Matchmaking Private Finance and Green Infrastructure

  • The contrast between the scarcity of investments in infrastructure and the excess of savings invested in liquid and low-return assets in the global economy must be dealt with.
  • Greening infrastructure in emerging and developing economies would benefit from being able to attract greenbacks into the business.
  • Development of pipelines of projects with homogeneous regulations and standards, as well as with minimum mismatch between risks and comfort of private investors to manage them will be needed.

First appeared at Policy Center for the New South (July 7, 2021)

The world faces a huge shortfall of infrastructure investment relative to its needs. With a few exceptions, such as China, this shortfall is greatest in emerging and developing countries.

The G20 Infrastructure Investors Dialogue estimated the volume of global infrastructure investment needed by 2040 to be $81 trillion, $53 trillion of which will be needed in non-advanced countries. The Dialogue projected a gap—in other words, a shortfall in relation to the investment needs foreseen today—of around $15 trillion globally, of which $10 trillion is in emerging economies (Figure 1, left panel). The World Bank has estimated that, for emerging and developing economies to reach the Millennium Development Goals set for 2030, their infrastructure investment would have to correspond to 4.5% of their annual GDPs (Figure 1, right panel).

Infrastructure Gaps

In addition to the need for infrastructure investment, there is a need for that investment to be ‘greened’ as rapidly and extensively as possible, in order to minimize the negative impact in terms of increased global warming. For example, the energy sector must be decarbonized by expanding the use of renewable sources instead of coal. Increases in use efficiency, and the elimination of subsidies for the use of fossil fuels, would be part of this strategy.

Transport is now responsible for 25% of the world’s greenhouse-gas emissions. This must be reduced by shifting transportation to low-carbon options, in addition to investments in energy-efficient equipment, and supporting the transition to electric vehicles and fleets.

A major part of the ‘greening’ will be in cities: improved water supply and sanitation services, changes in energy supply, waste recycling, and greater energy efficiency through better building standards and/or renovation of existing buildings. This transition, as for manufacturing and agricultural activities, will require investment in infrastructure.

A major obstacle holding back such investment is the lack of fiscal space, which is constraining public spending. This problem has been made worse by the fiscal packages adopted because of the pandemic. While the largest advanced economies can afford to increase their public debt, with a low risk they will face deteriorating financing conditions, this does not apply to most emerging economies, let alone low-income countries grappling with unsustainable debt trajectories (Figure 2).

Higher global debt across the world

Consequently, measures need to be taken to expand the options for private financing of infrastructure projects. Indeed, according to data from the Institute of International Finance, over the past 15 years, institutional investors with long time profiles in their assets, such as pension funds, have been gradually increasing their allocations to infrastructure investments and alternatives to fixed income instruments, equity, and other traditional instruments.

Stable and long-term returns from infrastructure projects dovetail well with the long-term commitments of those financial institutions, particularly in the context of declining long-term real interest rates on public and private bonds, as seen in recent decades in advanced countries. Surveys carried out by Preqin show fund managers already pointing to the decarbonization of energy as a factor in attracting private investment to infrastructure.

The biggest challenge is to build bridges between, on the one hand, infrastructure investment needs in non-advanced countries and, on the other, private sources of finance abundant in dollars and other convertible currencies with few opportunities to obtain returns compatible with their requirements on their liability side.

Building such bridges requires the completion of two tasks. First, the development of properly structured projects, with risks and returns in line with the preferences of the different types of financial intermediation, would help close the private financing gap in infrastructure.

Investors have different mandates and skills regarding the management of risks associated with types of projects, and phases of project investment cycles. They demand coverage of risks whose exposure is not adequate or permitted by regulation. The absence of complementary instruments or investors is one of the most frequently identified causes of failure in the financial completion of projects. Figure 3 provides a snapshot of the diversity of instruments and vehicles through which private finance can participate in infrastructure projects.

Taxonomy of instruments and vehicles for inrastructure financing

The constrained fiscal space in emerging and developing countries can be used to mainly cover such risks and enable the building up of investment, rather than replacing private investment: crowding-in private finance rather than crowding it out. National and multilateral development banks could prioritize this instead of financing total investments.

Identifying attractive investment opportunities for different types of investors and combining these perspectives more systematically around specific projects or asset pools is a promising way to fill the infrastructure financing gap. The planning and integrated issuance—with different time profiles—of fixed-income securities, bank loans, credit insurance, and others, for the different phases from project preparation to operation, make that combination possible.

The second task to boost private infrastructure investment in emerging and developing economies is the reduction of legal, regulatory, and political risks. Transparency and harmonization of rules and standards can increase the scale of comparable projects and make it possible to build project portfolios. Non-banking financial institutions often highlight the absence of large enough project portfolios as a disincentive deterring the setting up of business lines focused on the area. This is a particular weakness in the case of smaller countries.

The contrast between the scarcity of investments in infrastructure—particularly in non-advanced economies—and the excess of savings invested in liquid and low-yield assets in the global economy deserves to be confronted. Greening infrastructure in non-advanced economies would benefit from being able to attract greenbacks into the business.

Watch Bridging Private Finance and Green Infrastructure

Otaviano Canuto, based in Washington, D.C, is a senior fellow at the Policy Center for the New South, a nonresident senior fellow at Brookings Institution, a professorial lecturer of international affairs at the Elliott School of International Affairs – George Washington University, and principal at Center for Macroeconomics and Development. He is a former vice-president and a former executive director at the World Bank, a former executive director at the International Monetary Fund and a former vice-president at the Inter-American Development Bank. He is also a former deputy minister for international affairs at Brazil’s Ministry of Finance and a former professor of economics at University of São Paulo and University of Campinas, Brazil.

Is Investing in Green Energy Financially Savvy?

The global market for green energy is expected to grow to a value of $1.5 trillion by 2025. 

When you consider the fact that this was a market that barely existed a few decades ago, it’s obvious that investing in green energy has made many people rich. It’s also going to continue making people rich for as long as the world needs renewable energy, which is likely to be forever.

The question, therefore, is this: what is the best way to make money from the green revolution if you’re new to the game?

Read on as we look at the answer to that question and set you on the path to becoming a profitable green investor.

The Different Ways of Investing in Green Energy

There are many different ways to get exposure to green energy. The right one for you will depend on your risk appetite, the amount you want to invest, and whether you want to be actively involved in the investment.

We’ve looked at the different options in more detail here.

Starting a Business

If you want to take an active hand in the green energy market, you could set up a business in the field. There are a few different options here.

Wind and solar energy are the two main forms of renewable energy in the world today. If you enter this industry, you’ll likely be setting up either a wind farm or solar farm.

This is, of course, specialized work. You’ll need an educational background in energy or physics, and you may need prior professional experience of working with renewable energy.

In order to produce energy on an industrial scale, you’ll also need to make a considerable initial investment. Solar panels and wind turbines are both expensive to buy in bulk. They also take up considerable space, which means that you’ll need to have a large plot of land to work on.

Buying Stocks

If you don’t want to set up a green energy company yourself, you could choose to invest in one that’s already in operation.

There are many different options here, from established energy giants to brand new operations. The latter will not feature on public stock exchanges, however, so you’ll need to look to different investment platforms for these.

If you invest in a new start-up while its shares are cheap and it goes on to create highly valuable energy solutions, you could end up multiplying the value of your investment many times over. On the other hand, if the company goes bankrupt, you’ll lose all your money.

If you’d prefer a lower-risk stock investment, it might be a good idea to look for a publicly-traded, blue-chip green energy company.

Investing in a Green Mutual Fund or ETF

This is similar to investing in green stocks. It will offer passive exposure to the green energy market, giving you financial benefits if and when the market as a whole improves.

The key difference between this and the option of buying company shares is the risk-reward profile. Because funds diversify your investment across a large number of ventures, you won’t lose all your money because of one company’s bad decisions.

However, you will also have a much more limited growth capacity. 

There are a couple of important differences between an ETF and a mutual fund. Most significantly, a mutual fund is actively managed, which means that fund managers will pick up and drop stocks in real time on the basis of market trends.

ETF managers, on the other hand, pick a basket of stocks or index at the fund’s inception and leave them in place regardless of trends. Because of this passive strategy, ETF fees tend to be much lower.

Setting Up Solar Panels or a Windmill

This admittedly isn’t an investment in the business sense. However, that doesn’t mean it’s not a great bet.

Recent COVID-19-related dips aside, fossil fuels are getting more expensive. As oil-producing countries tinker with the supply chain and the reserves of natural fuel continue to dwindle, the price of non-renewable energy will eventually become unsustainable.

When that happens, the homes and businesses that are self-sufficient in terms of energy will be much better off. If you live in an area that gets a lot of sun or wind, this is something you should consider.

The Advantages of Investing in Green Energy

The main advantage of investing in green energy is the market outlook. There aren’t many industries with as bright a future as renewable energy.

Green companies also benefit from government subsidies and tax breaks in many areas. Because many places desperately need green energy, ruling bodies are happy to incentivize its development in whatever ways they can.

To make the most of this, you should research political attitudes to green energy in a given country before deciding to invest in a company from there.

Depending on the investment you make, you might also be helping to fund a company that makes a real breakthrough in the field of clean energy. There are countless capable energy specialists that only need start-up capital to start building the energy solutions of tomorrow.

Investing in the Energy Solution of Tomorrow

When it comes to investments with future value potential, you might find it difficult to come across a better option than green energy. Our planet’s energy requirements are massive, and continuously growing, while non-renewable energy resources continue to dwindle.

Investing in green energy is therefore likely to be a successful strategy. However, to make sure you take on an investment that suits your goals and outlook, you’ll need to do a little research on the various available options.

To learn more about investment opportunities, check out our finance section.