Issues such as climate change and rapid technological advancements are set to put pressure on the infrastructure sector and lead to the substantial alteration in the patterns of demand for the asset class, impacting potential returns, according to new research by global law firm Ashurst.
The report, Resilient Infrastructure – Rising to the challenge of a more sustainable future, compiles the views of global business leaders from across the transport, social infrastructure and water industries on the resilience of the infrastructure sector. The research explored attitudes towards the fundamental forces driving change in the industry and approaches to ensuring resilience is built into infrastructure so assets continue to serve their purpose for generations to come.
It showed that there has been – and will continue to be – a shift in the perceived risk attached to the infrastructure sector. Just under 80% of respondents confirmed that the pandemic had increased the risk to the sector to some degree, while nearly one in twelve felt that the risk had increased significantly. Even taking Covid-19 out of the equation, nearly 50% felt the risk profile of the sector was increasing – with more than 10% thought the future risk profile of the sector would be significantly higher.
Yet more than half of respondents felt the risk profile hadn’t changed, or had actually declined. Given this contrast, says the report, there is clearly a danger that a significant number of industry participants have yet to come to terms with the forces driving change within the sector and the resultant changes in the sector's dynamics.
The research also identified the top challenges likely to affect the sector over the next two decades, with more than eight in ten participants rating the impact of the transition to net zero as either high or very high. This was followed by technology, with 79% of respondents believing it had a high or very high impact, followed by the impact of climate change. These results confirm that ESG issues are increasingly dominating infrastructure development, investment and financing decisions.
As businesses respond to these changes, the ability to create a strong economic return for investors is still seen as the most significant factor influencing decision making. This is closely followed by government policy, with the drive for corporate and social responsibility third. However there are also a number of barriers preventing the infrastructure sector from providing a coherent response to the changing environment. Despite governments being among the most significant influences on the sector, they were also named as the biggest obstacle, with more than three quarters of respondents citing a lack of coherent government policies as the biggest barrier.
It seems that delivering the more resilient infrastructure asset base required to succeed in a time of greater uncertainty will include a marked impact on the return demanded by investors for their capital, as reflected by the more than one in six of respondents stating this new environment will significantly change the way they price risk. While this may put some investors off, others may welcome the uncertainties, particularly if they are able to understand, and see competitive advantages, and evaluate the risk of operating in a different world.
Mark Elsey, partner and global co-head of infrastructure at Ashurst, said: "This report highlights both the threats and the opportunities for the infrastructure market as it transitions to meet the challenges posed by the drive to net zero, new technology and other forces of change. There is clearly a significant pressure on all market participants to shift their approach and put a greater focus on more resilient infrastructure – assets that are flexible and robust enough for this changing landscape and will meet the needs of not just today but the future.
“As a key part of the required step change, governments and regulators will need to take increasingly joined up decisions if they are to create the right playing field for the sector to flourish. They will need to set innovative and flexible policy frameworks, decide which types of infrastructure are important for the future and what role they want the private sector to play. At the same time it will be key to ensure that sufficiently stable regulatory and economic platforms are in place to let investment continue to flow to the sector."
Lee McDonald, partner and global co-head of projects & real estate at Ashurst, said: "Infrastructure has long been a haven for investors seeking a stable, sustainable return in a changeable world, and as our survey shows, the appetite for the sector is likely to remain undiminished. Yet, the pressures on the sector mean that strategies which may have worked in the past cannot be relied upon to provide guidance for the future. With the right support, those who can come to understand the new market dynamic and the need for more resilient infrastructure will be best placed to navigate a world of increased risk – and greater opportunity."