The Catalytic Finance Initiative aims to invest USD8 billion in clean energy projects over the next few years
Trillions of dollars are needed to fund transport, power and other infrastructure projects around the world over the coming decades, with the vast majority supporting green projects. Improving infrastructure is good for economic growth, society and increasingly also for the planet.
At last year’s COP21 talks in Paris 187 countries signed a universal climate agreement to attempt to limit the rise in global temperatures to within 2˚C above pre-industrial levels.
Meeting the terms of the COP21 pledges will require cooperation between developed and developing countries and between the public and private sector. Only by working together will they be able to raise the significant sums of money required to make this transition to a low-carbon way of life.
Even the richest and most developed economies aim to replace ageing and inefficient infrastructure
Even the richest and most developed economies aim to replace ageing and inefficient infrastructure and to build smart cities, better transport networks, and invest in renewables.
Countries that are already feeling the effects of climate change urgently need to develop infrastructure that will protect their populations and economies from events such as tsunamis, rising water levels and drought. The Vulnerable 20 Group of countries that are most affected by such catastrophes need support.
The problem is that governments around the world already have a long wish list of infrastructure projects, and only finite resources with which to fund them. Filling the funding gap calls for other organisations to get involved.
Traditionally, governments have looked to multilateral development banks to help. Organisations such as the World Bank, the European Investment Bank and the Asian Development Bank have long played, and will continue to play, a crucial role in financing major projects.
But there is more that these agencies can do to work with the private sector – notably institutional investors and insurers – to finance infrastructure projects. Infrastructure debt offers a natural investment option for these institutions, providing long-term returns to match their long-term liabilities.
Despite this, institutional investors are often wary of getting involved in infrastructure. The deals which meet their needs are thin on the ground, the structures are challenging, and in numerous cases the construction, political and regulatory risks involved make many infrastructure projects too complex and unpalatable for investors.
Creating a more standardised approach to documenting and reporting deals would be a start and would help investors gain a clearer understanding of the risks involved in infrastructure projects. Multilateral development banks have an important role to play in this respect.
Commercial banks will continue to play a key role in funding infrastructure projects, particularly through the difficult construction years. And they are increasingly supporting infrastructure projects that respond specifically to the climate challenge. For example, HSBC is one of three banks in the Catalytic Finance Initiative, a consortium that includes investors and multilateral development banks and which aims to invest USD8 billion in clean energy projects over the next few years.
Developing a common language is a vital step to help banks and development organisations work together effectively and give private investors the confidence to get involved. It’s this kind of collaborative approach that will build the green infrastructure that society needs.