Shortlisted for PRI Awards 2024: Recognition for Action – Climate
Organisation: Equitix
Signatory type: Investment manager
HQ country: England
Other responsible organisation: Mott MacDonald and Lobelia Earth
The approach, initiative, or process
Due to chronic and acute changes in climate patterns from global warming, physical climate risks are a material consideration in Equitix’s approach to considering sustainability throughout the investment lifecycle. Left unmitigated, physical climate risks may have implications for the operational and financial performance of critical infrastructure, which emphasises the need to enhance understanding of long-term climate resilience for investors and communities.
Within the private infrastructure asset class, limited data availability and accessibility represent a challenge to integrating physical climate risk and resilience considerations into active asset management processes. This can be complicated by the scale, sector diversity and global nature of managing an infrastructure portfolio that spans both advanced and emerging economies.
With more than US$14bn in assets under management, Equitix has invested in over 360 infrastructure assets (totalling more than 1,000 property locations) across 21 countries. Equitix therefore considered it imperative to ensure that its approach to climate risk monitoring took account of inherent sector vulnerability and resilience characteristics, local geographic context and asset-specific mitigation measures. Had we not factored these elements in, our analysis of portfolio-level climate risk could yield limited actionable insights. Equitix therefore sought a partner to build a novel solution tailored to its portfolio context.
From the outset, the project objective was to provide a bespoke, decision-useful tool for investment and asset management teams. The tool could also support reporting to investors and the public on climate considerations in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). A truly collaborative effort between engineering firm Mott MacDonald and Equitix led to the successful delivery of a digital climate monitoring solution, a comprehensive yet accessible portfolio-wide tool for assessing physical climate risk and resilience.
Equitix has used the climate risk tool in a variety of ways, such as:
- Engagement with management teams and contractors;
- Consideration of climate risk and resilience when reviewing asset performance;
- Inclusion of dashboard graphics across product-level TCFD reports produced by Equitix for investors.
Mott MacDonald facilitated a pragmatic approach, prioritising the understanding of climate resilience efforts based on financial materiality, climate hazard risk exposure, and asset criticality. Equitix provided its sector expertise, tailored asset knowledge, and financial acumen as part of developing a robust methodology and useable output.
Projects were classified into single-point, linear or regional sites to account for different risk characteristics. This determined the methodologies applied to analyse climate risk for each category inclusive of regional averaging, segmental analysis, and critical point assessment.
Using a worst-case climate scenario (i.e. SSP 5-8.5) to 2050, the climate hazard exposure of each site was then quantified using geospatial data sourced from Lobelia (a leading climate data provider) and a tailored sector sensitivity matrix adapted from the European Bank for Reconstruction and Development report on advancing TCFD guidance on physical climate risks and opportunities. A composite sector-weighted climate risk score was derived for every asset in the portfolio.
This higher-level analysis provided an overview of long-term considerations for the portfolio and engagement opportunities with underlying assets. Equitix and Mott MacDonald placed equal emphasis on conducting the assessment and applying the underlying results. The data was pooled into a bespoke interactive Power BI tool for Equitix teams to access project vulnerability data in a visual, digestible format of decision-useful outputs. Asset management teams have the express capability to filter portfolio-wide data by geography, sector, and sub-sectors whilst simultaneously obtaining a more granular understanding of climate exposure across seven acute and chronic hazards related to each asset. Furthermore, climate performance across different funds can be directly assessed and filtered by risk exposure. Visually, RAG ratings are mapped to site locations on interactive maps; a variety of graphs are available to benchmark climate risk scores against climate hazards at different levels of granularity; and project valuations are mapped against sector-weighted climate risk.
In addition, the portfolio-wide assessment was accompanied by the launch of a more detailed climate risk and resilience analysis of 20 site locations identified as having a combination of high financial materiality and unmitigated climate risk exposure. Two different climate scenarios (SSP2-4.5 and SSP5-8.5) and two reference time horizons (2030 and 2050) were applied to this analysis to show the evolution of climate risk for the selected sites.
The depth of analysis, prioritisation of materiality, and consideration of asset-specific characteristics demonstrates climate leadership in the infrastructure asset class. We believe this differentiates the project from standard industry practices which can often rely on off the shelf products to consider climate impacts.
Through collaborative dialogue with underlying asset teams and the distribution of tailored surveys, a review was conducted to establish the existing or planned climate resilience measures for the short-listed projects. Mitigation measures were analysed against the climate risks identified to determine their appropriateness for reducing potential hazard impact. The mitigation measures identified were categorised into groups using the Intergovernmental Panel on Climate Change defined categories for adaption actions (ecological, structural, behavioural, or institutional).
The critical site assessment had practical implications for engagement with the underlying assets. For example, an onshore wind site was identified as potentially exposed to extreme temperature and large heatwave duration under the scenario and time period assessed. However, as a result of engaging with the owner of the asset, several mitigants were identified through management surveys and further enquiries with the turbine manufacturer to confirm the asset’s resilience to extreme heat.
Nascent in private infrastructure, the development of bespoke portfolio tools and processes to better understand climate risk and resilience are a component of Equitix’s responsible and sustainable investment framework. This has manifested into an innovative approach to analysis, monitoring, reporting, and engagement, which will continue to evolve.
The measures to ensure transparency
The results of this project have featured in Equitix’s Climate Report. At the same time, all investors in Equitix’s managed funds and separate managed accounts will have access to a product-specific TCFD report.
The product reports include visual data generated through the project including physical climate risk graphs, an assessment of physical climate resilience measures for certain projects, where available, and information on prominent climate risks for financially material assets.
Equitix and Mott MacDonald plan to present this project in relevant forums and have submitted a written case study to the Institute of Asset Management Climate Emergency Program to support the development of sector best practice.
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Equitix disclaimer: Equitix Investment Management Limited is authorised and regulated by the Financial Conduct Authority. The content provided herein is for informational purposes only and is not intended to be used for any other purpose and should not be relied upon. Equitix may revise its ESG-related activities in whole or part, at any time. This case study does not constitute an offer, an invitation to an offer or a recommendation to enter any transaction with Equitix. Nothing in this case study should be construed as legal, tax or financial advice. For more details, please refer to our website: www.equitix.com.
