This infrastructure investment special issue of the EDHECInfra & Private Assets Research Institute supplement to Investment & Pensions Europe presents the results of our most recent investigations with the aim of providing institutional investors with an academic research perspective on some of the most pressing issues facing them today.

The first two articles in the supplement delve into the field of environmental, social and governance risks, and the implications these hold for the investment community. In our first, we explore the practical challenges of using the EU Taxonomy for Sustainable Activities to assess the sustainability of the infrastructure asset class and conclude that, while the Taxonomy marks a significant step, it does not provide comprehensive insights. In the second, we develop Social Risk Sector Ratings and conduct a case study to examine how social acceptance on the sector level affects social risk levels for water companies in the UK. Significantly, our analysis shows that acceptance levels align with sector trends and reveals statistically significant relationships between sector sentiment and company support.

The next two papers look at the investment implications of climate risk for global infrastructure. We first explore the substantial financial risks posed by climate change to infrastructure investments, which include both physical risks from extreme weather events and transition risks related to the shift towards greener technologies. We then present the findings of a survey of the international investment community which revealed that they are concerned and lack data regarding the physical climate risks overhanging the sector. These risks could be huge and could wipe as much as 54% off the value of portfolios and concerned investors say they have little confidence in the advice and data they are receiving.

The final two articles present some of our latest research insights into infrastructure investment portfolio construction and risk management. The penultimate piece reveals how investors in Thames Water could have learned about the entity’s risk and likely market value much earlier had they compared its characteristics to market and peer group data. A straightforward comparative analysis would have signaled a high-risk, low-return profile that should have raised numerous red flags. Our final paper looks at the challenging goal of achieving diversification in unlisted infrastructure investments, given their pronounced illiquidity. We show that a “Smart Infra” approach, focusing on diversifying factor risks, makes broad diversification feasible even given these hurdles.