Investors Need To Take Vulnerable Infrastructure Seriously

As of this writing, tens of thousands of North Carolina homeowners and businesses remain without power because of an attack on two electricity substations.

Over the past two years we’ve all become very familiar with the economic effects of supply chain disruptions. COVID-related bottlenecks impacted multiple industries and helped prompt the wave of inflation that is now seemingly leading to a 2023 recession. Many businesspeople and investors have also seen the reports that climate risks are increasingly making critical infrastructure vulnerable to impacts — one recent report suggested that upwards of one quarter of all critical US infrastructure is susceptible to extreme flooding events, which we now know are being exacerbated by climate change. We also saw the effects on the Texas power grid of climate change heightened extreme weather over the past year-plus. The evidence is now obvious.

So climate change is now putting a significant portion of US infrastructure at risk.

But climate change isn’t the only risk to US infrastructure. As the incident in North Carolina shows, domestic terrorism now also threatens US infrastructure, especially power infrastructure. This is now the third known example of such sabotage of a transformer station in the U.S. just over the past decade, and extremists within the country have now made clear that attacking critical infrastructure is part of their playbook.

This means that any business in any industry is now vulnerable because their energy supply and critical inputs are at risk. If energy, water and transportation infrastructure is increasingly at risk, so are all the businesses that require energy, water or transportation for their business to operate. Which is… everyone.

We have a tendency to think about these risks as being applicable mostly to companies in those same industries, but globalization has extended supply chains for all industries. And the longer the supply chain, the more vulnerable it is to infrastructure disruption. Take the hypothetical example of a tomato sauce processing plant in the mid-Atlantic region. They require electricity. They require water both as an input and for other in-plant uses like washing, and they have wastewater that must be treated by the local municipal wastewater utility. They also require tomatoes, of course! And while perhaps they source field-grown summertime tomatoes from somewhere relatively close like Ohio, it’s more likely these days that they’re bringing in tomatoes from much further afield — and during the off-season for tomatoes, perhaps they’re using greenhouse-grown tomatoes, the vast majority of which come from Mexico.

All of these inputs are now more vulnerable than they were even just a decade ago, thanks to the ramping up of both climate change and domestic terrorism threats. Among other potential threats of disruption. And so not only do business operators now need to worry about such risks, investors do as well. And no, this isn’t just a tomato sauce problem. This potentially impacts all industries from information technology to health care to education to manufacturing.

At this point, all business operators and their investors need to be asking three critical questions:

1. How can we shorten our supply chains? While we have spent the past few decades building a global economy where food is grown or goods are manufactured halfway around the world from where they’re actually needed, the “circular economy” can help shorten supply chains. This means localized solutions for turning local waste into local supply. For example, our tomato processing plant could adopt onsite containerized wastewater treatment for “water recycling”, to insulate themselves from any power or other operational disruptions to their local water utility (and in many cases, to save money anyways). Beyond these circular economy solutions, our intrepid spaghetti sauce maker could also source at least a portion of their tomato supply from indoor agriculture operators much closer to their plant than in faraway Mexico. Even if at a slightly higher cost, the ability to source more reliable supply could yield benefits.
2. How can we arrange reliable onsite power? While the traditional solution for backup power has been natural gas or diesel-fired generators, what happens if those fuel supplies are also disrupted? Which could very well happen as a result of the same disruptive event that knocked out power supply in the first place — a major flood or hurricane, for example. Fortunately there are emerging solutions for “C&I microgrids” (basically: solar + batteries + software) where no fuel supply would be required.
3. How can we build in more resiliency into our facilities and projects? The solutions here can be fairly simple — for instance building taller flood barriers and concrete pads for installations, or raised roads. Hardened powerline and data line conduits. Contractors and architects typically don’t encourage such solutions because they add construction cost to a facility. But taking on these small costs up front can pay dividends down the road.

Finally, while it’s not strictly an operational matter, many business operators do charitable activities in their local communities — these increasing risks not only potentially impact the business but especially their most vulnerable neighbors and their employees’ families. With eyes now open about the increasing risk of disrupted infrastructure, our tomato processing plant could consider emphasizing donations and contributions to provide resilient power solutions to local food banks and community shelters who end up being lifelines when disasters do strike. Or even donating to national organizations like The Footprint Project which now has a track record of being effective first responders with onsite renewable power to help food banks and community shelters, and can provide branding opportunities for some ongoing marketing benefits for corporate donors as well.

The major takeaway from these recent episodes is that business operators and their investors may still feel like critical infrastructure isn’t anything they need to worry about, but if so they need to wake up to the risk. Critical infrastructure disruption is more likely than it was a decade ago, and is getting worse not better. Investors need to start asking pointed questions of their portfolio companies, across all industries and sectors. Business leaders need to be asking these questions of their management teams.

Shortening supply chains and building in more localization and resiliency can end up making the difference between being able to weather the storms, or getting washed out.