Let's spend more to make infrastructure sustainable

by Amal-Lee Amin, Jane Ambachtsheer | Inter-American Development Bank
Friday, 4 November 2016 16:07 GMT

The first bus service entirely on electricity drives in front of the town hall during its inauguration by the Board of Marseille Transport (RTM) in Marseille, France, June 6, 2016. REUTERS/Jean-Paul Pelissier

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Can climate goals be met if planned infrastructure isn't built right?

“We’ll always have Paris.” On the same day as the Paris Agreement’s entry into force on November 4, delegates attending a warm-up event in Casablanca, Morocco, before the UN climate talks in Marrakesh next week, may utter the Casablanca film’s iconic line.

Yet despite the location and timing being a perfect match; the Casablanca reference is off key. As the film depicts, the protagonists may have found love in Paris but their present predicament dictates they must separate. In the case of the Paris Agreement and its alignment with the finance necessary to implement it, this is not the end but the start of what could be a beautiful friendship.

The Paris Agreement has the objective of making finance flows consistent with a pathway towards low emission and climate-resilient development. As countries look to boost growth while implementing the Sustainable Development Goals and their Paris commitments, shifting finance flows to sustainable infrastructure is critical.

This requires major investment in clean public transport, smart efficient energy systems and buildings and the effective use of natural capital such as forests. Studies show that such investments could increase up-front capital costs by approximately 5 percent. But sustainable infrastructure should generate lower operating costs over the life of the investment, while also reducing risks and negative externalities including pollution.

The Global Commission on the Economy and Climate estimates that the world is expected to invest roughly $90 trillion in infrastructure over the next 15 years; a major boost from current levels. Most countries have chronic infrastructure deficits. In the case of Latin America and the Caribbean, the Inter-American Development Bank estimates that up to 5 percent of the region’s GDP or roughly $250 billion per year will be required to meet future demand for infrastructure.

In part, this deficit reflects existing barriers facing private sector financing of sustainable infrastructure. These include a failure on the part of governments to develop transparent pipelines, which has led to a poor estimation of infrastructure needs. Investors may also be deterred by high development and transactions costs.  

Fortunately a large number of initiatives focused on closing the infrastructure funding gap are emerging.

The initiatives generally fall into three categories.  One set are “influencers” which focus on thought leadership and attempts to affect policy change. There are also “mobilizers” which work to develop “bankable” projects or convene investors to facilitate capital flows. Lastly “tool providers” attempt to enable integrated environmental or social analysis of infrastructure projects into the investment and monitoring process.

All of these industry initiatives have the potential to play significant roles in promoting investment in sustainable infrastructure. However, in some cases they appear to be working against each other.

The Paris Agreement is lauded as helping to provide a long-term signal to investors to allocate capital that is consistent with low-carbon and resilient development. But this signal can only illuminate the path forward. These initiatives must achieve far greater coherency and coordination between them to ensure that they and the Paris Agreement are mutually reinforcing.

FOUR STEPS

To achieve this, we propose the following steps.

First, industry initiatives need to clarify the principles and develop shared definitions for sustainable infrastructure investment. This can provide greater certainty and urgency across the industry, create a more compelling alternative to traditional infrastructure such as coal-fired power-stations while also enabling comparability for investors.

Second, those infrastructure initiatives that do not consider sustainable infrastructure should change tact and commit to sustainable infrastructure principles through a review of their mission and objectives.

Third, to optimise joint impact it will be necessary to convene the convenors and work together towards a shared “grand plan” that sets out an effective division of labour and the sharing of ideas between initiatives.

Fourth, collaboration should be encouraged between initiatives sharing common missions so that collectively they can work to scale up investment.

These steps will be essential to provide investors with the right signals and tools required to align their investment strategies with the Paris Agreement and Sustainable Development Goals.

Time is rapidly evaporating. With 70 percent of the forecast increase in emissions from developing countries likely to come from infrastructure that is still to be built, decisions taken now will determine whether staying well below 2 degrees Celsius is viable. The time to begin that beautiful friendship among sustainable infrastructure initiatives is now. Our future could well depend on it.

Amal-Lee Amin is the climate change division chief at the Inter-American Development Bank; Jane Ambachtsheer is a partner and the chair of responsible investment at Mercer. Access the full report at “Building a Bridge to Sustainable Infrastructure”