What is the path to net zero infrastructure?
The original version of this article appeared in the Financial Times.
As countries announce major infrastructure packages to stimulate their post-pandemic recovery, the sector faces two substantial and related challenges: climate change and a funding shortfall.
Climate change is obviously pressing. Over the past 18 months, the private and public sectors have increased their commitments to achieving net zero carbon targets by 2050. Most G20 countries have pledged carbon neutrality by 2050 or 2070, but few have developed comprehensive infrastructure programmes to enable this transition. Furthermore, half of the infrastructure of 2050 is already built, under construction or being planned.
Infrastructure undoubtedly has the power to support the transition to net zero — the fields of energy and transportation provide clear examples of how this is possible. But the pathway to net zero for infrastructure must be pursued with greater urgency and on a global basis if emissions targets are to be met. We need to “build neutral now”.
The question, then, is how can we enable such a deep and fast transition when many governments have record debt levels and the technology needed is still in development?
The importance of data, collected and collated collaboratively
Data are critical bricks in the net zero pathway. We need better data - gathered globally and disseminated more rapidly to the public and private sectors - to enable required innovation and meet urgent timelines. Actionable data and scenario modelling will enable decision-makers to prioritise net-zero infrastructure.
As it stands, infrastructure data is typically available either on a granular basis for individual projects or on an incomplete and scattered basis by sub-sector, geography or other characteristics. The lack of clear, global data impedes governments’ abilities to design long-term solutions and prioritise the funding of these solutions during comparatively short political cycles and governing terms. Investment decisions continue to follow existing local precedents, rather than integrating global knowledge and innovations.
For decision-makers to make the right decisions, we urgently need data to be collected and aggregated at scale, standardised (ideally) and made actionable. To achieve this, we need an entity within the global infrastructure sector that works as the International Energy Agency (IEA) does for energy - one that collaborates with multilateral organisations, rating agencies and others to support the collation and sharing of data and insights across infrastructure sectors. As an independent organisation, unique as the G20’s only infrastructure entity, the Global Infrastructure Hub can be a key player in such collaboration.
Systemising and collecting data will create clearer evidence and hence drive a stronger direction, arming countries with the knowledge to localise and develop plans to achieve net zero. Actionable data insights will enable governments to translate plans, with speed and at scale, into projects, thereby helping to attract further private investment to infrastructure.
Fixing the funding gap
And this private investment is needed because governments facing the pandemic fiscal bill won’t be able to achieve their infrastructure goals alone. Private finance for new infrastructure in low-income markets is critical to economic development and the transition to net zero. Infrastructure is attractive to long-term investors as it has low cumulative default rates compared to other project finance loans. This is also true in low and lower-middle-income countries, even though private investment in those markets has fallen in the decade since 2010.
To reverse this trend, investors need more projects, more transparency and more data - especially as they align their portfolio to ESG and net zero objectives. Encouragingly, private investment in renewables has actually increased over the past decade, and it remained strong in 2020, despite Covid-19, confirming an appetite for the sector. If data were collected, collated and shared with actionable insights and proposals, the data and the enhanced transparency would ease the way to attracting more investment.
Creating net zero pathways
Having clear and actionable data would be a huge step forward, but that data must also be acted upon to develop net zero pathways for infrastructure. This will be a key step to provide confidence that assets will not end up stranded. Take energy, for example. As recently as May 2021, when the IEA revealed its recommendations for the energy sector to reach net zero by 2050, some investors and policy makers were surprised to learn that no more gas projects should be developed. Gas, previously embraced for being greener than coal, turned out to be "not green enough" and likely to be problematic in the near future.
The fact that even the energy sector lacks clarity, with its relative transparency and comparatively more available data, is telling. If governments are unclear about what projects are green enough to achieve climate goals, investors will either override net zero targets or look to other asset classes. The gas "shock" is a strong warning for infrastructure and endorses the need for better data to guide decision-makers as early as possible. Investors eager to enter the space could also help push the sector to reach net zero by asking, is this green enough?
Infrastructure assets have historically been attractive to investors for certainty and stability. With better data and a coordinated approach to net zero between the public and private sector, this should be feasible once more.
The risks and opportunities related to climate change are too important for promises to remain vague or uncertain. Defining the path ahead depends upon actionable data. Without this, the road to net zero by 2050 will be near impossible to map.