Miscommunication hinders $150 billion sustainable infrastructure investment

03 January 2018 Consultancy.uk 6 min. read
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In the age of the Paris climate accord, attaining sustainable infrastructure goals in line with sustainable development goals is increasingly pressing. However, despite a massive spike in green bonds being issued for sustainability projects, topping $150 billion in 2017, poor communication between funders and projects is hampering investment, and success, according to a new study.

Throughout history, from the Mayans to the Ancient Egyptians, some of the greatest civilisations to have existed have collapsed due to poor environmental stewardship. While these examples are literally ancient history, current economic models are no less at risk of creating a collapse, as late capitalism has the mechanised potential to strip non-renewable natural resources from the earth in an even more complete manner. Global pressure to shift to sustainable ways of living has subsequently gained major traction in recent years, as environmental disasters – including increasing numbers of hurricanes, floods, and a major drought which triggered the chain of events leading to civil war in Syria – have warned of a rapidly approaching point of no return.

Despite the need for collective action to ensure the future of their own economic mode of production, however, businesses have continually dragged their feet when transforming their operations to more sustainable models. While preserving the state of the earth is essential to their continued existence in the long-term, the entrenched short-term profit imperatives of major businesses means that they remain a major contributor to climate change.

Authorities have subsequently sought to intervene in the market in order to incentivise a longer-term approach from global markets. One such method, that of green bonds, was created to fund projects that have positive environmental and/or climate benefits, using debt capital markets to fund climate solutions. The majority of such bonds issued are green “use of proceeds” or asset-linked bonds.

In spite of Donald Trump’s withdrawal of the USA from the Paris climate agreement, and subsequent gutting of his nation’s environmental services globally, green bonds levels have reached new highs over the past 12 months. New analysis from Oliver Wyman, titled ‘Financing for Climate Resilience’, has explored the market for green bonds and how difficulties shifting to sustainable infrastructure projects can be overcome if investors and projects could better communicate their needs and expectations.

Volume of green bonds

Funding required to meet sustainable infrastructure demand in Southeast Asia alone tops $200 billion, per year, to around 2050. The huge sum dwarfs estimated supply of $40 billion – resulting in an apparent mismatch of supply and demand. However, recent studies show that the mismatch may be somewhat different from expectations, as investors may well have the required funding. There is currently a lack of supply of accessible green projects,as investors cite key areas of concern related to project data, project invisibility, or standards.

While green bonds have increased considerably in size, topping $150 billion in 2017, the report notes that green projects may require broader funding types than just such bonds, including Government and State grants; Multilateral Development Banks; Private-sector quasi-MDBs; and Private-sector funding providers.

Illustration of root challenges

The different funding types allow for a broader range of projects to be initiated, where one, or more, funding models would work where others would fail. Yet the firm notes that connecting funds with projects, and vice versa, continues to be its own challenge.

The various challenges, including language use, operational considerations and processes, continue to hamper both fund recipients and providers. The mismatch means that investors feel there are not enough quality projects available, while recipients feel that there is no funding available. Inherently, certain practical limitations that can be surmounted by both parties inhibits mutually beneficial outcomes.

Action points

According to the firm, a number of actions can be taken, including making funding recipients better counterparties, through online education programmes and industry standards; making funding providers better partners for those requiring funds, through standardised and digitalised application processes; and finally by improving the information flow between the two sides, through effective communication tools and benchmarks.

Commenting on the challenge, the report’s authors stated, “Addressing climate change is clearly an era-defining global challenge. Effective financing of such projects by multiple parties is essential to overcoming the challenge. As such, careful development and growth of effective transfer mechanisms is critical.”

Action 3

Aside from improving the connection between funding and projects, keen attention will also need to be paid to the compliance of projects with key global frameworks for sustainability. The Paris Agreement and the Sustainable Development Goals set out clear targets for the future of infrastructure, requiring considerable, cross-sector planning and investment in cities, agriculture and energy.

The report suggests that key concerns remain for both investors and project leaders seeking to meet compliance criteria and attract funding. Areas of concern include lack of understanding of business case; lack of industry standards, and lack of coordinated policy agreements, among others.

The authors concluded, “There are collaborations that must take place between stakeholder groups to cross the bridge towards sustainable infrastructure. These leverage key links across the development and financing process, from project planning, to investment due diligence and reporting. To advance the ecosystem towards effective sustainable infrastructure, each group must play a role. A key focus is on building new relationships and shifting the discussion so that infrastructure investment and development naturally consider alignment with commitments aimed at achieving the 2 degree, or lower, target.”