Green infrastructure investment must be unlocked

Achieving the UK government’s new policy of net zero carbon emissions by 2050 – and more broadly meeting the international Paris climate change Agreement objectives – will require an unprecedented transformation of the global infrastructure system, according to a new report from TheCityUK and Imperial College Business School.

The report, ‘Financing low-carbon infrastructure,’ asserts that current investment in low-carbon infrastructure is well below what is needed to meet climate change targets in most major markets. In the UK, for example, the Committee on Climate Change estimates that investment in greening the energy sector needs to double from an average of £10bn a year to £20bn annually, if it is to reach net zero emissions by 2050. Globally, an additional $1.1trn is needed annually between now and 2040 to meet the International Energy Agency’s green energy target.

Most of the money required for this green investment will need to come from the private sector. However, despite growing investor appetite and supportive macroeconomic conditions, green investment levels remain below potential and insufficient to meet climate change targets. Significant barriers exist, from structural issues and market failures, to misaligned incentives, which are holding back investment. The challenges are varied but include political, regulatory, financial, data and technological hurdles to overcome.

Removing these barriers will be complex and government policy will be an important driver, as will market-driven incentives. In the long run, a standard definition of ‘low-carbon infrastructure’ will help to unlock investment at scale, along with better benchmarking and transparency for investors.

Anjalika Bardalai, Chief Economist and Head of Research, TheCityUK, said,

Climate change has risen rapidly up political, regulatory and investor agendas, but persistent barriers are preventing the scale of investment that is so urgently needed. Markets have a key role to play in addressing this challenge by financing the unprecedented transformation of the global infrastructure system towards clean, resilient and environmentally sustainable economic growth. Governments, regulators and industry must work together to unlock the huge amounts of money necessary to meet the unparalleled challenge of climate change.”

Raffaele Della Croce, Senior Fellow, Centre for Climate Finance and Investment, Imperial College Business School, said,

Despite growing investor interest, the amount of money flowing to green infrastructure is far short of the level needed. Meeting the Paris Agreement targets means aligning short-term infrastructure investment plans with long-term, low emission, climate-resilient development strategies. This will require a step-change in policy focus, new financing solutions, and faster technological progress.”

The barriers to green infrastructure investment identified in the report include:

  • Political risk – Infrastructure investment is often done in partnership with governments over long investment horizons, but this leaves investors at risk of political or policy changes which make such investment more risky and less attractive.
  • Regulatory barriers – Some financial regulation, such as Basel III and Solvency II, have made investing in long term projects more expensive.
  • Currency risk – Infrastructure investments are often made in the local currency, but financed in another. Over long time periods, this increases the currency risk requiring mitigation measures which in turn increase to cost of the investment. This can be particularly problematic for non-OECD countries.
  • Poor data – Most infrastructure assists are unlisted, making data collection and reporting of returns difficult. Commercially available data sets are few and inconsistent, and projects are often distinctive and hard to compare, making investment opportunities hard to evaluate.
  • No standard definition – There is no standard definition of low-carbon or green infrastructure. This makes comparisons of projects and assessments of impact and returns difficult.
  • Use of novel technology – Low-carbon infrastructure often makes use of novel technology, this places additional risks on investors compared to traditional infrastructure projects with well-established and well-tested technologies.