Investing in sustainable infrastructures to be “green” and “chic”

In light of the recent Paris agreements, this strategy becomes even more relevant. Policies, above all regarding tax matters, seek to reduce emissions and improve mobility in citizens and may be able to support long-term growth of the GDP, which for the countries of the G20 should range between 2% and 3% from now to 2050. These estimates do not include the potential cost linked to the economic damages caused by various types of natural phenomena that, if serious “green” policies are not properly implemented, are likely to become increasingly frequent and of ever greater impact.

The economic growth, produced by a “decisive” transition in support of investments that look to high growth rates and a reduction in emissions would, in the short-term, have a negative impact, insofar as they would need to be financed by deficit but, in the medium term, would instead show a positive impact on the reduction of public debt in the G20 countries, with estimates of a decrease of around 5%-7% in five years, before in the long-term, achieving a reduction of 20% by 2040. It is, however, important to stress that this data is based on major assumptions and, therefore, it can only be taken as approximate and subject to the institutional and regulatory framework of the individual countries.

GRAPH: Impact of decisive transition to decarbonisation on debt/GDP ratio  – difference to baseline, percentage points (OECD data)

 

Including in terms of employment, this economic policy would be beneficial, above all in a condition as is the current situation in which unemployment has started to decline in Europe too, but where growth of salaries remains below par. Therefore, said policies may strengthen the decline in unemployment and in the long-term increase the level of salary increases, thereby supporting the price growth trend. Despite this, it is important to consider the opposite effect that said policies would have on sectors with high emissions levels. Forecasts talk of around 1.5% of employees to be relocated following the implementation of climate policies by 2050. This figure is not particularly worrying if we consider that from 1995 to 2005, sector relocation and that within the OECD countries was 20% of employees.

POSSIBLE INVESTMENTS

In order to make what the OECD defines as a “decisive impact”, two types of investment are needed. On the one hand, in fact, there is room to reduce energy industry emissions in the broadest sense, acting to improve and development infrastructures such as, for example, on- and offshore wind and solar farms. This type of intervention, although characterised by a considerable level of risk, due to the high initial costs and little in the way of scale economies, is estimated as being able to produce a return on equity of between 10% and 15%.

 

GRAPH: Expected equity return, renewable energy finance, by sector  (in %-  data OECD)

 

On the other hand, it is important to analyse how mobility will develop over the forthcoming decades. The phenomenon of urbanisation is constantly growing and the manner in which infrastructures are behind the times worldwide means that, in order to satisfy the demands of the growing population, considerable investments will be needed. Estimates talk of $95 trillion between 2016 and 2030, making for $6.3 trillion per year. Of this, 43% will go to the transport sector.

GRAPH: Global investment needs by sector, 2016-203o (OECD data)

 

The greatest advantages in terms of investments in mobility, in addition to the drive of inclusive, sustainable economic growth, include the possibility of bringing forward the reduction of emissions and complying with the Paris agreements. In actual fact, over the years to come, provisions will be necessary aiming to apply the environmental parameters established and therefore numerous infrastructures, even those more recently developed, may become obsolete before they reach the end of their useful life. With the improvement of transport systems in terms of the service offered and emissions, the OECD forecasts that CO2 levels produced by G20 countries should reduce by between 34% and 50% by 2050. Not heading in a sustainable direction would mean, due to the long life of this type of infrastructures, being “stuck” in high emission transport. For the G20 countries, the estimates hypothesise in this contrary scenario (which will hopefully be avoided), a 10% increase in CO2 levels or would imply a high number of “stranded” assets, i.e. assets that can no longer be used and need to be replaced before envisaged.

A key element in the development of sustainable mobility is clearly the method by which these projects are financed. There are, in fact, countless risks: a political risk that is more intense in emerging countries, high initial costs, long payback times, particularly as regards railways and subways and a financing structure that has not yet been standardised. Moreover, under the scope of public transport, for reasons of social accessibility, tariffs need to be established that do not always suffice to completely cover the costs of the operation.

In light of these critical issues, it is important to stress the importance of the collaboration between public and private, in order to increase the level of capital invested in the sector. More specifically, private equity funds, but also numerous asset management companies are implementing strategies aiming to achieve sustainable investments both in energy and infrastructures.

One of the preferred forms of investments are private public partnerships (PPPs), which enable private individuals to be involved, but sharing the risk with public institutions. This type of financing is today particularly used for frequent rail connections and for vehicle and bicycle sharing systems.

Recently, the issue of bonds for the financing of investments in sustainable mobility has grown considerably. The main issuers of these instruments are companies and development banks and in 2016, the equivalent value of the outstanding “Climate Aligned Bond” was $694 billion. In 2017, the French government was the first to issue green bonds, collecting $7 billion dollars during the first auction.

It is therefore highly likely, and indeed to be hoped for, that in the next few decades we will gradually see the development and reinforcement of a strong trend as regards mobility and sustainable energy. This, as explained, will help foster global growth with positive social effects, thanks to a greater inclusion and lesser unemployment, as well as environmental effects, as a consequence of the reduction of emissions. In this context, a key role will be played by the development of the financial sector, with innovative and sustainable solutions.

 

GRAPH: Annual infrastructure investment needs and fuel savings in a low-carbon future (global estimates- annual average 2016-2030 – USD 2015 trillion. OECD data)

OECD, “Investing in climate, investing in growth”, June 2017.