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Physical climate risks and the transition to a low-carbon economy are often assessed separately by infrastructure investors. This article by Alexis de Pampelonne, Climate Risk Manager at Scientific Climate Ratings, argues that both should be integrated into a single financial framework, translating climate-related risks and mitigation measures into their impact on net asset value. Two case studies, a Brazilian electricity transmission line and a Norwegian waste-to-power plant, illustrate why assessing only one type of risk can lead to an incomplete picture of an asset’s financial vulnerability.
The Brazilian case highlights the potential benefits of targeted adaptation. Without intervention, wildfires, floods and storms are projected to erode approximately 30% of the transmission line’s net asset value over its concession period. However, the analysis shows that the most effective response is not necessarily the most expensive or comprehensive. Installing firebreaks, at a cost equivalent to around 3% of net asset value, could avoid projected losses of 25.7%, delivering an estimated benefit-to-cost ratio of approximately 8:1. This demonstrates the importance of identifying the dominant physical hazards and prioritising measures according to their economic effectiveness.
The Norwegian case illustrates the financial consequences of transition risk. Although the waste-to-power plant faces limited physical climate exposure, rising carbon costs threaten its long-term profitability and could ultimately make continued operation uneconomic. An on-site carbon capture facility, expected to reduce operational emissions substantially, lowers projected climate-related value losses by 2050 from 13% to 7%. The asset’s Climate Risk Rating also improves from D to C, illustrating the potential of decarbonisation investments to mitigate transition risk and preserve long-term asset value.
Together, the case studies demonstrate that climate risk management is fundamentally a valuation and capital allocation challenge. Investors need to assess physical and transition risks in parallel, quantify the financial implications of potential interventions, and compare their costs and benefits before committing capital. Financing conditions, particularly loan maturity, can also influence whether an adaptation investment is economically viable.
The article concludes that effective climate-risk management requires asset-level analysis rather than broad portfolio commitments. By integrating climate science, financial valuation and investment prioritisation, investors can identify where adaptation and decarbonisation offer the greatest potential to protect long-term asset value.