Global Frameworks for Financing Sustainable Infrastructure

As decision makers gathered at COP23 this November in Bonn, Germany, they considered strategies that could empower them to reach the United Nations Sustainable Development Goals (SDGs). Financing sustainable infrastructure is one of the keys to putting these goals in motion.

According to Laura Canas da Costa, senior advisor in sustainable infrastructure financing at WWF Switzerland, developing nations will be building extensive amounts of infrastructure as they pursue the SDGs. Traditionally, up to 70 percent of infrastructure financing comes from the public sector.

“Many countries are likely to scale up their investment in sustainable infrastructure — defined as infrastructure that is socially inclusive, low-carbon, and climate-resilient,” said a 2016 report from McKinsey & Company, “Financing Change: How to Mobilize Private Sector Financing for Sustainable Infrastructure.”

“How countries build and operate infrastructure will be a major factor in whether they can deliver on their intended nationally determined contributions (INDCs),” the report said. It estimated that global infrastructure spending would need to be doubled from $2.5-3 trillion per year to $6 trillion. Over 60 percent of the gap was projected to be in middle-income nations.

“Given the unprecedented levels of infrastructure finance that will be necessary to meet the SDGs… there’s no way around the private sector. The private sector is able to raise unprecedented amounts for infrastructure globally,” Canas da Costa said. “75 percent of the infrastructure that will exist in 2050 hasn’t been built yet. Most of it will be in developing countries. It’s paramount to reconcile this with concerns about sustainability.”

Canas da Costa, together with a group of stakeholders, is supporting Global Infrastructure Basel in the development of a global standard for sustainable infrastructure.

There are many steps that can help streamline sustainable infrastructure investment, the McKinsey & Company report said.

1. Pricing carbon with distortion corrections can facilitate financing.
2. Developing new international regulations for investment in infrastructure can change the playing field.
3. Producing guidelines for high-performing projects can shift the landscape of financing.
4. Using grants to fund project planning and design can kick-start new initiatives.
5. Financing premiums with development capital can also help accelerate the process.
6. Cutting back subsidies for fossil fuels can incentivize a shift toward sustainability.
7. Leveraging development capital to finance sustainability premiums can open up new avenues for growth.
8. Using guarantees can improve the prospects of capital markets.
9. Syndicating loans can allow the recycling of development capital and may reduce transaction costs.
10. Developing larger secondary markets for financing products also increases investor access.
11. Using sustainability criteria for procurement can move governments toward their green investment goals.

“We see the tremendous potential of using natural or ‘green’ infrastructure such as mangroves, coral reefs, green walls, etc. for de-risking projects and making them more resilient to climate change,” Canas da Costa said.

Green infrastructure consists of nature-based solutions while gray infrastructure consists of materials such as concrete and steel.

According to an unpublished project summary from US Endowment for Forestry and Communities, green infrastructure provides many economic advantages. Forests and wetlands can reduce the costs of water treatment and storage. World Resources Institute is collaborating with the endowment to study these potential savings.

“Infrastructure could be financed more sustainably by taking into account the impact on ecosystems, including forests,” said Duncan Marsh, former director of international climate policy at The Nature Conservancy. “In cases where there are roads being built or dams being built – or other types of infrastructure including urban sprawl or energy programs – these programs can be pursued with more attentiveness to impacts on forests. If we’re smart about it, we can build in incentives for infrastructure companies to build more sustainability.”

The authors of the McKinsey & Company report cautioned readers that climate finance requires an enabling environment with effective institutions, transparent behavior, contract enforcement, and sound policies.

Canas da Costa said she often discusses risk management. “We want to provide the knowledge and tools that investors need for factoring in the full spectrum of risks and costs of not building infrastructure sustainably and the benefits of doing so.”

Some risks of unsustainable infrastructure construction in developing nations can include “not thinking about future impacts of changing weather patterns and climate change when you build hydropower,” Canas da Costa said. “The plant might run dry. Also, there are reputational risks associated with investing in unsustainable road planning in forests.”

Development banks play a key role, Canas da Costa said. “They are very important catalysts. The multinational development banks have a huge pool of knowledge about sustainability issues and a very deep knowledge of the markets themselves that many institutional investors in Europe do not have. The development banks… can be very important for de-risking in the early stage.”

Together with innovations in forest management, sustainable infrastructure has the potential to greatly reshape how developing nations would look.

Note: This article was jointly published by Conservation Finance Network (CFN) and Clean Energy Finance Forum. The Nature Conservancy has donated to CFN. The article was updated on 11/22/2017 to reflect corrections from Laura Canas da Costa.

To comment on this article, please post in our LinkedIn group, contact us on Twitter, or email the author via our contact form.