New Approach for Investment Into Sustainable Infrastructure in Low- and Middle-Income Countries

Increasing the flow of investment into sustainable infrastructure is a clear priority if climate leaders are to limit global warming to  2° Celsius rise from pre-industrial levels, as set out by the Paris climate agreement in 2015. Infrastructure, defined broadly to include roads, transport, telecommunications, energy, water and buildings, is critical to the development of sustainable and prosperous communities and yet currently accounts for nearly 70 per cent of global greenhouse gas emissions. 

The OECD estimates that to limit global temperature rise to 2° Celsius, USD 6.3 trillion of annual investment is needed until 2030. In 2018 investment into sustainable infrastructure was estimated to stand at USD 4 trillion, signalling an annual investment gap currently of around USD 2.2 trillion. Further still, the burden of this investment gap is not equally shared. 

As is often the case, these needs are not shared equally, with experts suggesting that at least two thirds of the USD 2.2 trillion required is needed in low- and middle-income countries, especially given the population- and development projections in these areas. 

Currently, national banks are leading the investment charge, with multilateral agencies and development banks the second and third highest donors. Private capital lags behind suggesting an opportunity to channel funds from such sources, especially given the potential profits from sustainable infrastructure assets. Yet private lenders are deterred by long return cycles, high regulatory risks and policy changes and the general complexity of projects. 

A new proposal from the One Planet Lab Working Group on Financing Sustainable Infrastructure (including the International Finance Corporation (IFC), the Climate Policy Initiative, HSBC, the Institute for Climate Economics, the Green Climate Fund and the French government as partners) may offer a way to help scale the development and financing of sustainable infrastructure in low- and middle-income countries. 

The proposal, called VERT-Infra, is a holistic framework that outlines at least four measures to support infrastructure across the entirety of the project life cycle. VERT-Infra (short for “Vision for an Environmentally Responsible Transition – Infrastructure”) would initially focus on the four areas of energy, energy storage, transport and buildings but with the opportunity to expand to others in time. It would then put in place the following building blocks:

As laid out in a recent article, the Project Preparation Funds would provide technical assistance to support development of bankable sustainable infrastructure projects. 

Sustainable Financing Facilities would provide low-cost financing to eligible national development banks (NDBs) and local financial institutions that lack regular access to international capital markets. These institutions would then lend the funds to sustainable infrastructure projects.

Sustainable Infrastructure Funds would purchase loans for operating assets that have already been financed by regional development banks, NDBs and local institutions. This would free up capital for new and additional investment.

Policy and Planning Funds would support long-term capacity building to help low- and middle-income countries plan and deliver sustainable infrastructure and strengthen vital governance and policy frameworks in line with nationally determined policies.

Underpinned by the same governance structure as the green bond market, this new proposal may pave a way forward to fill the investment gap for sustainable infrastructure.