Green infrastructure investment

Green infrastructure investment

The public sector cannot do it alone

  • The war in Ukraine underscores that scaling up investment in climate-smart infrastructure is necessary to ensure energy and food security as we transition to a lower-carbon future. Well-planned green infrastructure projects not only raise potential output growth and enhance resilience but can also help reduce the carbon footprint that comes with economic progress.  
  • However, current public investment plans alone will not be sufficient for strategic rebalancing toward climate-friendly infrastructure. Important investment gaps remain, especially in electricity and networks (in Europe ranging from the 1.6% and 1.3% of GDP per year in Spain and France, respectively, to 0.6% and 0.4% in Italy and Germany), where investment needs are the largest.However, public investment can be a catalyst for greater private participation, especially in green infrastructure. We estimate that a one percentage-point increase in public investment, private investment rises by 0.51pp. A green crowding-in “multiplier” is even larger.
  • Greater private sector participation in the planning, construction and operation of infrastructure can help mitigate public sector constraints in funding the green transition. Life insurers and pension funds in particular will be critical to mobilizing private capital. Infrastructure investment can bring predictable yields and stable cash flows, providing a natural match to their long-term liabilities.
  • Mobilizing long-term finance will require creating an enabling regulatory environment for green infrastructure investment. Our findings based on a comprehensive dataset of project loans suggest sufficient scope for lower capital charges to be applied to infrastructure investment, which have a more favorable risk profile than corporate debt. Especially “green projects” seem to default only half as often over a 10-year period as “brown projects”, with a greater difference in emerging markets relative to advanced economies. Capital charges that recognize the declining downgrade risk of infrastructure debt over time could potentially free up costly capital in an environment of monetary tightening; this would help mobilize resources to finance infrastructure—thus promoting the green transition.

Read the complete report here: https://www.allianz.com/en/economic_research/publications/specials_fmo/infrastructure-investment.html