Our future resilience depends on smart infrastructure investment today
The case for investing in more sustainable, resilient infrastructure has never been more compelling.
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The COVID-19 pandemic has exposed critical weaknesses in today's infrastructure systems that have cost thousands of lives and failed to shield millions more. The destructive force of climate change, visible in more frequent and severe natural disasters, highlights the urgency to better protect our communities against catastrophic losses while drastically reducing carbon emissions.
The right kind of infrastructure is crucial to help mitigate shocks like climate change and pandemics, and is also an important source of economic growth and social progress. Clean transport, low-carbon energy and digital development are critical enablers for achieving the Sustainable Development Goals (SDGs) and Paris Agreement commitments. Without exaggeration, whether we will be able to avert the worst consequences of climate change and withstand future shocks largely depends on the kind of infrastructure we invest in today.
According to Global Infrastructure Basel (GIB) Foundation, 75 percent of the infrastructure projected to be in place by 2050 does not yet exist. This means that we have an opportunity to course correct and construct a world that will be greener, more resilient, more sustainable and more inclusive. A monumental challenge, however, is that global demand for infrastructure far outstrips the amount of finance currently applied to the sector—contributing to a staggering USD 15 trillion investment gap by 2040 . This gap is brought into particularly stark relief in emerging markets and developing economies (EMDEs), which represent two-thirds of global infrastructure demand, but where financing deficits are often largest.
Given growing fiscal constraints across EMDEs, private investment—particularly some USD 80 trillion in assets under management held by institutional investors—is paramount. Yet, these investors’ participation in EDME infrastructure remains very low, at less than 1 percent of global portfolios.
In recognition of both the financing gap and the urgency to build back better as part of economic recovery efforts in a post-COVID-19 environment, we are outlining key action areas to move this needle in a joint report by the Swiss Re Institute and the Global Infrastructure Facility (GIF): "Closing the Infrastructure Gap - Mobilising Institutional Investment into Sustainable, Quality Infrastructure in Emerging Markets and Developing Economies (EMDEs)" .
We aim to help ensure that demand-side requirements are met by the supply of EMDE infrastructure projects to secure higher levels of institutional capital investments. We know that, given the long time-horizon of their liabilities and enough long-term capital to commit, institutional investors such as pension funds, banks or insurance companies are ideally positioned to play this role. We also know, because they have told us directly, that an increasing number of them are willing to do so - given the right conditions.
Appropriate risk-sharing between the public and private sectors is essential
A chief obstacle noted in the report is the lack of bankable projects, attributed to EMDE governments’ often limited capacity to prepare, plan, and prioritise those that would be attractive to private investments. This makes upstream project preparation a key action area. Cracking this nut will ensure appropriate allocation of risk between the public and private sectors, a critical first step in attracting institutional investors.
Done well, these are win-win efforts. The U.S. Federal Reserve's framework review earlier in the year indicates that investors will continue in a low-yield environment for the foreseeable future. At the same time fiscal deficits have ballooned following responses to the COVID-19 pandemic. Institutional investors will continue their search for smart opportunities while safeguarding returns to fund future liabilities. In the case of EMDE infrastructure projects, they can undoubtedly deliver attractive returns. And we believe that, especially with the use of more credit enhancement products, they could attract higher levels of institutional capital.
It's neither easy nor fast – but it's doable
Infrastructure projects are often accompanied by bespoke financing structures that require careful due diligence. Transaction costs can increase quickly, especially relative to the typically small ticket sizes involved for individual transactions. We feel strongly that standardising loan contracts to reduce costs – both in terms of time and capital – and creating aggregation platforms to help institutional investors deploy larger amounts of capital in a single transaction will go far to offer improved risk-return profiles.
Finally, while COVID-19 continues to dominate headlines, the outbreak will ultimately end up being a temporary, albeit very painful, disruption. Yet, many topics highlighted by the virus will persist beyond containment and recovery. Global health, social welfare, climate change, and sustainability – all these will remain at the top of the global agenda and will not be resolved any time soon.
This is why environmental, social and governance (ESG) considerations, which were already growing in importance among public and private sector actors pre-pandemic, will continue to be an important part of global discussions on infrastructure development. Institutional investors, like many, need to get up to speed quickly here, so ensuring ESG compliance through adherence to time-tested standard practices and robust regulations will be a significant boon to these efforts. Our last recommendation is therefore to further enhance the disclosure of ESG requirements associated with infrastructure projects.
Now more than ever, we need private investment in sustainable, quality infrastructure to boost economic growth in EMDEs and promote resilience against public health crises and climate-related risks, as well as unforeseen global and national shocks. But the window of opportunity is narrowing to affect the climate change trajectory – which will, in turn have broad effects on people’s resilience, including their health and security across the globe. Creating new investment opportunities for institutional investors is a specific and highly achievable goal that we look forward to advancing collaboratively.