Executive Summary

  • In a world of mounting geopolitical tensions and intensifying climate change, critical infrastructure is particularly at risk of disruption. Recent events have shown how vulnerable industry, energy and transport services can be to conflict or damages from increasingly frequent heatwaves, floods, storms and droughts. Nearly 85% of goods traded around the world are transported by container ships but tensions in the Red Sea have effectively blocked off the Suez Canal, a vital waterway for trade between Asia and Europe. As a result, shipping costs have surged by +92%. At the same time, fluctuating water levels are threatening inland transportation and ports are increasingly at risk from coastal floods. Meanwhile, energy supply is also at risk as power plants and pipelines can come under physical attack or sabotage, while droughts, flooding and storms could also lead to widespread power outages and business interruption, threatening both national security and global economic stability. Direct damages alone from climate change amount to USD30bn a year in high-income countries and USD18bn in low- and middle-income countries.
  • In this context, the geopolitical risk premium is increasing for both insurance and investments. By the end of last year, war risk insurance premiums for the Red Sea were increased to up to 1% of the value of the ship, from 0.07% before the Israel-Hamas war. Even companies that are rerouting their ships to avoid the area are paying a higher price for longer routes. Similarly, financial markets have reacted by demanding higher returns as the infrastructure investment landscape faces geopolitical risks, inflation, interest rates movements and an overall period of volatility and heightened sensitivity simultaneously.
  • But there is room for governments, investors and supranational institutions to work on prevention. And making critical infrastructure future-proof will pay off in the long term: adaptation costs are lower than mitigation costs and resilience can be built while we invest towards the green transition. After years of underfinancing that accelerated the aging of infrastructure and created inefficiencies, the tides seem to be changing. The EU has taken steps to build infrastructure resilience, first in the context of the green transition with the plans associated with the European Green Deal and, more recently, with the REPowerEU Plan, adding the focus on energy security. This has not only boosted projects in wind, solar and hydrogen energy (particularly in Germany, France and Spain) but also led to the modernization of the grid. The increased presence of private investors, and renewed interest in Public-Private Partnerships (PPP), also point in that direction. The climate transition holds the key to enhancing infrastructure investments further as resilience can be built alongside green initiatives without much of an additional cost.  According to Global Infrastructure Hub, there is an estimated financing shortfall of USD1.5trn for infrastructure investment in Europe, based on infrastructure needs (USD10.6trn) and current investment trends.
  • But not everything is direct investment: regulatory changes that incentivize infrastructure investments can also have significant impact. The European Banking Authority and the European Insurance and Occupational Pensions Authority could (further) adjust capital requirements to make infrastructure investments more attractive in terms of capital charges or foster the inclusion of ESG guidelines in their lending and investment decisions. EU green bonds could also play a bigger role in boosting infrastructure investments across Europe as their syndicated nature aligns perfectly with the uses of trans-European infrastructure projects. In general, the promotion of blended finance, be it directly (leveraging or extending existing programs, guarantees) or via the creation of clear regulatory frameworks that provide clearer rules of the game, could be a significant step forward to close the (green) infrastructure gap.

Pablo Espinosa-Uriel

Allianz SE

Ano Kuhanathan

Allianz Trade

Jasmin Gröschl

Allianz SE

Maria Latorre

Allianz Trade

Arne Holzhausen

Allianz SE

Yao Lu

Allianz Trade