Investment in low-carbon infrastructure is currently “well below” the levels required to meet climate change targets in most major markets, according to new research.
On 20 November, TheCityUK and Imperial College Business School published a report, Financing low-carbon infrastructure, in which they revealed that $1.1tn (£851bn) will be needed each year up to 2040 if the International Energy Agency’s green energy target is to be met. In the UK alone, the report cited the Committee on Climate Change’s forecast that investment must double to £20bn a year if the 2050 net zero target is to be met.
A combination of insufficient incentive structures and significant structural barriers were noted as causing the financing of green infrastructure to lag behind in most major markets. The barriers include those common to all forms of infrastructure investment – regulatory risk, currency risk and the challenges of free-riding – as well as some specific to green infrastructure. These include there being no standard definition of low-carbon or green infrastructure, ensuring comparisons of projects and assessments of impact and returns is difficult, and the use of novel technology, which places additional risks on investors when compared to traditional infrastructure projects.
Noting private investment is expected to meet the vast majority of financing needs for low-carbon infrastructure investment, the report recommended government policy as a key driver for unlocking the funds required. It called for market-based incentives and the progressive removal of barriers, while there was also a role for the industry itself to play in increasing the appeal of green infrastructure as an asset class.
It made a series of specific recommendations, stressing that government and private sector must work together to ensure there is a sufficient pipeline of investable infrastructure projects offering a suitable risk-return profile; that governments ensure infrastructure-related policy frameworks are designed for the long-term, providing clarity and certainty for investors; and that financial market participants consider climate and environmental risks in economic and financial decision making and asset valuation. This, it explained, would see these risks priced in to terms of lending and investment, subsequently driving a shift from carbon intensive assets.
In the longer term, the report called for there to be a standard definition of low-carbon infrastructure. This would be able to unlock investment at scale, alongside better benchmarking and transparency for investors.
Anjalika Bardalai, Chief Economist and Head of Research at TheCityUK, said: “Climate change has risen rapidly up political, regulatory and investor agendas, but persistent barriers are preventing the scale of investment that is so urgently needed. Markets have a key role to play in addressing this challenge by financing the unprecedented transformation of the global infrastructure system towards clean, resilient and environmentally sustainable economic growth. Governments, regulators and industry must work together to unlock the huge amounts of money necessary to meet the unparalleled challenge of climate change.”