How to close the sustainable infrastructure gap

Three ways to make it a mainstream, liquid asset class

Infrastructure is of paramount importance to global economic development and sustainability. It underpins access to essential goods and services and will enable vulnerable countries to adapt to weather-related risks from climate change.

To meet the United Nations’ Sustainable Development Goals and ensure compatibility with the Paris agreement objectives, the Organisation for Economic Co-operation and Development estimates that $6.9tn of investment in sustainable infrastructure will be required each year. Much of this will need to be directed towards developing and emerging economies. Unfortunately, current levels of investment are insufficient, due to both a lack of bankable projects and the private sector capital needed to finance them.

The Finance to Accelerate the Sustainable Transition – Infrastructure (FAST-Infra) initiative was conceived to address this challenge, under the auspices of French President Emmanuel Macron’s One Planet Lab. In the spirit of cross-sector collaboration, founding partners include the Climate Policy Initiative, HSBC, International Finance Corporation, OECD and the Global Infrastructure Facility.

Since inception, well over 100 organisations have joined the initiative, from commercial banks and asset managers to governments and non-governmental organisations. The aim is to transform sustainable infrastructure into a mainstream, liquid asset class to mobilise private investment at scale. To get there, FAST-Infra is taking a three-pronged approach.

1. Sustainable infrastructure label

‘Sustainable infrastructure’ is defined differently across the plethora of standards currently on the market, leading to investor confusion in this space. FAST-Infra is creating a consistent, globally applicable labelling system for sustainable infrastructure assets. Beyond standardisation of requirements, it will reflect best practice across four dimensions of sustainability: environmental, social, governance and adaptation/resilience.

This will go a long way towards unlocking the market for sustainable infrastructure. Investors will be able to ascertain the sustainability of assets more easily, increasing financing volumes towards the right projects.

Governments will be more likely to incorporate meaningful ESG criteria at design and pre-construction phases – on the grounds that achieving the label will attract larger financing volumes – increasing the supply of sustainable infrastructure projects across the globe.

2. New technology

Infrastructure assets, irrespective of their sustainability objective, can take a long time to finance due to private and complex financing terms, manual processes and frequent renegotiations. Alleviating this fundamental issue will be key to solving the sustainable infrastructure challenge.

FAST-Infra is creating an end-to-end platform for infrastructure. Through artificial intelligence and natural language processing tools, the platform will streamline each phase of the infrastructure financing lifecycle. It will also collect a large suite of standardised project data, enabling increased harmonisation and comparability of contractual terms.

The end result will be a larger number of sustainable infrastructure projects brought to market and a greater percentage of these being financed.

3. Financial de-risking mechanisms

A final barrier to private investment is the economics of infrastructure projects in emerging countries. These projects can offer stable and long-term rewards but are also exposed to a broad range of risks that do not always match the returns.

FAST-Infra is creating a set of financial de-risking solutions tailored to emerging market infrastructure projects. These include an innovative guarantee fund and an open managed co-lending portfolio programme.

The guarantee fund will provide risk coverage to renewable energy producers in emerging and frontier markets against the risk of not receiving payment from utilities. This will mobilise investments in renewables and create a framework for financing in these markets that can be replicated across other areas of sustainable infrastructure.

The OMCPP syndication structure is modelled after the IFC’s ground-breaking managed co-lending portfolio programme platform. It will enable participation from national development banks in emerging markets and investors, connecting private capital with a broad set of infrastructure projects on a common platform.

As we approach COP26, sustainable infrastructure must be at the centre of efforts to address the sustainability challenges we face. Infrastructure investment is, and will continue to be, a top priority for governments looking to ‘build back better’ after Covid-19. In the years to come there will be a proliferation of projects in need of private capital, and once built these assets will be here to stay.

With the right incentives they can be both bankable and sustainable. This will be a sizeable step towards achieving global sustainability goals.

Further information on FAST-Infra can be found here.

Rudi Lang is Partner and Global Leader Financial Services at Mazars. Benjamin Taylor is an Associate at Mazars and a member of the FAST-Infra Secretariat.

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