The impacts of climate change, and the contribution of infrastructure to climate change, is resulting in an increased focus on sustainable and resilient infrastructure. Incorporating these considerations into project assessment and investment decision-making is critical, and has been gaining traction in both public and private infrastructure planning. We explore this trend in Australia's public infrastructure assessment processes, focusing on the targeted sustainability and climate change analysis now required under Building Queensland's recent release 3 of its Business Case Development Framework.

Impact of climate change on infrastructure

As infrastructure assets are operational over very long periods of time, they are exposed to both short term (e.g. extreme weather events) and long term (e.g. rising sea levels, an increasing number of hot days, rainfall acidification) impacts of climate change. These physical impacts can have implications including:

• decreased asset lifespan;
• increased frequency of repairs and / or replacement of degraded materials;
• increased maintenance costs (for example, as a result of assets working harder for longer in higher temperatures); and
• increased need for modifications or upgrades.

Climate change also presents transition risks - that is, market responses to the risks associated with climate change, and the transition of the global economy to a net zero emissions norm. These impacts can result in 'stranded asset' risks - that is, that an asset materially devalues prior to the end of its intended useful life, for example due to changed demand or due to unacceptably high operating costs.

Supporting sustainable infrastructure – the role of the business case

Sustainable infrastructure requires an integrated approach to the planning and development of new major projects, both to avoid exposure to climate change risks and to ensure maximum value from infrastructure investments.

All states and territories across Australia have guidelines for the assessment of proposed projects and infrastructure investments, except for WA, which is currently developing its framework. In most States, and consistent with Infrastructure Australia guidance, the principal project assessment document is a business case and the guidelines are therefore generally referred to as business case guidelines or frameworks. Each of the guidelines address climate risk and the need for sustainable infrastructure, although to varying extents. The guidelines are in the process of 'catching up' to scientific developments which increasingly allow climate change impacts to be measured in a quantitative way, and the trend we are seeing across jurisdictions is that the guidelines are increasingly placing a larger focus on sustainability and the environment with increased details and tools to assist with quantifying and assessing the risk posed by these issues.

The requirements in each State and Territory are set out below, in order of most to least sustainability focused:

South Australia

Business case guideline:

• Guidelines for the Evaluation of Public Sector Initiatives; ISA Assurance Framework;

Sustainability criteria:

• Environmental and Sustainability complexity – 10% weighting in Programme Profile Risk Evaluation.

Queensland

Business case guideline:

• Building Queensland Business Case Development Framework;

Sustainability criteria:

• Sustainability Assessment (Must achieve Basic level of compliance);
• Environment Assessment;
• Scenario and sensitivity analysis.

New South Wales

Business case guideline:

• NSW Governmental Business Case Guidelines; NSW Government Guide to Cost-Benefit Analysis;

Sustainability criteria:

• Environment to be considered in cost benefit analysis (including scenario and sensitivity testing);
• Environmental Impact Statement (scientific analysis);
• Economic assessment of environmental impacts (economic analysis).

Victoria

Business case guideline:

• Investment Lifecycle and High Value High Risk Guidelines – Business Case;

Sustainability criteria:

• Environment to be considered in cost benefit analysis
• Requirement to assess environmental impacts.

Tasmania

Business case guideline:

• Structured Infrastructure Investment Review Process: Business Case;

Sustainability criteria:

• Requirement to assess consequences and impacts of environmental risks.

Northern Territory

Business case guideline:

• Northern Territory Project Development Framework; Strategic Business Case Template; Detailed Business Case Template;

Sustainability criteria:

• Quantitative analysis may include environmental considerations.

Western Australia

Business case guideline:

• Pending (Infrastructure WA in the process of drafting guidelines for assessment of major infrastructure proposals);

Sustainability criteria:

• Not applicable.

Case study: Building Queensland's revised Business Case Development Framework

Building Queensland's Business Case Development Framework (BCDF) provides detailed guidance on the requirements for business cases, to enable government to undertake assessments consistently and compare investment opportunities. Together with a number of other updates, release 3 (published on 20 April 2020) places an increased emphasis on the sustainability and environmental impacts of projects.

Sustainability assessment

A sustainability assessment is required as part of the Detailed Business Case where the proposed project's capital value is greater than $100 million. While this assessment and the ratings (Poor, Compliant, Basic, Moderate or Advanced) are not new, release 3 contains more in depth and robust assessment tools. Additionally, all projects must now achieve the level of 'Basic', rather than the lower level of 'Compliant' (as was the case under release 2 of the BCDF). 

'Sustainability' is broadly focussed and not limited to environmental or climate change aspects. The sustainability assessment involves considering the design, construction applications and operational arrangements of a project to optimise governance, environmental, social and economic outcomes. Building Queensland has collaborated with both the Infrastructure Sustainability Council of Australia and the Green Building Council of Australia to develop an approach for internal project teams to consider sustainability for both linear infrastructure and buildings / facilities. The BCDF now has separate assessment templates for infrastructure and buildings which cover the particular assessment principles. These tools will be extremely valuable for both government and industry, as quantifying climate and sustainability impacts has historically been very difficult.

The assessment generally follows the below process:

Evaluating the sustainability principles:

• linear infrastructure: governance, environment, social and economic considerations;
• buildings: project set up and management, indoor environment quality, energy, transport, water, materials, land and ecology, emissions and innovation;

Identifying the stakeholders, including their:

• interests;
• drivers; and
• the reference project's impact on them;

Conducting a workshop to apply the sustainability framework and developing innovative approaches to all relevant principles. The workshop should:

• examine the wider system;
• examine the significant connections of the proposal;
• identify the most important drivers of change and their future implications.

Environmental assessment

The environmental assessment remains largely unchanged, with some additional detail relating to developing the base case provided as part of release 3. The assessment examines the project's environmental impacts and the impact of climate change on the project, and is based on a whole-of-life, whole-of-system, whole-of-state approach, incorporating future trends, climate change, foresighting and resilience analysis. The aim of the environmental assessment is to identify and review information from previous relevant studies and the sustainability assessment to identify all potential environmental impacts and issues and assess how these issues may impact on the proposed project. In doing so, the assessment responds to the following considerations:

1. legislation and permit requirements;
2. planning and land use;
3. property impacts;
4. topography, geology and soils;
5. water quality;
6. hydrology;
7. climate and air quality;
8. flora and fauna;
9. climate change and emissions;
10. noise and vibration;
11. landscape and visual amenity;
12. cultural heritage; and
13. waste management.

The environmental assessment is an important component of the business case and resulting investment decisions, as it is a key means through which government can ensure and demonstrate that climate risk issues have been properly considered. Government must ensure proper consideration of climate risk and compliance with legal requirements in order to avoid litigation like that seen in the UK with the successful challenge of the new Heathrow runway project and the New York regulator's decision to deny the Williams Gas Pipeline. Similar litigation challenging infrastructure approvals on the basis of a failure to consider climate impacts may not be far off in Queensland, with Youth Verdict, an environmental action group, announcing it will object to the approval of a coal mine in the Galilee Basin on the basis of the Human Rights Act 2019 (Qld) (contact us for more information about this action and its implications).

Scenario and sensitivity analysis

Another key output of Building Queensland's Detailed Business Case is the scenario and sensitivity analysis, which forms part of the cost-benefit exercise required as part of the economic analysis. As the economic analysis requires forecasting of an uncertain future, this scenario testing takes into account uncertainties including climate risk and alternative futures. The BCDF suggests the need to assess costs, benefits, demand, risks of supply and market developments when conducting the scenario and sensitivity analysis in relation to climate risk. However, it does not go further in concretely specifying what alternative futures must be forecast and tested.

Stress testing is required by equity investors, debt providers, insurers and corporate regulators, where both the inherent exposure and adapted resilience of key infrastructure is an increasingly relevant concern. The standard climate scenarios now used by climate modellers are the representative concentration pathways (RCPs) initiated by the Intergovernmental Panel on Climate Change. These comprise four scenarios – 2.6, 4.5, 6.0 and 8.5 – which refer to the extra radiative impact on climate by the end of the 21st century. We have seen some insurers and credit agencies such as Moody's requiring assets to be built to withstand a climate scenario of RCP8.5, being the worst case scenario of an average global temperature increase of 4.5 degrees Celsius above pre-industrial levels. Additionally some technical standards now require consideration of the RCPs in assessing infrastructure, including the Australian Rainfall and Runoff Guidebook which requires RCPs 4.5 or 8.5 (low and high concentrations) to be used when undertaking impact assessments. Queensland's Department of Transport and Main Roads has also recently released engineering policy which recommends using RCPs 4.5 and 8.5, with RCP 8.5 to be applied as a minimum for risk assessment of critical infrastructure.

Although not expressly required in the BCDF, the RCPs could be used as an alternative future when undertaking the scenario and sensitivity analysis. We also suggest that infrastructure proponents consider both the physical and economic transition risk landscape. This is because:

• Whilst 'low' concentration scenarios assume relatively lower physical risks to 'high' concentration scenarios, even the'best case'scenario still assumes impacts that are more frequent and/or more intense than historical norms. That is, RCP 2.6 (for example) is not a proxy for continuance of a "business as usual / as historical" situation.
• There is an inverse relationship between physical risk impacts and the speed and depth of the transition to a low-carbon economy, so a 'low' concentration scenario must assume elevated economic transition risks, including rapid transformation of the power network to renewable sources, rapid uptake of electric vehicles, significant reduction in building materials' carbon intensity, and a tightening of funding and insurance availability for assets that are not well positioned for the transition. This scenario may have knock-on impacts for other aspects of the project being assessed (for example, available power sources) and these knock-on impacts should be considered in a way that is consistent with the concentration scenario.

Not considering future scenarios in this way at the business case stage could impact future asset financeability, insurability and of course resilience, as well as leading to inconsistent decision-making about project scope and budget.

What can we expect to see next

We predict business case guidelines and frameworks will continue to require increased consideration of climate risk and sustainability, especially in those States where this is not presently an area of focus for project assessments. This trend mirrors an increased formalisation of ESG private assessment tools: for example, GRESB (the leading global ESG benchmarking organisation) has just released its open-source due diligence tool for infrastructure assets, as an input to investment decision making. In addition, there is an obvious benefit to all involved in infrastructure development of making assessment frameworks largely uniform across jurisdictions. We suggest this is an area for useful collaboration between relevant agencies, policy-makers and private sector organisations throughout Australia.

Sustainability considerations in assessment frameworks are not just boxes to be ticked. They require real consideration, both to avoid the risk of increased legal challenges and to ensure key climate risks do not result in a cost blowout or prevent a project being able to obtain insurance finance. Getting the investment decision and project scope 'right' from a sustainability perspective is one piece of the puzzle of continuing development that supports growth while balancing sustainability objectives.