Partnerships Bulletin

The finalisation of the Paris Agreement at the climate negotiations in December 2015 (COP21) has given governments and business a clear signal that the world is shifting to a low carbon economy.

There has been much discussion about the impact of COP21 on energy - but what about infrastructure?

Low carbon infrastructure is not a new concept, but it is one which will see more attention after COP21. Sustainability, climate risk, health and technology are increasingly becoming mainstream investment considerations alongside economic drivers.

Post COP21, Governments need to look at delivering on their climate pledges - known as Intended Nationally Determined Contributions or INDCs (now NDCs) - submitted prior to COP21, and ramping up ambition for successive 5 yearly NDC submissions. Climate-resilient infrastructure investment will be critical.

Where are the investment opportunities?

The short answer is everywhere.

Public infrastructure planning should include ways to be smarter, more sustainable and more climate-resilient. With cities being responsible for 70% of global emissions and buildings alone representing 1/3 of global emissions¹ , we expect energy efficiency, green buildings and sustainable construction to be investment growth areas.

There are already numerous policy-driven sustainable city initiatives. Copenhagen is going carbon neutral from 2025. Beijing aims to peak emissions by 2020 to limit dangerous pollution levels. Korea has invested US$35 billion in building the Songdo sustainable city from scratch.

At CO21, more than 450 cities representing 1 billion people committed to halve emissions within 15 years through e-mobility, waste, district heating/cooling, renewables and green infrastructure initiatives² , all of which will require substantial investment.

With more than 200 transport references in INDCs, green transport infrastructure will be a big investment focus.

Taking roads as an example, the International Energy Agency estimates that at least 20% of road vehicles need to be zero emissions vehicles (ZEVs) by 2030.  The UK, Norway, Netherlands, Germany, Quebec and 8 US states pledged at COP21 that all new vehicles will be ZEVs by 2050, entailing significant investment in R&D, manufacturing and charging facilities. Looking not too far ahead, electric scooter deployment could revolutionise transport in gridlocked cities in Asia and elsewhere.

Smart everything?

Cleantech initiatives will enhance efficiencies, save costs and reduce emissions.

Mission Innovation, representing 20 countries committed to doubling cleantech investment by 2020, was launched at COP21, backed by the Breakthrough Energy Coalition of 30 billionaires, mobilising US$20 billion to get cleantech solutions from research to market. Current innovations in smart metering, battery storage and smart highways will just be a starting point for channelling investment.

Where’s the money?

A critical issue at COP21 and in climate negotiations as a whole, is financing to fund mitigation and adaptation efforts. Over 130 INDCs are conditional on receipt of climate finance.

Paris recognised a clear commitment to US$100 billion per annum by 2020, with finance to be escalated for successive NDCs after 2020 and a new finance goal established by 2025.

So what climate funds are flowing? And how much is infrastructure-focused? It’s very difficult to say. An OECD report estimated US$62 billion in climate finance³ was mobilised in 2014, but developing countries challenge this figure. Current annual infrastructure investment is estimated at US$1.7 trillion⁴ , with an estimated US$90 trillion needed by 2030. A large proportion of this should be low carbon.

Scaling up low carbon infrastructure finance will need a combination of public and private financing, with additional support from international financial institutions and initiatives.

The largest international public climate fund, the Green Climate Fund, has only a modest US$10 billion to spend. In November 2015 it approved US$168 million project funding, with about US$95 million going to infrastructure-related projects. On a global scale, this is tiny.

Climate finance budgets of multilateral development banks rose in 2015, with the African Development Bank and the Asian Development Bank committing to fund, respectively, US$5 billion and US$6 billion annually by 2020, and the EIB committing to US$20 billion annually to 2020. New multilaterals such as the Asian Infrastructure Investment Bank are also providing new dedicated sources of infrastructure finance.

The biggest source of capital is the private sector. Billions of dollars are already being invested alongside or independently of public finance, but more is needed.

COP21 stimulated a raft of new funding announcements, including Engie’s Terrawatt Initiative to help mobilise US$1 trillion solar investment in conjunction with the International Solar Alliance. Recognising the enormous investment potential of a green economy, over 400 investors with total assets under management of over US$25 trillion, and over 2000 companies have made investment commitments⁵.

So there is liquidity in the market for low carbon infrastructure – but are enough investors seizing the opportunity to invest?

Critical to boosting investment uptake will be aligning infrastructure projects, policies, investment profiles and financing.

One initiative launched at COP21 to do just that is the Green Infrastructure Investment Coalition. This network of investors, financial institutions and NGOs works with government to identify, promote and facilitate multi-trillion dollar investment in green infrastructure opportunities.

We need to see more initiatives like this.

The Paris Agreement presents a huge opportunity for investors, governments, technology companies, planners and consultants to work together to develop a new generation of sustainable infrastructure projects. There is a role for everyone in the low carbon infrastructure space.

The investment climate is changing, with institutional investors such as Google, Amazon and Microsoft now owning clean energy projects, green infrastructure bonds becoming more commonplace and pension funds diversifying. When investment pipelines, policies and profiles align to make projects bankable, investors should be spoilt for choice in post COP21 infrastructure investment opportunities.