Executive summary
Infrastructure assets are exposed to long-term and complex risks creating challenges to investors in assessing and managing risks over time. While some institutional investors with a long-term horizon may consider such assets attractive for asset-liability management purposes, this has not translated to actual investment in practice, creating a wide investment gap for infrastructure assets. As investors increase demand for sustainable investment opportunities that combine acceptable returns with the achievement of environmental, social and governance benefits, there is a need to create an environment in which investors are better able to make decisions on the basis of relevant information and data, and for governments to strengthen the mechanisms to prioritise and prepare bankable infrastructure projects that meet the highest quality standards.
Long-term strategies of countries, such as nationally determined contributions (NDCs), the National Adaptation Plans (NAP) and the National Biodiversity Strategies and Action Plans (NBSAPs), are pivotal in mitigating climate change impacts and to improve environmental sustainability. As a consequence of long-term strategies, a number of sustainable finance and infrastructure initiatives have been developed in recent years reflecting the increasing interest and need for financing to take into account ESG factors more carefully and closely.
The G20 Principles for Quality Infrastructure Investment (QII) lay out a clear vision for the need to maximise the positive impact of infrastructure to achieve sustainable growth and development. This recognises both the immediate economic impact of scaling up infrastructure investment, as well as its importance in setting the direction for a sustainable green transition.
However, beyond ensuring that infrastructure investment supports the economic recovery from the crisis in a timely way, governments must also channel resources towards projects that minimise environmental and climate impact, are resilient to future shocks, and contribute to sustainable long-term growth. Using infrastructure to reach climate objectives will require far reaching transitions within and across different sectors (i.e. energy and transport). Disregarding infrastructure’s strategic role and long-term impact is likely to lead to investments that run the risk of early obsolescence or locking-in of unsustainable technologies and practices.
Examples across G20 countries suggest that infrastructure investments will do most of the heavy lifting in terms of social and economic recovery in forthcoming years. Under the current economic context, governments therefore face the double challenge of attracting private investment and ensuring that these resources are channelled towards environmentally sustainable and climate resilient infrastructure assets. Scaling-up sustainable infrastructure financing will depend to a large extent on the availability of governments to set a long-term strategic vision that is well aligned with environmental and climate objectives, and has the capacity to materialise this vision in project pipelines that provide prospective investors with a clear sense of the national and subnational government’s needs and commitment towards the achievement of climate and environmental objectivwes.
It is clear that the lack of consistent reporting of infrastructure investments and projects is a fundamental weakness in the ecosystem of sustainable infrastructure financing and planning. Reporting requirements are complex given the intersection with corporate regimes and corporate governance, but scoping out the current reporting of infrastructure financing and reporting would be a useful first step in understanding where necessary policy action may be. What amounts to sustainable and quality infrastructure, and ESG factors that may be applicable is very much in the nascent stages of development. More discussion of what governments intend for sustainable and quality infrastructure, and how this can be applied in terms of concessions and multilateral development bank financing could provide additional clarity to investors.
Institutional frameworks to finance and develop infrastructure projects remains a key consideration, and strengthened government mechanisms can contribute to ensuring that fiscal planning and project selection is based on the strategies of countries, and that sustainability and ESG factors are taken into account.
In G20 countries, 60% of public investment is undertaken by subnational governments. This means that supporting investment by subnational governments is essential for the development of regions and cities. Supporting inclusive and quality infrastructure investment by subnational governments requires creating an enabling environment with appropriate fiscal and regulatory frameworks, developing sufficient institutional capacity, putting-in-place mechanisms for co-ordination and cooperation, and developing financial markets. It also requires mobilising diverse funding sources (e.g., grants, taxes, user charges, land value capture, etc.), financing instruments (e.g., bonds, loans, etc.) and investment approaches (e.g., public private partnerships, etc.) appropriate for the local context.