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Sustainable infrastructure investing – The case for private investment in Asia

The numbers are staggering. The last decade was hotter than any period in 125,000 years, while atmospheric CO2 is now at a two-million-year peak. The consumption of fossil fuels has combined with agriculture to push methane and nitrous oxide – also greenhouse gases – to the highest in at least the last 800,000 years.

What matters now is a focus on actions and tangible solutions, and transforming the way asset allocators and investors think about investing in sustainable real assets will be critical to accelerate the transition to clean energy.

Background

Good infrastructure is the backbone of any successful society and economy. People need access to energy, transport, sanitation, hospitals, and schools in order to thrive. Unfortunately, the way we have built much of this infrastructure over the last century has been extremely carbon-intensive, both in construction and in operation.

Europe reaped the benefits of its carbon-intensive industrial revolution in the middle of the 20th century and is now seeking to remedy its effects, but Asia’s own industrial revolution based on fossil fuels continues well into the 21st century. With 60% of the world’s population and a ‘carbon cost of GDP’ more than four times greater than the largest countries in Europe, the challenge of CO2 emissions in Asia is becoming ever more pressing.

The opportunity: sustainable infrastructure in Asia

Sustainable infrastructure plays a central role in meeting climate as well as wider environmental and development objectives, which is key to supporting the energy transition in developing countries. From a total of 3.74 billion people at the end of 2000, Asia has seen its population grow to 4.64 billion: a 25% increase in just two decades. Population growth has gone hand in hand with rising incomes. Indeed, emerging and developing economies today represent 59% of total global GDP in comparison to under 45% two decades ago (based on PPP-adjusted USD).

Sustainable infrastructure – the growth opportunity

Economic growth creates considerable demand for the development of infrastructure in an environment where local governments and other funding sources are far from meeting it. The UN highlights the need for significant investment in infrastructure in the developing world to achieve the ambitious Sustainable Development Goals (SDGs) with emerging markets currently only receiving a fifth of global clean energy investment.

There is an annual investment gap (the difference between required and actual planned spending) of $2.5trn in developing countries, which needs to be bridged to reach the UN SDGs by the target date of 2030. Around 75% of that gap is made up of critical infrastructure projects in the developing world.

So why is there still a gap?

Put simply, the financing gap for sustainable infrastructure is in large part the result of poor policies, institutional failures, and lack of investor familiarity with greener technologies and projects. Given the rate at which governments need to build infrastructure, many will struggle to secure the financing to meet demand.

The many challenges to infrastructure investments, from complex planning and potential construction delays to the often-large amount of time before assets generate cash flow and produce a return on investment, have historically deterred private investors who have stuck with traditional equities and fixed-income.

The good news is that investors have finally begun to appreciate sustainable infrastructure as both a financial and an impact opportunity, as evidenced by record $272bn in sustainable infrastructure projects across categories including wind, solar, waste and others that were announced in 2020.

Backed by long-term, durable assets, infrastructure is highly resilient to economic or market volatility and the level of demand is inelastic and does not tend to ebb and flow with market fluctuations. This brings true diversification benefits that are attractive to investors with a long-term investment horizon as real assets are mostly uncorrelated with other asset classes or listed markets.

The way forward

While capital constraints can make it challenging or impossible for governments to meet stated infrastructure development goals, there is now a growing demand from private investors seeking to align their capital allocation decisions specifically with the SDGs, with many adopting these as a reference point and using impact measuring tools to complement their existing methodologies. Investing though an ESG lens has recently been increasing, but we believe that greater good will come from a focus on impact: investing where money makes a real difference to the quality of life while still delivering market-driven returns.

The alignment of interests between private investors and the infrastructure needs across emerging markets presents a clear opportunity to address the funding gap. It creates the ideal environment to attract investment in low-carbon, climate-resilient, sustainable infrastructure projects. Supported by political will, effective institutions, and ambitious regulation, the time is right to mobilise private finance for this urgent task.

Nick Parsons is head of research & ESG at ThomasLloyd Group

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