MMC’s Director of Insights, Blair Chalmers looks back at the joint GIIA / MMC Risk Roundtable held recently in London.
Marsh & McLennan Companies and the Global Infrastructure Investor Association hosted an infrastructure investor roundtable discussion in London on 25 September 2019.
The morning began with a welcome from Jon Phillips of the Global Infrastructure Investor Association and Martin Bennett of Marsh JLT Specialty. Then Blair Chalmers of Marsh & McLennan Insights set the scene by delivering an overview of the key takeaways for investors in infrastructure from the Global Risks Report 2019, a publication that Marsh & McLennan Companies has supported the World Economic Forum on for the last 14 years. Whilst environmental and cyber related risks were dominant from a global perspective, it was clear that infrastructure investors are also exposed to a broad range of economic, geo-political, societal and reputational risks as well.
Neil Duchesne, a Senior Partner from Credit Specialties at Marsh JLT Specialty provided insights with respect to political risks in developed markets. Neil presented case studies which highlighted the trend of increasing geo-political and economic uncertainty in previously considered ‘safe’ countries. One case examined the current status quo in the United Kingdom where the rise of radical, populist parties could threaten a change in utility ownership and regulatory supervision. Another showed that whilst China’s Belt & Road Initiative (BRI) was initially expected to be almost entirely focused on emerging markets, 12 EU markets have already signed MOUs with China with respect to the BRI, with Italy expected to be the first G7 nation to join. The ongoing and escalating trade war between the US and China continues to erode investor confidence, raise EP&C costs and increase the chance of direct export embargos. Neil showed that whilst concerns about political risks in developed markets are a hot topic, as high as they have been for a while; Lloyd’s political risk claims data from 1997-2017 shows that over USD$660 million of claims were paid out in Western and Central Europe. Whilst concerns are currently high, the reality of the political risks in developed countries has always been there. Recommended mitigation strategies included close monitoring of government activities in jurisdiction of interest, developing a detailed understanding of a firm’s supply chain and risk exposures, and conducting extensive legal due diligence on all contractual matters.
Sarika Goel, Principal at Mercer presented infrastructure investor takeaways from Mercer’s latest ‘Investing in a Time of Climate Change’ report. The third edition of the report was released in 2019 and states that investing for a 2ºC scenario is both an imperative and an opportunity. Whilst infrastructure assets face the greatest exposure from physical risks in the long run from climate change, infrastructure also has a high positive exposure to transition risk. Sarika also shared findings from Mercer’s European Investor Asset Allocation Survey, which gathers insights from c. 900 asset owners representing approximately $1 trillion in AUM. The most recent survey shows that 55% of asset owners are now considering ESG risks in their investment decision making process (up from 40% in 2018). However, separately, only 14% currently consider climate change risks.
In concluding, Sarika highlighted three types of investors with respect to climate change. There are the ‘Unaware Future Takers’ who ignore risks and opportunities linked to systemic risks, to the potential detriment of long-term returns. Then there are the ‘Aware Future Takers’ who consider systemic risks in portfolios, taking action across and within asset classes and industry sectors. Lastly there are the ‘Future Makers’ who build upon the aware future taker position and make a concerted effort to influence systemic, market-wide actions aligned with ideal real world outcomes. These are the investors who are working individually and collectively to advocate for a 2 degree Celsius aligned world from both businesses and from governments.
Andy Perry, Principal at Oliver Wyman, spoke on the topic ‘The Future of Renewables Investing’. He began by showing how forecasts for the growth in renewable energy (RE) generation capacity have been underestimating the true growth each year for the last decade. In addition, the cost of renewable generation has been falling so quickly that subsidies are disappearing because RE generation is competitive on a standalone basis. Andy explained that this is indicative of the RE industry coming to the end of the first of three phases of development, namely it has earned the ‘right to compete’ on a levelised cost competitive basis. The industry is now moving into the second phase where there will be a ‘Focus on Flexibility’ that will dominate in the period 2020 to 2030/35. This period will see a significant value shift from generation volumes sold in the wholesale market to flexibility and capacity services that ensure availability of generation when it is needed and the ability to optimise against price in the market. The third and final phase is focused on a move to a net zero energy system made possible through a combination of means including cheap home solar, local EV and home storage, affordable large-scale cheap RE generation and potentially carbon capture technology and H2 as a means of supporting globally traded flexibility.
It is unclear exactly how the market will evolve in the coming decade, but what is clear is that using flexibility to control renewables output will be critical to optimising returns. In closing, Andy laid out a number of potential business models with this is mind. The first option would be to have RE and assets which allow flexibility to be jointly developed at the same site by the same owner/investor. Another would be to invest in multiple RE and flexibility assets in different locations which would be operated in unison as part of a portfolio. A third is for a joint PPA with a profile guarantee, where there is a contractual agreement for remote flexibility assets to smooth RE output for the off-taker. The last option was for the sale of RE into a 3rd party VPP platform, whereby the VPP takes responsibility for optimising output in tandem with separately procured flexible capability.
Guillaume Thibault, Partner at Oliver Wyman, closed out the morning with his presentation on ‘Future Mobility Trends’. Guillaume explained that mobility, whether through the movement or goods or people, is a fundamental pillar of the global economy and represents 16% of GDP. Advances in technology, combined with a multitude of trends and disruptions have massively change the mobility landscape. There are now significant environmental, societal and economic impacts at stake depending on the way in which future mobility dynamics play out.
What is clear however is that investment will continue to pour into the mobility sector, with mobility market growth expected to outperform global GDP growth by 30% by 2030. In the same timeframe, physical exports are forecast to rise 40% globally and international tourist arrivals will grow by 70%. With 50% of future ground mobility expected to come in the form of shared vehicles, this will have a significant impact on the cities of the future which much develop ways for all mobility components to be interconnected. Dedicated communication infrastructure will be needed to absorb the increasingly large data requirements. Investors need to recognise that there is a value shift happening in the industry, with Oliver Wyman predicting that by 2030 only 20% of the mobility industry value will be in manufacturing. Over 50% is expected to come from mobility meta-platforms.
In conclusion Guillaume highlighted how energy and transport providers will likely need to resort to coalition building as this will increasingly become a pre-requisite for success in a world where everything is increasingly connected but no one organisation can be a leader across the board. Additionally he stated that more flexible and open-sourced governance approaches will be required in the future. This applies to urban master planning, regulatory regimes and project financing.
This event was the third infrastructure investor roundtable hosted by the Global Infrastructure Investor Association and Marsh & McLennan Companies in 2019, following roundtables in Tokyo (June) and New York (July).
The Global Risks Report 2020 will be released in January 2020 and GIIA and MMC will continue to collaborate on additional resources linked to significant infrastructure investment risks and opportunities.