Definitions and classifications of infrastructure hugely influence investment decisions and the ability to close the infrastructure gap
Infrastructure definitions and classifications (or taxonomies, as we refer to them in this article) may not be an everyday topic of conversation at the office watercooler. Indeed, this topic is more generally associated with accounting, auditing, and reporting – exciting for some, but perhaps not for all. The term ‘taxonomies’ may even bring back memories of biology classifications or the Dewey Decimal System. Regardless of your association with this topic, all taxonomies play an important role in helping us organise and make sense of complex systems. The same can be said for infrastructure taxonomies. They have a huge impact on how much gets invested in infrastructure by both the public and private sectors and what types of infrastructure get this investment.
This week at the G20 Infrastructure Working Group (IWG) meeting in Visakhapatnam, India the GI Hub held a roundtable on infrastructure taxonomies to explore how they can be used to help close the infrastructure investment gap. This roundtable was one of our contributions to the Indian G20 Presidency’s 2023 agenda on infrastructure and is a continuation of Actions 2.1 and 2.2 of the G20’s 2022 framework for scaling up infrastructure investment.
Infrastructure taxonomies can be considered the foundation of effective investment and policy decisionmaking. One reason for this is the importance of taxonomies or data capture and analysis. Measurable, comparable, and consistent infrastructure taxonomies support the capture of measurable, comparable, and consistent data – a key pillar to unlocking investment in infrastructure.
Despite the important role of taxonomies in investment decisionmaking, there are currently no internationally agreed definitions or classifications for infrastructure. Differences exist across – and sometimes even within – government jurisdictions and also among international organisations and across the private sector.
The types of assets considered to be infrastructure are also rapidly evolving in response to global trends like climate change, digitalisation, and rising social inequality. This creates large data gaps, especially for new types of infrastructure that cross sectors and/or integrate technologies, like energy transition infrastructure (e.g. e-mobility or solar district heating), digital infrastructure (e.g. e-government), resilient infrastructure (e.g. nature-based flood defences), and circular infrastructure (e.g. waste-derived fuel, circular treatment of waste from construction, biomaterials).
The fragmented and rapidly changing landscape of infrastructure taxonomies presents opportunities for policymakers and investors by bringing to light new types of impactful investments. However, the absence of clear and comparable definitions to organise and make sense of these complex ecosystems can also have several negative effects:
- Collection of data (and therefore the availability of historic datasets) on new types of infrastructure investment, including data on risk and impact, is hindered. This has a carry-over effect on the allocation of capital towards these new types of infrastructure projects
- Certain transformative infrastructure subsectors may not be considered for investment. Following on from the previous point, some infrastructure subsectors – including some that have the potential to be transformative for people and the planet – may not be considered infrastructure, and therefore may not be considered for investment by the private sector. Governments may consider infrastructure as assets that provide a public good, enabling economic development and quality of life. Investors look at the risk of investing in infrastructure. In this context, the availability of historic data on risk can determine whether that asset is considered infrastructure. For example, the private sector has a growing appetite to invest in infrastructure for resilience and adaptation, but there is limited information on the sectors, assets, risks, and impacts that comprise ‘resilient infrastructure’, which hinders decisions about these kinds of investments.
- Regulators are less able to evaluate and consider infrastructure as a distinct and low-risk asset class, resulting in high capital charges that further impede infrastructure investment by banks and insurance companies. In the absence of a common definition for infrastructure’s impact and risk, financial regulators are not recognising that infrastructure is much less risky than other forms of corporate debt, and could therefore be considered a specific asset class with different regulatory capital requirements.
To address these challenges, the G20 IWG is exploring practical ways that infrastructure taxonomies can be leveraged to support better investment decisionmaking that takes into account the evolution of infrastructure, differences across jurisdictions, and other factors. This approach avoids the lengthy process of standardising infrastructure definitions and taxonomies to look at the opportunities that exist now.
The GI Hub is leading this work for the G20, identifying existing infrastructure taxonomies, highlighting the differences between them, and producing a set of opportunity areas for the IWG under four themes:
- Improving the understanding of national infrastructure spending and policy.
- Enabling a better understanding of asset risk and performance – potentially leading to infrastructure asset classes with specific local or national regulations/policies.
- Enabling a better understanding of the impacts from transformative infrastructure investment – potentially leading to asset classes with specific regulations.
- Helping build better and more transparent infrastructure pipelines in emerging markets.
At this week’s IWG, we brought together in India high-level experts from the UNDP, OECD, INEGI Mexico, the UK Office for National Statistics, the International Monetary Fund, Swiss Re, Standard Chartered, EDHECinfra, the Global Infrastructure Facility, the European Bank for Reconstruction and Development (EBRD), the Asian Development Bank, Macquarie Green Investment Group, and PT Sarana Multi Infrastruktur (SMI) for an in-person panel discussion and roundtable with IWG members.
We will be using the inputs from the roundtable to continue identifying ways that the public and private sectors can leverage infrastructure taxonomies for investment decisionmaking and to close the infrastructure investment gap.