Speech for Deloitte and CISI Islamic Finance Forum: Impact investing Designing investment strategies to create social impact

New research on green infrastructure

Click here to download the slides for this speech.

Good morning everyone, and thanks very much for the invitation to be here today. For those of you who may not be familiar with TheCityUK, it’s the industry body that represents UK-based financial and related professional services. That grouping covers the full range of financial services, as well as legal, accounting and consulting services.

My role is to manage the organisation’s economic research programme, and one of the things I’ve been most excited about is the research collaboration I’ve forged with the Centre for Climate Finance & Investment at Imperial College Business School on green finance. So today I’m very pleased to be able to share with you highlights from the report we published just two weeks ago on green infrastructure. I think some of you will have seen the report already, so I’m not going to show you a lot of slides. I’ve just got a few graphics to illustrate some of my main points as I go along, but mostly, I’d like to talk to you.

And I’d like to start with a very brief bit of context about our work on green finance: this latest report is the third in our collaboration with Imperial.

We started in 2017 with a primer on green finance.


At that time, we felt there was a significant education gap among financial market participants and also policymakers, and so the idea was to explain to a non-specialist audience what exactly green finance is.

We followed that up last year with a report on green bonds.


because green bonds are the largest and best known part of the green finance sector.

This year, we chose to focus on green infrastructure investment, and in fact it was a nice segue because there’s a clear link between green bonds and green infrastructure financing. In our 2018 report, we explained that a green bond is a fixed-income financial security sold with a promise to devote the funds raised to environmentally beneficial projects. In our latest research we explained that although not all green bond proceeds are used to finance green infrastructure projects, these bonds do represent an important source of financing for low-carbon infrastructure because bond issuance is a common source of debt funding for infrastructure in general. We pointed to some recent examples of green bonds issued to fund renewable energy projects, and noted that insurers, asset managers and pension funds are among the most prominent investors in green bonds globally.

But at heart, our latest report


seeks to analyse overall investment in infrastructure that will further the achievement of net-zero carbon emissions targets. We focused primarily on developed countries, and explained the wider economic, financial and policy context, as well as barriers to such investment.

But before I go into some of the key findings of the research, let me spend a moment putting this report in its broader context. For one thing, it’s extremely topical – almost every day I now see headlines in the mainstream media about climate change, green finance, and net-zero carbon emissions targets. These are just a few very recent examples:


In the UK, we are only 2 days away from a general election, and one thing that’s been notable is the focus given by all the major parties to climate change and indeed green infrastructure. For example, under the current Conservative government the UK became the first country to legislate a net-zero carbon emissions target. Meanwhile, the Labour party promises to create a Sustainable Investment Board to co-ordinate investment to tackle climate change, and the Liberal Democrats would invest £5bn in a new Green Investment Bank.

So hopefully you can see why we felt there was a real need for research like this at this particular time.

It should also be clear the relevance this has to today’s theme of impact investing. The OECD defines ‘social impact investment’ as:

the provision of finance to organisations addressing social needs with the explicit expectation of a measurable social, as well as financial, return.

I’m sure others in the room will have alternative definitions…in much the same way that there is as yet no standardised definition of green finance, or green infrastructure—a point I’ll come back to a bit later on. But globally, core infrastructure is estimated to account for around 60% of total greenhouse gas emissions. And the negative social impacts of climate change and environmental pollution are clear. For example, research by the OECD estimates that the annual global welfare costs associated with premature deaths from air pollution will rise from $3trn in 2015 to $18-25trn in 2060. In addition, the annual global welfare costs associated with pain and suffering from illness are projected to rise to around $2trn by 2060, up from around $300bn in 2015.

In this context, it’s fair to say that investment that mitigates these negative environmental effects and their associated welfare consequences could be considered impact investment.

Another way to look at it is in this visualisation,


which is from the European Commission. You can see that green infrastructure investment would come under the category of ‘contributing to solutions’.


So coming now to look at our research in more detail, the key point is this. Macroeconomic conditions for infrastructure investment, including green infrastructure investment, have been very supportive when you consider things like the persistent low interest-rate environment, and the willingness of many rich-world governments to embrace Keynsian-style fiscal policies. And investment in green infrastructure appears to have increased noticeably in recent years, although hard data are still nearly impossible to obtain.

But despite this, financing of green infrastructure appears to be below potential in most major markets. More importantly, such investment falls far short of what is needed to meet the Paris Agreement commitment of restricting climate change to an increase in global temperature of a maximum of 1.5 degrees relative to pre-industrial times. We state in our report that achieving this goal, and meeting the various country-specific net-zero carbon emissions targets, will require an unprecedented transformation of infrastructure systems.

One way you can see the scale of the challenge is in this chart, which is from the Global Carbon Project.


It shows the sharp rise in carbon dioxide emissions over the past 40 years, and the particular contribution to this rise from the US, China and India. It also shows you that although more than 60 countries now have some form of net-zero carbon emissions policy, these countries collectively account for just around a tenth of global emissions.

So, in this context, our report first set out the need for increased investment in low-carbon infrastructure.

We then outlined the various types of private-sector investors on both the debt and equity sides, including sovereign wealth funds, infrastructure funds, insurance companies, pension funds, commercial banks and corporates. We found that private-sector investment in green infrastructure is motivated by three main factors, either independently or in combination.

The first is of course risk and return – the standard consideration for any financial investment. Investors obviously seek the highest return given a certain amount of risk. But at the moment, data limitations mean that there is limited evidence to show that the returns for low-carbon infrastructure investment are higher than the returns on conventional infrastructure given the same amount of risk—or, alternatively, that higher-risk investment in low-carbon infrastructure, whether real or perceived, would be compensated for by higher returns than on conventional infrastructure.

This means that the other two considerations we identified are, at the moment, especially important even though they are non-financial.

The first of these is government mandates.  Of course, in developed markets like the UK explicit government directives are rare, but in the context of policies like the net-zero emissions targets I was discussing a moment ago, investors may be indirectly incentivised to reorient their asset allocations towards green infrastructure.

The other crucial non-financial consideration is societal pressure. Growing shareholder activism to discourage investment in so-called ‘brown’ sectors like coal, as well as concerns about future reputational risk arising from being associated with traditional carbon-intensive sectors, are also likely to be driving some of the recent growth in green infrastructure investment.

In short, the current incentive structure is insufficient to direct suitably large sums of money towards low-carbon infrastructure. So what ends up happening is that a lot of such investment currently occurs with the support of either an explicit external subsidy—for example, from a government or a multilateral lender—or, an internal cross subsidy—for example, a bank offering a green infrastructure project loan at an interest rate low enough to make the project viable, so as to incentivise the project developer.

Part of the reason the incentive structure is currently sub-optimal is that there are still quite a lot of barriers to investment in this asset class.


Our report talks about the fact that there are barriers to infrastructure investment generally, and then, in addition to this, there are particular barriers to investment in low-carbon infrastructure. This idea is summarised here:


But let me give you a few examples to illustrate the point. One major obstacle to infrastructure investment is political risk, since many infrastructure projects are structured as public-private partnerships. Even if governments are not directly involved in projects, they’re still involved in the sense that projects need regulatory approval. Although political risk is most often associated with emerging markets and developing economies—or at least has been until the past few years!—it’s  relevant even in advanced economies, not least because electoral cycles mean that politicians are often under short-term pressures that are at odds with the long time horizons needed for infrastructure project planning.

When we come to green infrastructure, there is an additional set of unique challenges. One is the lack of a standardised definition of low-carbon infrastructure. This isn’t necessarily an insurmountable barrier at this stage because in practice, what we see is that each investing institution assesses projects based on its own definitions and takes investment decisions based on internal metrics.

But on this basis, only the most obviously financially viable projects are likely to be financed. This is why, for example, in the UK green infrastructure is almost synonymous with offshore wind. So in the longer term, a common definition and a taxonomy of financial frameworks will have to be established if green infrastructure investment is to occur at scale.

Another interesting challenge is the fact that the negative externalities associated with brown infrastructure are currently unpriced in most financial models. What this means, in effect, is that carbon-intensive infrastructure gets an implicit subsidy relative to  green infrastructure as long as such externalities are uncosted.

We concluded our research with a look at some factors that might help optimise investment opportunities, which I think is a good way to conclude my remarks today since it ties in nicely with the theme of this conference, ‘designing investment strategies to create social impact’.

Although our report focuses on private-sector investment, we are clear that governments will have an important role to play in scaling up investment in low-carbon infrastructure. One obvious area in which governments can make a positive contribution is in establishing robust, long-term policy frameworks to give greater clarity and certainty to investors. Another is that, in collaboration with private investors, governments could consider how blended finance could be used strategically to address project-specific financing shortfalls, and to mobilise additional investment where necessary.

For its part, we think it’s critical that the private sector start to explicitly consider climate and environmental risks in economic and financial decision-making and asset valuation. That would ensure that these risks are priced into the terms of lending and investment, which I think is the only way to encourage a large-scale shift away from carbon-intensive assets.


I hope that’s given you a useful overview of our recent research and a sense of how green infrastructure investment fits under the umbrella of impact investing. I know there’ll be further discussion of green infrastructure later in the morning, so hopefully my remarks have provided some broader context for that part of the discussion. If you’d like a copy of our report or indeed any of our other green finance research, please just come and speak to me.

So I’ll finish there so that we can hear now from our first set of panellists. But if there are any questions about our work, I can answer them during the panel discussion. Thank you very much.