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In the latest shift in power from investors to corporate boardrooms under the Trump administration, the ability of US pension funds to use proxy advisors like Institutional Shareholder Services (ISS) and Glass Lewis to advise and vote on corporate decisions on their behalf has come under fresh scrutiny and restriction.

President Trump’s executive order “Protecting American Investors from Foreign-Owned and Politically Motivated Proxy Advisors” ramps up federal scrutiny of proxy advisory firms, and states that returns should be the only priority in advising investors.

Proxy voting is an important tool for investors seeking to influence a company’s governance practices according to their own board-approved governance and sustainability principles. But under the latest edict, investors can no longer wholly rely on the recommendations of their proxy advisors and must do the work themselves in a time-consuming process, particularly for large institutional investors which own shares in many companies and need to vote on thousands of routine matters.

What is the impact?

On one hand, Trump’s executive order may only have a limited impact. The executive order only directs US government agencies to review their existing regulations and guidance pertaining to proxy advisors: it would take months, for example, for the SEC to actually modify its regulations.

“There is little risk of wholesale change before the 2026 proxy season,” argues Peter Kimball, a Washington-based director at Willis Towers Watson.

Still, Kimball warns that February 2025 showed that with respect to engagement and Schedule 13G eligibility, SEC staff guidance can be “changed quickly and without notice,” in a process that “warrants continued monitoring”.

Proxy firms – which have swiftly issued responses on their enduring commitment to continue to operate in the best interests of their clients – are also well down the road when it comes to changing their operations.

From the beginning of 2027, Glass Lewis will move to more customised proxy voting guidelines to better suit clients’ individual priorities rather than a single “house” recommendation. According to a recent webinar on ESG guidelines, it said new thematic voting recommendations will fall into four “perspectives” to reflect the varied viewpoints of its clients.

ISS has also revised its proxy voting guidelines to no longer generally recommend voting for ESG proposals and will instead evaluate these proposals on a case-by-case basis.

Moreover, Kimball notes that virtually all institutional investors have had customised arrangements with their proxy advisors for many years anyway.

Institutions provide the proxy advisor with a set of voting priorities and the proxy advisor delivers not only its benchmark or in-house proxy advisory report, but also a custom report marrying the proxy advisor’s analysis with the institution’s voting priorities, he explains. Alongside custom reports and recommendations, institutions also have their own internal voting teams.

“Even the proxy advisors’ customised recommendations are often not determinants of voting decisions, but rather data points in the institutional investors’ own analysis,” says Kimball.

It’s certainly the case at CalPERS.

Last year, the investment team voted proxies at more than 10,000 shareholder meetings, translating to 95,000 individual votes across 63 countries on issues such as say-on-pay, board independence and diversity using several research providers, including proxy advisory firms ISS and Glass Lewis.

But despite the volume of votes cast, the notion that institutional investors rely solely on proxy firms is misguided. Before casting a vote, the CalPERS internal team do their own research into the companies the pension fund owns in a process that requires “hundreds of hours of work” – one corporate proxy statement can be 75 to 100 pages long.

And CalPERS often has a different opinion from its advisors, noted CEO Marcie Frost, speaking on the topic at the June 2025 board meeting.

Last year, it voted in alignment with corporate management’s recommendations approximately 74 per cent of the time, while Glass Lewis aligned with management 90 per cent of the time.

“CalPERS doesn’t, nor has it ever, relied solely on these recommendations for our voting decisions. This is a common misconception in the marketplace,” she said.

Other pension funds also show this hands-on approach. In 2022, the Teacher Retirement System of Texas (TRS) introduced a customised benchmark to give the fund the freedom to vote alongside corporate management on climate policy in accordance with its own views. In 2023, West Virginia Investment Management Board also began its own process of digging into the voting practices of every external manager to analyse votes cast in Virginia’s name; educate trustees and if necessary, vote the proxies itself.

More risk for investors

But the executive order does feed into an ongoing crimping of US investor power.

At the beginning of last year, the SEC changed its long-standing guidance by forcing passive investors to file costly and onerous disclosure forms if they wanted to press companies on ESG issues. The US administration is also exploring ways to curb the voting influence of the big three passive firms BlackRock, Vanguard and State Street, whose index funds typically own 20-30 per cent of most public companies.

Several US states have also advanced or passed laws banning the consideration of ESG factors in investment and proxy-voting decisions. According to a statement from trustees of the five New York City public pension systems, this has led to a growing reluctance to support shareholder proposals, including those focused on long-term risk management.

“Average support for ESG shareholder proposals, (excluding anti-ESG proposals) fell to its lowest level since 2018 despite continued investor awareness of financial risks related to the management of climate and workforce issues,” state the trustees who flag the complexity and cost incurred by investors to undertake their own proxy analysis.

Despite the challenging environment for shareholder engagement, the investor said shareholder proposals continue to serve an important role as an effective catalyst for productive dialogue and positive outcomes, as detailed in the following report.

“Looking ahead, NYCRS remains firmly committed to advancing sustainable and accountable corporate practices through active ownership. The 2025 season highlighted the importance of protecting the integrity of the shareholder proposal process and ensuring that investors can continue to raise material concerns essential to long-term value creation.”

Finland’s €5 billion ($5.8 billion) Veritas Pension Insurance Company is preparing to increase its public equity allocation by 15 per cent in line with new regulations, in a bid to boost returns and mitigate demographic changes which are threatening the sustainability of its pension system.

It means total public and private equity at the institution, which provides statutory pension provision for Finland’s private sector employees, will account for 70 per cent of assets under management, triggering a reappraisal of diversification and portfolio construction at the fund, alongside preparation for much more volatility in returns ahead.

“There isn’t a magic bullet that allows us to maintain the same diversification and increase equity,” chief investment officer Laura Wickström tells Top1000funds.com in an interview from the city of Turku in the southwest of Finland.

Fixed income and alternatives will be relied on even more as sources of diversification and the allocation to hedge funds will be stripped of all equity risk or anything that correlates to equity, and favour quality and idiosyncratic strategies instead.

The reform was agreed in principle late in 2025; draft legislation is expected before Parliament in 2026 and changes could start as early as 2027. A key part of this reform focuses on unlocking higher returns by allowing greater risk-taking — particularly through higher equity exposure.

As she plans how best to build up the equity allocation challenged by high valuations, one strategy that has already proved its worth in helping manage a steadily increasing allocation to US stocks – which will inevitably grow larger still – includes an internally managed currency hedging position.

It has shielded the portfolio from the impact of the dollar weakening against the euro, particularly in the first quarter of 2025, and has also allowed the investor to maintain an equity exposure on which Wickström remains positive, mindful that the growth profile of many US-based companies is not easily replicated in a European equity portfolio.

“Our decision to hedge the currency had a bigger impact on the portfolio this year than our small reduction in the allocation to US equities did during Liberation Day. Our US listed equity exposure remains relatively unchanged – but what is different is our decision to hedge the US dollar.”

Given the inherent costs of hedging the dollar, investors typically have some kind of forecast of where the dollar will move. But she says the team don’t have a clear view on whether the dollar will weaken further against the euro going forward since it has already experienced a big move. The most important thing, she says, is to acknowledge that US assets are a larger part of the portfolio compared to the past and that any dollar moves will have a big impact on the portfolio.

The increased allocation to equity will be accompanied by more in-house management not only of the currency position and derivatives, but also the investor’s direct allocation to Finnish, Nordic and European equity. She notes that despite the expectation at the beginning of 2025 that European equities would have a bumper year, recent poor earnings continue to drag on returns.

“We’ll have to see what next year brings,” she reflects.

Moreover, sectors set to benefit like defence where Veritas invests in the defence sectors of NATO countries have not proved a particularly rich source of returns. She describes more hype around the sector than actual opportunities, although opportunistically tapping defence innovation by investing in early-stage venture companies is a priority.

“It’s a responsible thing to invest in something that provides the means to protect independence and freedom in Europe.”

Under the reforms, Veritas will also be able to integrate leverage into its indirect real estate allocation for the first time. It will enable the fund to free up capital without having to sell real estate assets, to invest more in equity. Veritas will apply 50 per cent (or lower) leverage to the portfolio, says Wickström.

She concludes that although applying leverage will magnify returns on the upside and downside, Veritas has the in-house skill to efficiently manage the risk.

Between July and December 2025, a new tactical asset allocation (TAA) at the $46 billion Iowa Public Employees Retirement System (IPERS) has earned between $10-15 million, according to chief investment officer Sriram Lakshminarayanan.

Speaking to Top1000funds.com in an interview alongside IPERS’ chief executive officer Gregory Samorajski, Lakshminarayanan explained that the TAA strategy runs at about 10 per cent of volatility on a pool of assets which are all margin funded.

IPERS most recent board documents show that the staff-directed trades program earned 8.36 per cent for the third quarter of 2025 – the highest-performing allocation on IPERS’ alpha scorecard across all active management for that period.

Lakshminarayanan says it’s the first time the investment team have gone live with an internal idea that has made money in its early months.

“We are hopeful that this trend continues for all such initiatives,” he adds.

TAA is part of a three-pronged active risk strategy in public markets at IPERS that includes a portable alpha allocation – likely to be expanded with more mandates soon – and an allocation to alternative risk premia (ARP) comprising different bank premia.

Although this allocation has struggled because markets are “irrationally exuberant”, Lakshminarayanan remains committed to a strategy that he argues will come into its own when markets show signs of stress.

Lakshminarayanan says his approach to TAA is distinct from those investors who simply over-weight and under-weight assets in a portfolio. IPERS runs a systematic process that trades about 30-35 different futures instruments using an in-house algorithm.

“When we talk about TAA, we are not talking about going long equity for 2 per cent for the next six months because of the macro climate. Ours is a systematic, CTA type strategy.”

IPERS joins a growing cohort of investors that are tapping a similar seam by deviating from their long term strategic asset allocation to take advantage of short to medium term market trends to increase diversity or bolster returns. But TAA at IPERS has been years in the making. The strategy had run on a paper basis for two and a half years before going live in July, and was originally presented to the board over ten years ago.

Trustees were “very buoyant” on TAA since day one, and governance and permissions were procured a long time ago. The long gestation period has been due to constraints around staff and IPERS ability to hire people and put together the required systems, he says.

“It’s okay for a strategy to experience a draw down and not make money all the time because of the market environment, but it’s not okay to be forced to turn off a strategy because operationally you’re not capable – if you have to turn it off because of data or an operational issue, it reflects very poorly on staff,” he says.

In the latest adjustment to its long-term strategic asset allocation, IPERS reduced its total growth assets to 51 per cent from 56 per cent. It announced the removal of a 5 per cent global smart beta allocation to fund an increase in total defensive assets to 25.5 per cent from 23.5 per cent focused on core (plus) fixed income.

Innovation in action

CEO Samorajski believes TAA reflects a determination to innovate and push the boundaries of investment that has come to define strategy at IPERS and helped support a 92 per cent funded status. He says the philosophy was visible over 30 years ago when IPERS became an early adopter of private equity investments.

“We do try to innovate, and the board allows it. We have a structure that allows innovation and very few restrictions by statute, and the board gives us freedom as long as we keep them informed,” he says.

A new co-investment seam in private credit, also launched in July, is another example of innovation in action.

Since then, IPERS has accepted around 5 per cent of the GP deals presented to the team via three initial commitments (pending legal review) totalling $50-60 million out of a budget to invest around $200 million.

“We have a lot of room left,” says Lakshminarayanan, explaining that one reason for the slow deployment is the small investment team of nine people, of whom only three to four are focused on private markets. Co-investment opportunities are sometimes attached to a rapid, one/two-week turnaround but concerned by the volume of money chasing after private credit, due diligence and finding the right partners can’t be rushed.

“It might not always work out for us because of the existing workload we have,” he says.

Co-investments must also bring ballast to the overall private credit portfolio. “If we find we are getting concentrated in one sector/direction with our GPs, we use the co-investment programme to select other deals and different GPs to act as a lever and bring diversification to control some of the risks.”

IPERS approach to fees in private markets also underscores a different outlook: rather than pay fees, IPERS charges them.

“Whenever a manager comes with an alpha strategy of some sort, we ask ‘if the strategy is as good as they claim, why are they selling it to us?'” he questions.

The ensuing discussion sets a hurdle rate where IPERS will always earn at least a T-bill interest rate, plus a share of the profits.

“We allow our managers to keep a share of the profits for using our money. We charge fees rather than pay fees, doing that gives us one of the lowest fee structures of public plans in the US.”

According to recent board documents, total investment management expenses decreased 33.1 per cent over the last year, including a fall of 35.3 per cent in investment manager fees.

Today, Samorajski is looking at innovative ways to support the investment and back office teams in increasing efficiency with AI, and nurture and hold onto talent. For example, he is exploring ways to build the investment team that includes strategies to attract retirees back into work.

“Going forward, the largest population growth will be amongst the 65s and over. The new workforce is going to be folks who we think of retirement age and we need to figure out ways to bring people back,” he concludes.

This is the fourth part in a series of six columns from WTW’s Thinking Ahead Institute exploring a new risk management framework for investment professionals, or what it calls ‘risk 2.0’. See other parts of the series here.

In this thought piece, we turn back in time – not to imagine how outcomes might have been different under a risk 2.0 framework, but to deepen our understanding of what this new mindset reveals. Because of path dependency, it is likely that a world trained in risk 2.0 would have even evolved along entirely different trajectories. So, rather than asking “what if?”, we ask “what can we learn?”

Our inquiry is guided by two questions:

What new insights emerge when past crises are reinterpreted through the risk 2.0 mindset?
How do these insights help us recognise the limitations of risk 1.0 and better prepare for the risks of the present and future?

Historical examples of significant market falls allow us to consider whether there are flaws in risk 1.0 thinking that resulted in the nature, likelihood and/or severity of these events being underestimated.

We applied a set of diagnostic criteria that exposed where traditional frameworks systematically fell short. These criteria were chosen because they highlight distinct but interlinked failures across assumptions, models, and system-level understanding:

Crash recorded – describes the event which provides context for the testing framework that follows
Risk 1.0 assumption violated – identifies the core theoretical assumptions that failed under stress (e.g., normal distributions, stable correlations, etc). It also highlights how simplifications embedded in risk 1.0 created blind spots under extreme conditions
Unexplained by risk 1.0 – captures dynamics that risk 1.0 models could not account for (e.g., nonlinear feedback loops or contagion effects)
Model blindness – reflects the inability of risk 1.0 models to adapt to emergent realities, leading to misplaced confidence in flawed measures. Demonstrates the disconnect between reductionist models and complex adaptive market behaviour
VaR inadequacy – shows how VaR underestimated clustering, fat-tailed events, and compounding systemic pressures
Neglect of systemic risk – exposes the absence of system-wide awareness in risk 1.0 (inter-market connectivity, liquidity spirals, contagion, etc)

[click to enlarge] Example 1 | black monday, 19 Oct 1987

Seen through a risk 2.0 lens, Black Monday exposed the fragility of risk 1.0 foundations. The Dow Jones fell 22.6% in a single day – a 20-plus-sigma event that defied assumptions of normality and stable correlations. What appeared as an isolated market shock was in fact a system-wide feedback loop: portfolio insurance and dynamic hedging amplified losses as automated selling cascaded across markets and borders.

Gaussian-based VaR models failed to anticipate extreme tail risks or the clustering of volatility that followed. Model blindness was exposed by confidence in reductionist models that ignored how collective actions could drive instability. Beneath it all lay a neglect of systemic risk: liquidity vanished, margin calls spiralled, and inter-market connectivity turned local stress into global contagion. Black Monday stands as an early warning of how complex dynamics can overwhelm static models – and why risk 2.0 demands adaptive, system-aware thinking.

Through a risk 2.0 lens, the dot-com collapse reveals how belief in rational pricing masked deep behavioural and systemic distortions. By October 2002, the Nasdaq had fallen around 77%, exposing how risk 1.0 models equated low beta with low risk and ignored valuation extremes. Market exuberance became self-reinforcing, driven by momentum, narratives, and a collective faith in technological transformation.

Traditional mean-variance frameworks failed to capture how capital is concentrated in overvalued assets, nor how investor behaviour amplifies instability. Volatility regimes shifted abruptly, invalidating assumptions of stable risk premia, while VaR models ignored emerging tail risks.

The crash revealed feedback loops between capital loss, investor sentiment, and liquidity withdrawal – dynamics under-appreciated by risk 1.0.

Example 3 | great financial crisis, 2007-2009

Viewed through a risk 2.0 lens, the Global Financial Crisis epitomises the collapse of risk 1.0 assumptions. Between October 2007 and March 2009, the Dow Jones fell roughly 53%, as beliefs in stable correlations and the independence of credit risks unravelled. Bonds once deemed risk-free became central nodes of systemic contagion.

Traditional models could not explain the freezing of credit markets or the cascading counterparty failures. The Gaussian copula framework missed correlation spikes and nonlinear stress dynamics. VaR, built on historical data, underestimated the magnitude and persistence of losses.

At the system level, “too big to fail” institutions turned from stabilisers to amplifiers, exposing the fragility of tightly coupled markets. Liquidity spirals and regulatory blind spots deepened contagion. The GFC became the germinal moment for the modern notion of systemic risk.

The COVID-19 shock was unlike anything risk 1.0 could imagine. In just four trading days, the Dow fell around 26% – including a 13% single-day drop on 16 March. No model built on historical financial data contained a pandemic scenario, and assumptions of stable correlations and sector diversification collapsed.

The simultaneous decline of risk assets worldwide reflected an economy in sudden global shutdown. Risk 1.0 models could not link epidemiological dynamics to market stress, nor capture the speed at which liquidity evaporated. Jump risk, flash-crash behaviour and asymmetric liquidity were all overlooked.

Like in other events considered, VaR frameworks underestimated both the magnitude and clustering of volatility, while systemic blind spots emerged as liquidity froze. Only massive central bank intervention prevented a broader financial seizure.

Seen through a risk 2.0 lens, the COVID crisis highlights how financial systems are deeply entangled with environmental, social, and real-world shocks.

Example 5 | UK LDI/gilt crisis, Sept-Oct 2022

The UK gilt crisis of 2022 revealed how even safe assets can become sources of systemic instability. Within six days, long-dated gilt yields rose about 1.5 percentage points, triggering margin calls and forced selling across LDI portfolios. Assumptions of stable rates, low volatility, and gilts as inherently low-risk assets collapsed almost overnight.

Traditional risk models failed to capture how rapid yield spikes could trigger collateral spirals and feedback loops between leveraged pension funds and the broader gilt market. Stress tests were anchored in mild historical scenarios, overlooking the extreme rate shocks of 2022.

The episode exposed the deep interconnections within the pension and LDI ecosystem – linkages under-recognised by risk 1.0. Only the Bank of England’s emergency gilt purchases prevented a full-scale liquidity crisis.

What can we learn?

Revisiting these crises through a risk 2.0 lens is not about judging the past, but about refreshing our field of vision. Each episode exposes how risk 1.0’s linear, model-centric view missed the adaptive, interconnected nature of real markets.

Risk 2.0 invites us to see and think in systems, shaped by behaviour, feedback, and design. Its strength lies less in prediction and more in awareness – the ability to recognise fragility before it becomes failure.

Andrea Caloisi is a researcher at the Thinking Ahead Institute at WTW.

Global markets have faced several defining moments in 2025. From the DeepSeek-driven reassessment of the US’ AI leadership to the Liberation Day tariffs which plunged global trades into uncertainties, these episodes have tested asset owners’ theses around geopolitical stability, the dominance of the tech sector, and geographical diversification.

Top1000funds.com has always been committed to going beyond the headlines and uncovering the fundamental shifts in how asset owners construct their portfolios and run their organisations. This year our readers continued to engage with in-depth Investor Profiles showcasing the thinking of global CIOs.

We now have readers at asset owners from 108 countries, with combined assets of $45 trillion, and we are also pleased to say that in 2025 we significantly increased our pageviews and our user base with our readers spending more time on our site.

Advocating for better practices

This year marks the end of the Global Pension Transparency Benchmark, which Top1000funds.com conducted in partnership with CEM Benchmarking annually over the past five years.

The GPTB measures and ranks the transparency of 75 asset owners from 15 countries, based on the factors of costs, governance, performance and responsible investment.

We’re incredibly proud of the project’s impact across the pension industry. Some topline figures: 92 per cent of funds improved their total transparency scores; all 15 countries in 2025 achieved better scores than they did five years ago; and Norway’s Government Pension Fund Global earned a perfect transparency score of 100, two years in a row.

But for leaders of transparency, the journey doesn’t stop here, you can read about how the GPFG and Canada’s CPP Investments will seek continuous improvements from here.

We continue with other key knowledge-sharing initiatives including the Asset Owner Directory and the Research Hub.

The Asset Owner Directory is an interactive tool to give readers an insight into the world of global asset owners. It includes key information for the largest asset owners around the world, such as key personnel, asset allocation and performance, and also includes an archive of all the stories that have been written by Top1000funds.com allowing readers to better understand the strategy, governance and investment decisions of these important asset owners.

The research hub links our events and our content with our Fiduciary Investors Symposium event series built on a close association with academia. For nearly 15 years we have been hosting the events on leading university campuses, giving delegates an immersive educational experience and challenging them to think bigger.

Now we have developed this research hub, which brings investors the academic papers written by the university professors who have been such an integral part of our programs. The research hub allows you to search academic papers and related Top1000funds.com content by the name of an academic or university, or by subject.

I have the pleasure of speaking with you – our global allocators and managers – every day and we know that despite the volatility and uncertainties, there’s never been a more exciting time to be an investor. The job of protecting members’ capital as a fiduciary has also never been more important.

Thank you for being a reader, a delegate, a sponsor or a speaker, for engaging with our content and for generously sharing your knowledge.

We’re going to do it all again next year and kick off our event calendar with the Fiduciary Investors Symposium in Singapore from March 24-25, 2026.

Hope to see you there.

Until then, happy holidays.

Produced in partnership with Scientific Infra & Private Assets

Global asset owners are expanding into infrastructure debt in a bid to lock in long-duration income, but the surge of money is also triggering questions about how to quantify risk in an illiquid and inherently opaque market.

The trend sits at the centre of a broader rotation from public to private markets as investors hunt for new sources of alpha and diversification. Infrastructure assets under management grew at a 19.7 per cent compound annual rate over the decade to 2024, with infrastructure debt expanding even faster at 23.1 per cent.

The shift is now visible in the growing number and size of mandates.

In September 2025, Dutch pension giant APG announced its first infrastructure debt allocation, awarding €425 million to an impact-focused mandate to Schroders Capital, and in May 2025, UK workplace scheme NEST seeded a new Europe-focused infrastructure debt fund run by IFM – in which it holds a stake – with an initial commitment of about €530 million.

Infrastructure debt has outperformed corporate and liquid bond peers at similar durations (yielding 4.9–5.1 per cent), with lower volatility (4.5–5 per cent) and with higher risk-return ratios (up to 0.98), according to data provider Scientific Infra & Private Assets (SIPA).

It is these type of risk-return characteristics that make private assets well suited to generating reliable income, according to NEST Invest chief executive Mark Fawcett.

“Private credit, infrastructure, etc – if you go to the right part of that asset class, you can generate the income [and] generate a superior pension income,” he said at the recent Fiduciary Investors Symposium at the University of Oxford.

Behind the veil of private infrastructure credit

However, the challenge of measuring risk and return becomes particularly pronounced within private market sub-sectors such as infrastructure debt.

Most infrastructure credit is project finance and so assessed by ratings agencies. It pushes investors towards an imperfect workaround: taking a listed bond proxy and adding an illiquidity premium.

“There is no like-for-like listed market for infrastructure credit – you just don’t have public bonds formed from wind farms,” says Abhishek Gupta, head of product at Scientific Infra & Private Assets (SIPA), the commercial arm of the EDHEC Infrastructure & Private Assets Research Institute.

Investment grade infrastructure debt and corporate bonds have a long-term monthly return correlation of 0.8-0.9 given shared macro drivers such as interest rates and credit cycles, but there are also periods when their performance decouples. For example, in the non-investment-grade segment, the 12-month rolling return correlation between infrastructure debt and corporate bonds turned negative between mid-2018 and late-2021, illustrating periods of decoupled performance despite exposure to shared macroeconomic drivers.

Another issue with benchmarking is the illiquidity premium itself, which is usually treated as a static number rather than a dynamic variable.

“This illiquidity premia also changes over time during the market cycles depending how active the market is,” Gupta says.

It can lead to fundamental risks, despite infrastructure debt consistently demonstrating overall low default probabilities.

“If you don’t assess the risk properly, you can’t estimate spreads in this market as effectively. That’s a problem if you’re not valuing infrastructure credit on your books fairly to the market.”

An assessment of private debt ratings using InfraMetrics® classifications compared against public credit ratings (such as S&P) for the same issuing entities where both private and public instruments exist, shows a consistent alignment over time.

On average, 13 per cent of private debt instruments classified as investment-grade by public agencies were assigned a non-investment-grade label by InfraMetrics® over the past five years.

Notably, in 2023 and 2024, alignment between the two rating approaches reached 100 per cent, coinciding with an observed decline in overall credit risk following the pandemic period.

A heterogeneous asset class

Between 2019 and 2023, the average one-year probability of default (PD) for infrastructure debt declined, stabilising around 1 to 1.3 per cent, while recovery rates have consistently remained above 75 per cent, according to SIPA. Yields are attractive at 4-5 per cent compared to riskier private infrastructure equity at 6-8 per cent.

But the distribution of risk is lumpy depending on lifecycle, leverage, and sector, according to Riazul Islam, senior quantitative researcher at SIPA.

“Assessing infrastructure credit risk requires a granular and forward-looking approach that captures both project-specific characteristics and broader macroeconomic conditions. The InfraMetrics® model incorporates time-varying factors such as the debt service coverage ratio (DSCR), leverage, cash flow available for debt service (CFADS), firm age, and benchmark interest rates (e.g., the risk-free rate). These inputs allow for dynamic recalibration of credit risk as both firm-level fundamentals and external environments evolve. This factor-based framework enables nuanced, data-driven evaluation of creditworthiness and supports informed decisions on restructuring scenarios or credit classification adjustments over time.”

Globally, energy and water resources have shown the highest average probability of default, reflecting commodity cycles, resource constraints, and higher operational volatility (1.91 per cent), while network utilities with monopoly-like models posted the lowest (0.19 per cent).

Young firms (0-5 years) were most vulnerable, with default probabilities around 1.8 per cent – often due to construction risks and lack of operational history – with mature stage firms dropping to just 0.6 per cent.

Accurate data is the key to finding new investment opportunities, accurately valuing existing investments, and to underpin capital market assumptions, Islam says.

“Infrastructure debt can be managed not as an illiquid, opaque niche, but as a mainstream credit allocation with measurable risk and return characteristics.”

More granular, project-level data is allowing investors to distinguish between fundamentally different sources of risk across lifecycle stages, sectors and capital structures, rather than treating infrastructure debt as a homogenous allocation.