Infrastructure remains a major roadblock to achieving urgent climate targets. It is responsible for more than 79 per cent of global greenhouse gases and consumes 60 per cent of the world’s materials. But infrastructure is also one of the most impactful tools for fair and sustainable economic growth, and able to rapidly accelerate progress to net zero and sustainable development goals such as access to clean water and sanitation.
So, what is the difficulty? Essentially, we have not figured out how to accelerate the speed and scale at which infrastructure is developed and financed, and for decades the sector has faced a vast investment gap.
The Global Infrastructure Hub (GI Hub), an international infrastructure body established by the G20, used recent data to estimate that the investment gap has more than trebled from a 2017 global forecast of $0.7tn a year to around $3tn a year today, worsened by the costs of reaching carbon neutrality requirements, the pandemic and the war in Ukraine.
The figure is a stark reminder of what the public sector has not been able to achieve alone, despite G20 governments pledging $3.2tn for post-pandemic infrastructure stimulus spending. "More investment is critical,” says Marie Lam-Frendo, chief executive of GI Hub. “The sector is in crisis mode, trying to fill the investment gap, support sustainable development and play its vital role in the energy transition.”
Fortunately, she says, some trends show there are opportunities to stimulate the private sector to become more involved. This interest, if channelled correctly, might be enough to fund the large-scale change that will enable infrastructure to reach its climate and development potential.
Private investment in renewable infrastructure has doubled since 2010
Renewable projects now receive half of all private sector investment in infrastructure, demonstrating investors’ appetite for assets with clear green credentials. And yet the overall amount of private investment in new infrastructure - $100bn in 2020 - remains inadequate to address the climate emergency.
Note: Data are preliminary for 2021
In the broader energy sector alone, "investment needs to rise three to four times to achieve climate goals”, says Henri Blas, chief content officer of GI Hub. “This is both a challenge and an opportunity.”
Growing focus on ESG considerations could make it easier to convert on this opportunity. Lam-Frendo says the infrastructure sector “does a better job than others” of incorporating ESG and could see immediate benefits from standardised ESG metrics, which help attract private investment by making it easier for investors to verify how green an infrastructure project is.
To stimulate action towards achieving climate goals, the GI Hub is working on a framework for G20 countries to increase private sector investment in ESG-compliant infrastructure projects.
International cooperation is pushing the sector to meet climate targets faster with technology
“Technology underpins infrastructure’s ability to decarbonise,” says Lam-Frendo. Almost 50 per cent of the emissions reductions needed by 2050 depend on technologies that are at the prototype or demonstration stage.
The G20 recognises this and is driving international cooperation to increase infrastructure technology (InfraTech) investment and adoption. The G20’s InfraTech agenda has been in place since 2020, with InfraTech featuring in the group’s priorities in 2021 and 2022. The stimulus spending announced by G20 governments includes 17 per cent for InfraTech and digitalisation. Blas says technology also attracts private investment.
“When integrated into the infrastructure lifecycle, InfraTech enables better data and more transparent decision-making, which are highly desirable to private investors,” he says. However, for large-scale adoption of InfraTech to become a reality, Blas adds: "Governments can do more to de-risk the research and development needed, make procurement more flexible and incentivise technology adoption.”
The GI Hub is raising awareness of new technology in infrastructure and developing a blueprint for the G20 on scaling up InfraTech investment and development.
New instruments for funding and financing green infrastructure are taking off
Wider adoption of comparatively new financing and funding instruments is an encouraging sign, as they help attract private investment in sustainable infrastructure, especially in emerging markets where there is uncertainty of initial returns. Blended finance (philanthropic or development bank funds combined with private capital), for example, can encourage private participation by taking the first risk or guaranteeing revenues in the early phase of operation.
A financing approach that has seen major growth is green and sustainability-linked finance. These bonds and loans aim to facilitate and support sustainable economic activity and growth. In 2021, sustainability-linked loans surged 300 per cent to more than $700bn, more than three times the previous record.
Lam-Frendo emphasises that these instruments are also vehicles to closing the investment gap, accelerating institutional investors’ investment in sustainable infrastructure.
Where to next?
Given these trends, coordinated action across the sector and multi-laterally across government could amplify the net value of investment in infrastructure and grow the contribution from the private sector to take a big step forward in sustainability.
“We’ve spent too much time with the public and private sector expecting the other to come up with solutions,” says Lam-Frendo. “Our experience shows that in times of crisis, bringing everyone to the table in good faith to co-create enables us to solve these complex challenges much faster.”
Along with the G20, the GI Hub is playing a leadership role when it comes to collaboration that can catalyse change in infrastructure.
This content has been produced by GI Hub in collaboration with the Commercial Department of The Financial Times.
Funding and Financing Solutions
