FINANCING SUSTAINABLE INFRASTRUCTURE AT SCALE.

• Author: Deseglise, Christian

INTRODUCTION

Climate change is arguably the most pressing global challenge of our day and we are not succeeding in tackling it in time. Under current pledges to cut emissions of greenhouse gases (GHG) we are still heading towards a three degrees Celsius temperature increase by the end of this century compared to pre-industrial levels. The Intergovernmental Panel on Climate Change (IPCC) has called for accelerated and far-reaching multilevel, cross-sectoral climate mitigation as well as for incremental and transformative adaptation. That is, we need to act faster, at greater scale, and in a more disruptive way.

In particular, it will be critical to ensure that new and existing infrastructure assets are developed, retrofitted, and maintained under guidelines that prioritize environmental and social sustainability as well as climate resilience. First, existing infrastructure is a significant source of GHG emissions. Globally, the construction, operation, and maintenance of infrastructure assets, defined broadly as transport, power, telecommunication, water, and buildings, represent approximately 70% of GHG emissions, while fossil fuel combustion and industrial processes add up to 65% of GHG emissions, mostly driven by economic and population growth. (1, 2) Existing infrastructure has to be adapted to be more efficient, more environmentally harmonious, and more resilient. Second, infrastructure touches on almost every aspect of peoples' lives, and as such it partly determines our impact on nature and our climate. Developing infrastructure systems with embedded sustainability considerations can be instrumental in addressing "climate and natural disasters, reduce greenhouse gas emissions and contamination, manage natural capital, and enhance resource efficiency" (3) Not least, the IPCC highlighted that while the lock-in effect from infrastructure and spatial planning is hard to reduce, ensuring that infrastructure generates low lifecycle emissions enormously facilitates the transition to a low-carbon and sustainable economy. (4) Furthermore, climate-resilient infrastructure could improve the reliability of service provision, increase asset life and protect asset returns. (5) Embedding sustainability in the planning of future infrastructure will be fundamental since low-and middle-income countries are expected to at least double their stock of infrastructure assets by 2050.

Ensuring that financing is available at scale for sustainable infrastructure then becomes a substantial enabling factor in the fight against climate change. The infrastructure investment needed in order to meet the Paris Agreement targets and the Sustainable Development Goals (SDGs) has been estimated at around USD 6.9 trillion a year between 2015 and 2030. (6) Based on 2018 data, today's infrastructure investments fall between USD 3.4-4.4 trillion a year, thus showing that we are falling short by a range between USD 2.5 and USD 3.5 trillion a year. (7)

Although it is relatively straightforward to put together the necessary financing for projects in advanced economies with well-established regulatory frameworks and readily available funding, major challenges arise in most middle-and low-income economies.

For the purpose of this paper, sustainable infrastructure will be broadly understood as a complex and enabling system that provides a range of different services to end users as well as to intermediate users in a way that continuously improves its environmental performance. At the project level, this paper makes use of the recently launched definition by the Inter-American Development Bank (IDB), where sustainable infrastructure projects are those "planned, designed, constructed, operated, and decommissioned in a manner to ensure economic and financial, social, environmental (including climate resilience), and institutional sustainability over the entire life cycle of the project." (8) Section 2 of this paper expands further on the nuances that need consideration in defining and understanding sustainable infrastructure.

Acknowledging that resources are available to scale financing for sustainable infrastructure, the essay proposes a new holistic framework inspired by the work of the One Planet Lab Working Group on Financing Sustainable Infrastructure, of which this co-author is a member. (i) This framework targets both the demand side (the generation of bankable projects) as well as the supply side (the provision of financing) of infrastructure financing. Among its essential aspects are: acknowledging the complexity embedded in the sustainable infrastructure ecosystem, addressing the bottlenecks that have hindered infrastructure financing in low-and middle-income economies, proposing concrete solutions aimed at developing sustainable infrastructure as an asset class, embedding sustainability in infrastructure planning, and effective project preparation.

This essay starts with a discussion on the definition of sustainable infrastructure (Section 1), followed by an overview of the challenges and developments in financing sustainable infrastructure (Section 2). Finally, Section 3 presents the VERT-Infra Framework and advocates for urgent action in the context of fast population growth and urbanization.

DEFINING SUSTAINABLE INFRASTRUCTURE

As a first step, it is important to reach a common understanding of what constitutes sustainable infrastructure. Indeed, having broadly accepted principles will lay the foundation for the development of sustainable infrastructure as an asset class that is attractive to large international institutional investors. The importance of infrastructure is not a new topic. Its benefits have been researched extensively. Yet, the social and environmental sustainability angles have not been fully integrated in the debate. There are still conflicting views and interests in relation to what constitutes sustainable infrastructure.

Building on the conceptualization by Edward J. Oughton et al., this essay considers sustainable infrastructure as a complex and enabling system that provides a range of different services to end users as well as intermediate users in a way that continuously improves the overall system's environmental performance and impact on society (10) In more figurative terms, among the services provided are "water, energy, food, mobility and connectivity, shelter (building materials), sanitation/waste disposal, and public spaces in cities." (11) This definition acknowledges as well that the integration of sustainability and climate resilience into infrastructure is an ongoing process over the life-span of the infrastructure asset/s, seeking continuous improvement.

Understanding infrastructure as a system allows to incorporate to the definition the process of decentralization witnessed in the sector. Specifically in the energy sector, the "Financing Climate Futures" report highlights that "the concept of electricity access being solely grid-based is changing to one of a 'lego' design." (12) This decentralization is facilitated by various innovations, especially digital technologies, such as for example mobile payment platforms supporting pay-as-you-go business models or the application of digital technologies to facilitate the peer-to-peer transaction of energy generated at home with solar panels. Approaching infrastructure as a service underpins the innovations happening in the space. The increasing use of information communication technology (ICT) in infrastructure has made us evolve towards "a position where infrastructure sectors are becoming more and more interdependent." (13)

With financing in mind, it is important to consider definitions at the project level. The IDB recently issued a practical framework to guide sustainability across the life cycle of infrastructure projects in which the IDB provided a working definition that brings together the work of other institutions and includes feedback from the investor community. The resulting definition presents sustainable infrastructure as "infrastructure projects that are planned, designed, constructed, operated, and decommissioned in a manner to ensure economic and financial, social, environmental (including climate resilience), and institutional sustainability over the entire life cycle of the project." (14) This definition builds on the analysis of existing tools and approaches contemplating sustainability qualities of infrastructure projects. The aim was not to create a new tool, but rather to identify gaps, promote consistent approaches, and improve the coverage of existing resources. (15)

Low-carbon and climate-resilient infrastructure projects that mitigate GHG emissions and/or support adaptation are among the sustainable infrastructure projects to consider specifically in the context of climate change. An important subset here is that of sustainable energy infrastructure, which involves power generation from solar, wind, small hydro, geothermal, marine, biomass and waste-to-energy, biofuels, carbon capture and sequestration and energy smart technologies (such as smart grids, inter-connectors, energy efficiency, storage and electric vehicles). (16) There are however other sectors that have an impact on infrastructure and spatial planning, including sustainable agriculture, floodplain levees and coastal protection, waste management infrastructure and...