Infrastructure at risk: the business case for climate risk modelling in the face of deregulation

With regulation failing to mandate consistent climate risk assessments across the region, the onus is on financial institutions to integrate an awareness of climate risk into lending and investment decisions.

Working with investees to identify risks and improve adaptive capacity is a strategic imperative in the region most exposed to physical climate change globally. Our recent work with a major international airport demonstrates how proactive adaptation can bring climate risk back within tolerable thresholds.

Sustainability regulation is being dialled back, but climate risks are getting harder to ignore 

The sustainability regulatory landscape has been strewn with roadblocks and backtracking thus far in 2025, but this does not mean that companies are exempt from climate risk.

From a sustainability reporting perspective, the message to organisations about how to advance is highly convoluted. Those who have prioritised alignment with a particular framework have been penalised as the requirements of that framework have been watered down or reversed at short notice. The atmosphere that prevails is one of uncertainty about future regulatory direction and stringency of enforcement.

What is not uncertain however, is that climate change is having a tangible effect on our operating environment. Physical climate hazards which increase in severity with every record-breaking summer threaten the functionality of myriad assets and processes, often taken for granted in the normal course of business. The airport infrastructure explored in this article constitutes one such example.

For financial institutions this is highly significant. An accumulation of vulnerable assets across a portfolio can materially impact credit and liquidity risks, as well as capital adequacy frameworks. The scaling back of sustainability reporting by companies is a risk to financial institutions, as they are left with blind spots in their portfolios. Seen in this way, the global regulatory slowdown is not a reason to ease off on sustainability expectations for investee companies. Rather, it becomes a reason for financial institutions to become more active in engaging with their portfolios.

A hiatus from regulatory scrutiny does not translate into a hiatus from climate risk itself.

Infrastructure is particularly exposed and financial institutions are demanding information on future viability

Infrastructure assets are among the most exposed to physical climate risk due to the length of typical financing time horizons and fixed geographical location which renders them vulnerable to extreme weather events. Financial institutions increasingly require comfort that infrastructure will continue to be resilient in a changing climate.

Forvis Mazars recently conducted physical risk modelling for a major international airport as a precondition for securing ongoing financing. This involved evaluating the financial impact of climate risks to both physical assets (capital and operational expenditures) and service continuity (revenue lost due to business disruption).

Airports can face a broad spectrum of physical risks, including sea level rise leading to coastal storm surges, extreme rainfall, dangerous wind speeds and extreme heat and cold (leading to snow or ice conditions). These can result in asset damage and / or activity disruption due to suspension of operations and challenging conditions for ground staff.

The vulnerability of over 40 distinct airport components and activities was assessed against 18 physical climate hazards in the present, 2030, 2040, 2050 and 2100.

In order to derive financial impacts, the following steps were undertaken:

1.      Analysis of exposure to physical climate hazards;

2.      Identification and assessment of physical climate risks at the activity and component level, taking into account inherent vulnerabilities and systemic impacts on continuity of activities;

3.      Calculation of financial impacts based on a highly probable impact scenario in which combined hazards resulted in loss of revenue.

We subsequently helped with the development of an adaptation plan, which utilised cost-benefit analysis to prioritise adaptation measures, aimed at lowering risk levels to fit within existing risk tolerance. Capital and operational expenditures were projected across time horizons and adaptation measures, allowing for robust financial planning.   

The major takeaway from this project was the extent to which infrastructure is exposed to physical climate risk. Operational continuity is contingent on thorough understanding and analysis of risk and implementation of adaptation measures. This approach is scalable across different infrastructure types and financial institutions should be reviewing associated analysis and adaptation plans before extending investment or loans.

Infrastructure is not an isolated example; climate risk is increasing across diverse sectors and APAC is a particularly vulnerable region

Interconnected global value chains mean that few companies are unaffected by climate hazards. With APAC being more exposed than the global average, financial institutions in the region must assess their portfolios while there is still time to prepare.

Research conducted by the Asian Development Bank asserts that climate change could wipe 41% off GDP in developing APAC by the end of the century under a high emission scenario (RCP 8.5).^[1] The compounding impacts of rising sea level, heat stress and extreme weather events, specifically flooding, could drive down productivity and induce major asset damage.^[2]

Various climate studies including research by Swiss Re^[3] have consistently found APAC to be disproportionately impacted by physical climate risk compared with the global average. In this context, a slowdown in climate regulation from large economies in Europe and the US provides little justification for financial institutions in APAC to delay conducting climate risk assessments and reporting on their findings. 

Regardless of the regulatory regimes they fall under and where they are headquartered, financial institutions operating in APAC should be proactively assessing exposure to physical climate risk. The reach of this exercise extends far beyond regulation; it is about fostering resilience in a vulnerable region of the world.

Wrap-up: early adaptation is key

While regulatory requirements are being dialled back, tangible climate risks are not. In fact, they are set to increase due to warming which has already been locked in.

Climate risks will impact a wide range of sectors with infrastructure being particularly exposed due to its fixed geographical location. This creates a strong business case for early identification and assessment of risks to ensure business continuity.

The physical climate risk assessment conducted with the international airport is scalable across other infrastructure types and sectors. Financial institutions will benefit from conducting similar studies and integrating their findings into investment and lending decisions, subsequently working with their portfolios to improve resilience. This is critical for future-proofing individual portfolios and the adaptive capacity of the region as a whole.

At Forvis Mazars, we help organisations conduct climate risk modelling and translate this into actionable sustainability strategies for effective risk mitigation. Our focus is on building long-term value.
 

[1] Asia-Pacific Climate Report: Catalyzing Finance and Policy Solutions | Asian Development Bank

[2] Asia-Pacific Climate Report: Catalyzing Finance and Policy Solutions | Asian Development Bank

[3] This is How Climate Change Could Impact The Global Economy | World Economic Forum