally, the insurance sector has over USD 30 trillion assets under management and as investors, and we can take concrete actions to make these assets and our investment decisions count,” he says.
As an investor, the insurance industry needs to back assets that match the long duration of its liabilities, making infrastructure an ideal long-term investment asset class. By investing in sustainable projects, insurers help reduce financing costs and create incentives to build for resilience.
“We have led the industry in acknowledging the risk climate change poses to our asset management activities,” adds Wertli.
“Since 2017, we have begun moving all our assets into environmental, social and governance (ESG) based benchmarks and, today, ESG criteria are applied to nearly 100% of our USD 130 billion portfolio. Our analysis shows that long-term risk adjusted investment performance continues to be more favourable when ESG criteria are taken into account.”
While insurers’ role as investors is important, Wertli says it is the industry’s position as a “de-risker” that can prove most transformational in establishing a longer-term investment framework. It can create new types of insurance offerings that make infrastructure projects more standardised, cashflows more predictable and infrastructure as an asset class more attractive to investors − thus unlocking financing.
As a result, non-resilient infrastructure will become less insurable and the threat of losing access to insurance will incentivise a switch to projects that are better designed, better planned and truly consider the costs of climate change.
The role of big data
The third way in which insurers can shift the market to a longer-term, more resilient investment landscape is as users of big data. Insurers can create products that improve the maintenance and durability of critical infrastructure. Using digital technologies to monitor the performance of infrastructure will also help to avoid losses.
“Infrastructure owners and insurers have a common interest to maintain these assets to avoid catastrophic losses that are expensive to society and insurance companies,” says Wertli.
“If we can find smart ways to safely access this data, we could imagine a world where insurance does not just finance the reconstruction after the loss, but more importantly finances activities to prevent the loss,” he adds.
Leveraging data, analytics and digital tools will also be key to tackling the huge infrastructure needs created by urbanisation. More than half of the world’s population – around 4.2 billion people − lives in urban centres now, and that is projected to grow by 2.4 billion by 2050.
“Urbanisation creates massive infrastructure needs and we can expect to see major investments in the transportation sector, such as airports, high-speed rail links, metro systems, as well as in the utility sector to provide electricity, gas and fresh water distribution systems,” says Guido Benz, Head Engineering & Construction at Swiss Re Corporate Solutions.
COVID-19 has also highlighted the major healthcare gap. However, Benz warns much of this urban growth will happen in Asia, which is becoming increasingly prone to extreme weather, natural disasters and other climate change-related events.
Focus on innovation
Wertli says the pandemic has refocused the industry’s attention on innovation, environmental issues, resilience and fiscal responsibility. “For us, as an industry, this is clearly an opportunity to do things differently,” he says.
“It’s an opportunity to do things better. There has to be a shift from simply more infrastructure, to more sustainable infrastructure.”
And change is happening. Swiss Re has already demonstrated its commitment to improving the environment by explicitly avoiding investments in companies with substantial revenues from, or usage of, coal. Last year, it decided not to provide re/insurance to businesses with more than 30% exposure to coal.
“We as an industry actually have a choice − we can insure coal or we can support green energy. And therefore, we can actually have a tangible impact on how resilient and how green we are going to make the world after COVID-19,” says Wertli.
But it’s not all down to the insurance industry. Public-private partnerships and collaboration across multiple parties is necessary to turn projects into reality − and multilateral development banks have a key role in making the world more resilient.
The Asian Development Bank (ADB) is good example of how these institutions can support public-private partnerships through grants, loans, technical assistance and equity investments while raising capital on global bond markets.
The ADB’s recently published strategy for a green economic recovery after COVID-19 highlighted “the critical role of green infrastructure in supporting economic growth and livelihoods,” and called for innovative finance mechanisms to attract private capital for a sustainable regional recovery.
“The question now is how governments, multilateral development banks, the private sector and insurers can collaborate to allow for effective crisis management and a sustainable recovery to rebuild better,” adds Wertli.
There is an opportunity to work with the public sector to create a green recovery, a new growth deal, in which infrastructure plays a key role in tacking climate, drives decarbonization, supports digitalization of economies and fairer economic inclusion.
Despite a growing conversation about the need to invest in and support more sustainable projects, there remain some fundamental stumbling blocks. “We are still lacking a lot of opportunities to direct investments into sustainable and environmentally friendly technologies, businesses and infrastructure,” says Carsten Bopp, CEO of Swiss-based engineering consulting firm Pini Group.
“And where is the key point of hesitance from financial institutions, insurance companies and investors? It is policy – we are still lacking a stable framework for these long-term investments, and many investors face significant regulatory risk.”
Key to unlocking investment in resilient infrastructure is the need to build a fundamental understanding of risk, the cost-benefits of mitigating that risk and an evaluation of where and when to transfer risks to others.
Swiss Re Institute's new Biodiversity and Ecosystem Services (BES) Index provides data to support this analysis by comparing and benchmarking the state of local ecosystems around the world that underpin national economies.
BES shows that 55% of global GDP depends on high-functioning biodiversity and ecosystem services. A fifth of all countries (39 states) are at risk from fragile ecosystems. Major economies in Southeast Asia, Europe and the US are exposed to BES decline.
Insurers can use the BES Index to assess the biodiversity loss in any given location and develop relevant nature-based solutions that protect communities from the impacts of a low BES score.
A great example of public-private cooperation to enhance economically essential ecosystems is a project in which Swiss Re helped to design a new type of insurance to protect the Mesoamerican coral reef off the coast of Mexico's Yucatan Peninsula.
Research had shown a direct connection between a healthy coral reef and the region's ability to sustain itself economically. The reef plays a critical role in stopping storm erosion of the beaches on which the region’s tourism industry depends.
Swiss Re devised a parametric insurance solution, based on independently verified weather data, that paid out quickly to send divers to repair reef damage after severe storms. It is thought to be the world's first nature-based insurance solution.
In the face of accelerating climate change and its impacts on economies and the livelihoods of people around the globe, we need to show the value that sustainable infrastructure projects provide, and how this value can be translated into tangible revenue streams.
This is an opportunity for the insurance industry to drive us towards a more sustainable future that supports resilient societies. But we can’t do this alone. We need collaboration across the public and private sectors if we are to make green infrastructure projects a reality.