Climate-friendly infrastructure — opportunities for private investors
Governments increasingly recognize that infrastructure investment is the linchpin in establishing effective green transition pathways. Infrastructure currently accounts for more than two-thirds of global greenhouse gas emissions on average. Well-designed infrastructure projects with a stronger focus on climate change and the broader sustainability agenda therefore not only increase potential output growth and improve resilience, but also help reduce the carbon footprint. — However, current public investment plans alone will not be sufficient to close the estimated green investment gap.
Our internal calculations allow us to identify the needs of each sector to meet different emissions targets and match them with the distribution of new plans (Figure 1)5. The various infrastructure stimulus plans put in place during the Covid-19 crisis appear to partially reflect these changes. Comparing actual investment needs by sector with current plans, we find that the latter fall short in electricity and grids, where investment needs are greatest.
We estimate the largest green transformation investment gap in U.S. public infrastructure to be about 1.7% per year. In Europe, the largest investment gaps are in Spain and France (1.6% and 1.3% of GDP per year, respectively), while the figures are more moderate in Italy (0.6%) and Germany (0.4%). Germany can only meet the estimated investment needs taking into account the boost from the Easter package — provided that the funds are allocated efficiently and the projects are implemented effectively.
Creating a favorable regulatory environment for infrastructure investment can help mobilize long-term funding from long-term investors. Several G20 countries — and others with significant insurance sectors — have only partial or no special treatment for infrastructure. For example, liquidity rules require insurers to provide significant amounts of capital to cover investments in infrastructure debt, particularly for unrated transactions. To date, the lack of data on the creditworthiness of infrastructure projects has prevented better comparability with corporate loans and even more differentiated regulatory treatment. Improving the availability of performance data on infrastructure projects to governments, regulators, and investors would help expand the scope for more favorable regulatory treatment.
According to our calculations, green infrastructure projects actually appear to fail at half the rate of “brown” projects globally over a 10-year period, with the difference being greater in emerging economies than in advanced economies.