Investing in sustainable infrastructure is key to tackling three simultaneous challenges: reigniting global growth, delivering on the Sustainable Development Goals (SDGs), and reducing climate risk. Transformative change is needed now in how we build our cities, produce and use energy, transport people and goods, and manage our landscapes. And the challenge is urgent, according to the 2016 New Climate Economy Report.

Following the milestone achievements of 2015 – including the ambitious global goals set for sustainable development and its financing in Addis Ababa and New York, and through a landmark international agreement on climate action in Paris – the challenge is to now to shift urgently from rhetoric into action.

Infrastructure underpins core economic activity and is an essential foundation for achieving inclusive sustainable growth. It is indispensable for development and poverty elimination, as it enhances access to basic services, education and work opportunities, and can boost human capital and quality of life. It has a profound impact on climate goals, with the existing stock and use of infrastructure associated with more than 60% of the world’s greenhouse gas (GHG) emissions. Climate-smart, resilient infrastructure will be crucial for the world to adapt to the climate impacts that are already locked-in – in particular, to protect the poorest and most vulnerable people. Ensuring infrastructure is built to deliver sustainability is the only way to meet the global goals outlined above, and to guarantee long-term, inclusive and resilient growth.

A comprehensive definition of infrastructure includes both traditional types of infrastructure (everything from energy to public transport, buildings, water supply and sanitation) and, critically, also natural infrastructure (such as forest landscapes, wetlands and watershed protection). Sustainability means ensuring that the infrastructure we build is compatible with social and environmental goals, for instance by limiting air and water pollution, promoting resource efficiency and integrated urban development and ensuring access to zero- or low-carbon energy and mobility services for all. It also includes infrastructure that supports the conservation and sustainable use of natural resources, and contributes to enhanced livelihoods and social wellbeing.

Bad infrastructure, on the other hand, literally kills people by causing deadly respiratory illnesses, exacerbating road accidents and spreading unclean drinking water, among other hazards. It also puts pressure on land and natural resources, creating unsustainable burdens for future generations such as unproductive soils and runaway climate change.

The challenge is urgent: the investment choices we make even over the next 2-3 years will start to lock in for decades to come either a climate-smart, inclusive growth pathway, or a high-carbon, inefficient and unsustainable pathway. The window for making the right choices is narrow and closing fast, as is the global carbon budget. The time is ripe for a fundamental change of direction. Today’s low interest rates and rapid technological change mean that this is an especially opportune moment for sustainable infrastructure-led growth, and for investing in a better future.

The world is expected to invest around US$90 trillion in infrastructure over the next 15 years, more than is in place in our entire current stock today. These investments are needed to replace ageing infrastructure in advanced economies and to accommodate higher growth and structural change in emerging market and developing countries. This will require a significant increase globally, from the estimated US$3.4 trillion per year currently invested in infrastructure to about US$6 trillion per year.

The Global Commission has found that it does not need to cost much more to ensure that this new infrastructure is compatible with climate goals, and the additional up-front costs can be fully offset by efficiency gains and fuel savings over the infrastructure lifecycle. But many of these solutions require higher up-front financing, with the savings and other benefits accruing later. To deliver these solutions at scale, financing and investment have to be mobilised and better deployed from a multitude of different domestic and external sources, including national and local governments, multilateral and other development banks, private companies and institutional investors. International financing will be particularly important to support this transition in developing countries.

The global South will account for roughly two-thirds of global infrastructure investment (or about US$4 trillion per year) and can lead in building new sustainable infrastructure that “leapfrogs” the inefficient, sprawling and polluting systems of the past. Developing countries, such as those in Asia and Africa, need infrastructure to improve access to basic services, drive development and meet the needs of rapidly-urbanising populations and an expanding middle class. Resource-rich countries that rely on natural capital need to manage, maintain and enhance ecosystem goods and services. Many advanced economies, meanwhile, have to replace and upgrade power transmission and distribution systems, long-neglected bridges, water and sewerage pipelines, mass transit systems and other infrastructure.

Transformative change is needed now in how we build our cities, transport people and goods, produce and use energy, and manage our landscapes. Globally, at least 60% of infrastructure investment over the next 15 years will be made in the energy and transport sectors.i To transform the energy sector, it is estimated that investments in oil, coal and gas must decrease by about one-third by 2030, while investments in renewables and in energy efficiency must increase by at least a similar proportion if we are to keep global average temperature rise below 2°C.

We need to increase both the quantity and the quality of infrastructure investment, but major barriers persist. These include unfavourable policies and investment regulations, a lack of transparent and bankable project pipelines, inadequate risk-adjusted returns, a lack of viable funding models and often high transaction costs. Unlocking finance for sustainable infrastructure will require coordinated reforms across policies, institutions and practices in financial markets.

More money alone won’t do the job. Concerted action in four, inter-linked areas can together help us overcome these barriers and build the sustainable infrastructure of the 21st century. Governments will play a leading role in shaping and directing action across these areas. The Global Commission emphasises the particularly catalytic role that multilateral, regional and bilateral development finance institutions, as well as national development banks, can play in supporting countries and enabling a virtuous circle of action on sustainable infrastructure. In order to reach the scale of investments needed, however, the private sector will have an increasingly significant part to play in infrastructure investment.

First, we must collectively tackle fundamental price distortions – including subsidies and lack of appropriate pricing which leads to poor infrastructure investment decisions – to improve incentives for investment and innovation, and to generate revenue. The Global Commission on the Economy and Climate has repeatedly emphasised the importance of phasing out fossil fuel subsidies (which amounted to around US$550 billion in 2014) and other distorting subsidies and tax breaks, such as those for water use, company cars and parking, and access to natural resources. Evidence is building of how successful reforms can free up scarce government revenues for other priorities, such as protecting poor households and managing the transition for affected sectors. For example, these savings can be channelled into programmes that benefit poor people, through better targeted income support and social safety nets, through investments in pro-poor infrastructure such as off-grid renewable energy solutions and energy efficiency, etc.

In the last three years, almost 30 countries have initiated or accelerated reforms of their fossil fuel subsidies, with many taking advantage of low oil prices to do so. Egypt, for instance, raised fuel prices by 78% in 2014 and plans to double them over the next five years; Canada has phased out several subsidies to oil, gas and mining, including ending targeted support to tar sands production; Indonesia raised gasoline and diesel prices by 33% in 2013 and another 34% in 2014; and India eliminated diesel subsides in October 2014 after incremental hikes. Given that subsidies to energy and fuel often particularly benefit middle- and high-income households, reforms can be progressive and channelling the savings into the right areas can benefit the poorest and most vulnerable in society.

While there is momentum, further reform is needed in both developed and developing economies. Both the G7 countries and North American leaders recently set a deadline of 2025 to phase out their fossil fuel subsidies. Other countries, including the G20, should follow suit. Many international institutions (such as the IMF, OECD, World Bank and IEA) have shown important leadership on this and are supporting progress in countries around the world.

The Global Commission also continues to emphasise the fundamental importance of strong, effective and rising carbon prices as a necessary condition for inclusive and low-carbon growth, in line with the Paris Agreement. Current pricing schemes collectively cover only about 12% of global GHG emissions, but a number of countries and companies have recently stepped up action, including through energy pricing reforms that effectively send a price signal to shift to cleaner energy solutions. Around 40 countries have implemented or scheduled carbon pricing. China, for example, will establish a national emissions trading system in 2017, expected to be the largest in the world. France adopted a carbon tax on transport, heating and other fossil fuels in 2014, and Vietnam took action in 2015 to adjust taxes, including on transport fuels, to better reflect their carbon content. Similarly, over 1,000 companies have now adopted an internal carbon price or plan to do so soon. Corporate leaders with pricing already in place include major consumer staples companies, such as Nestlé and Unilever; car brands, such as Mazda and General Motors; energy companies, such as Shell and BP; and financial giants, such as Barclays.

Second, we must strengthen policy frameworks and institutional capacities to deliver the right policies and enabling conditions for investment, to build pipelines of viable and sustainable projects, to reduce high development and transaction costs, and to attract private investment. Countries need a well-defined and appropriately designed pipeline of bankable, sustainable projects. But the capacity to develop and implement projects is low because of underlying issues such as poor planning, lack of mandate, skills shortages, inadequate regulatory frameworks for public-private partnerships and implementation, and weak enabling policy environments. Governments and development finance institutions are already working to expand capacity, but much more is required, including increased concessional finance for project preparation, and strengthened support for implementation within a broader policy reform process (such as measures to tackle inefficiencies, improve governance and combat corruption) which reaches beyond central government agencies to cover subnational and local-level entities.

Overall, governments have to make a greater effort to “invest in investment” – to improve public infrastructure planning, management, governance and policies. At the same time, to ensure sustainability over the long term, investment plans and project selection must better reflect environmental and social sustainability criteria. Governments should develop and implement procurement processes that incorporate sustainability criteria and are systematic and consistent in approach.

A stable and predictable policy and regulatory environment can attract investment in infrastructure, supported by stronger enabling environments for business, for example by enhancing competition, trade policies and corporate disclosure. Of particular importance is the need to strengthen governance frameworks, including anti-corruption measures. Public-Private Partnerships (PPPs) can help, if implemented well, to secure private engagement in sustainable infrastructure investment. Improving the institutional and regulatory frameworks for PPPs – including the transparency and credibility of processes for selection and agreement on projects, consistency of policy and implementation, and standardisation of contracts and documents – is essential to boost investor confidence and attract the scale of investment needed.

Clear national, subnational and sectoral development strategies, with accompanying infrastructure and investment plans, are essential to guide long-term public and private investments. Leadership will be needed to monitor progress and ensure that these plans promote low-carbon and climate-resilient development, reflect the financial realities of each country, and are aligned with their Nationally Determined Contributions to achieve the 2°C goal in the Paris Agreement.

In addition to national strategies, governments must also develop and implement sectoral plans that align with climate goals. Building support for these will not always be easy, especially given potential resistance from powerful incumbents who benefit from business-as-usual. The rapid transformation needed in the energy sector to meet climate goals is particularly challenging.

These transition plans should include both measures to ensure that clean energy solutions are economically attractive and affordable, and those that will better reflect the true costs of coal and other fossil fuels. The Global Commission welcomes the establishment of a Just Transition Centre that is initiated by the International Trade Union Confederation (ITUC) with emerging partnerships with business and civil society, focused on dialogue between governments, employers, workers and civil society around how to ensure a “just transition” towards including at national and sectoral levels.

Third, we must transform the financial system to deliver the scale and quality of investment needed in order to augment financing from all sources (especially private sources such as long-term debt finance and the large pools of institutional investor capital), reduce the cost of capital, enable catalytic finance from development finance institutions (DFIs), and accelerate the greening of the financial system. The scale of financing requirements for sustainable infrastructure calls for a strengthening of resources from all sources: public and private, domestic and external. It will involve regulatory action, policies, better governance frameworks and business practices to harness capital markets and the financial system to deliver sustainable development.

Public finance, whether through domestic resources or through development finance, will remain fundamental to the provision of infrastructure, including by playing a catalytic role in attracting private finance. In developing and emerging economies, about 60–65% of the cost of infrastructure projects is financed by public resources, while in advanced economies this figure is around 40%.

National budget allocations to support sustainable infrastructure investment are essential and should increase. This will often include the use of revenues that countries raise themselves, for example through taxes, or other finance they are able to raise, including through bonds, loans, or through development finance institutions. Fossil fuel subsidy reform and carbon pricing, emphasised above, can also be important sources of capital for sustainable infrastructure. And whatever the source of financing, ensuring effective public spending, including through strong, transparent and green public procurement practices, can allow scarce public resources to achieve more.

Beyond public financing, there is real need to significantly scale up private financing to meet our infrastructure requirements. But there are real challenges in tapping adequate private investment and in bringing down the high costs of finance. Banks and local financial institutions are well suited to provide long-term debt finance in the construction phase. There is also much greater scope to attract institutional investors through equity offerings and the development of local capital markets, including for “take-out” finance (where securitisation of initial debt occurs to make it long-term and attractive to institutional investors). Take-out finance can also help free up capital for more projects over time, since banks are able to sell a part of their loans to a third party and reinvest the money as projects become operational.

DFIs, including Multilateral and Bilateral Development Banks, can play a pivotal role in pioneering and scaling up financing models for sustainable infrastructure that can crowd in private finance. This is especially true in developing countries and in emerging economies, which often face prohibitively high costs of capital due to high perceived risks. In addition to the development and wider deployment of risk mitigation instruments, DFIs can play a role through the use of blended finance more generally (including concessional and non-concessional finance, and dedicated climate finance), and help create more viable and replicable financing models and tools (e.g. for credit enhancement and risk mitigation). Successful instruments and platforms should be replicated and scaled-up. There is also a need to emphasise the “development” role of DFIs, paying particular attention to the needs of less developed countries for whom the challenges of preparing, financing and executing sustainable infrastructure projects are particularly acute, rather than operating like commercial banks when assessing infrastructure investment risks.

A number of DFIs are stepping up their investments already, including through measures to expand their capital base, blend finance from different sources and leverage private and other investment in sustainable infrastructure. They are also partnering with countries to strengthen policies, institutions and capacities to reliably deliver domestic resources and ensure a solid pipeline of bankable projects tailored to national priorities. The New Development Bank (BRICS Bank), for example, has recognised the imperative around sustainable infrastructure and is demonstrating initial leadership in this area. In April 2016, it launched its first four investments, worth US$811 million, all for clean energy projects. In July 2016, it announced its plans to issue green bonds worth approximately US$450 million. Other important steps are being taken by a number of DFIs, in particular to help crowd in other sources of finance.

There is increasing potential to mobilise green finance to bolster support for low-carbon and climate-resilient infrastructure through new tools and approaches like green bonds and green infrastructure. The green bond market reached US$42 billion in 2015. HSBC, working with the Climate Bonds Initiative, predicts that the amount could more than double this year. With the right approach, green bonds can be powerful instruments and play a tremendous role in facilitating sustainable infrastructure investment and growth.

While these examples are promising, further action is required to shift the financial system to support investment in sustainable infrastructure, including through the use of equity offerings, appropriate risk mitigation and development of local capital markets to provide the large sums that will be needed for take-out finance. Establishing some forms of infrastructure as a distinct asset class could also help make it a standard part of investment portfolios and unlock access to large pools of capital, such as from institutional investors.

Fourth, we must ramp up investments in clean technology research and development (R&D) and deployment to reduce the costs and enhance the accessibility of more sustainable technologies. Investing in new technologies and practices can make them significantly cheaper and accelerate deployment, reducing upfront financing needed for sustainable infrastructure in both advanced and emerging economies. It can also help overcome the advantages enjoyed by incumbent technologies and make investing in new technologies less risky.

Over the next 15 years, when key infrastructure systems will be built and locked in for decades, a pressing challenge is to deploy existing state-of-the-art technologies and business models or those that can rapidly be demonstrated at commercial scale, even as we also invest in next-generation technologies for the longer term.

The Global Commission welcomes the recent launch of several promising collaborative multi-partner global initiatives that aim to boost R&D and deployment with climate change as a central theme. Mission Innovation, launched at COP21 in Paris, brings together 21 members as of August 2016 – including the world’s five most populous countries: China, India, the United States, Indonesia and Brazil – that have committed to doubling public investments in clean energy research over the next five years. Similarly, the new Breakthrough Energy Coalition brings together 28 major individual investors with a collective net worth of more than US$350 billion to provide capital for research on high-risk but promising clean energy technologies. And the Low Carbon Technologies Partnership initiative brings together 150 companies and 70 partners to develop and implement concrete actions that go beyond business-as-usual to tackle climate change.

Better public and private support at scale, public-private initiatives and enhanced international cooperation including in the private sector will be essential to accelerate the innovations of the future and their rapid deployment. Time-bound public investment in the deployment of and access to new existing low-carbon and climate-resilient technologies will be essential to open new markets and overcome incumbent technology and actor advantages.

The four actions outlined here together set out the beginnings of a roadmap for financing sustainable infrastructure in the new climate economy. A number of the Recommendations of the Global Commission on Economy and Climate agreed in 2014 and 2015 are still relevant today and essential to this agenda. In addition, as indicated above, the Global Commission has identified a number of further priority actions that can help to rapidly shift investments toward sustainable infrastructure.

Ramping up investment in sustainable infrastructure is the growth story of the future. The Global Commission finds that investing in sustainable infrastructure can boost growth and global demand in the short term, a priority for today’s economic and financial decision-makers. Over the medium term, it can spur innovation, creativity and efficiency of energy, mobility and logistics. It can help to lay the foundation for sustainable industrialisation. And it underpins the only sustainable, long-term growth path on offer, bringing with it a means to increase living standards, promote inclusion and reduce poverty. While the challenges and opportunities vary in different parts of the world, investing in sustainable infrastructure is in the collective global interest as well as in the self-interest of individual countries, whatever their stage of development.

If we act now and act together to finance sustainable infrastructure, better growth, better development, and a better climate are within our reach.

---

The world set ambitious goals through the Addis Conference on Financing for Development in July 2015, the adoption of the 2030 Agenda and the Sustainable Development Goals (SDGs) in September, and by reaching a landmark international agreement on climate action at COP21 in Paris in December. This new global agenda has mobilised the support not only of national leaders, but also of mayors, business leaders, investors, civil society and citizens. Now the task is to quickly turn that momentum into on-the-ground action to implement the Paris Agreement, achieve the SDGs, and reignite global economic growth.

Sustainable infrastructure is crucial to all three goals. Investing in it can support inclusive growth, enhance access to basic services that can reduce poverty and accelerate development, and promote environmental sustainability.

For growth: Boosting investment in sustainable infrastructure can stimulate demand at a time when many economies are struggling. The International Monetary Fund (IMF) estimates that for advanced economies, investing an extra 1% of GDP in infrastructure will yield, on average, a 1.5% increase in GDP within four years. In emerging and developing economies, where infrastructure is often inadequate, the benefits for productivity and growth can be even greater, particularly if the investments are accompanied by reforms that increase institutional capacity for better planning and stronger budget processes and rules to guide public spending. Beyond the immediate boost to growth, investment in sustainable infrastructure can spur innovation and efficiency in key systems such as energy, mobility and logistics. Since the economic and financial crisis that started in 2008, governments have responded with a number of monetary, fiscal and structural policy reforms to boost growth. While important, these have not yet fully delivered the scale and quality of growth desired. The divide between the poorest and the wealthiest continues to grow in many countries, and large gaps persist in basic infrastructure and related services in a number of countries. Awareness is rising of the role that boosting investment in sustainable infrastructure can play to complement and bolster other reforms to deliver better long-term, sustainable and inclusive growth. The pace of action must be accelerated to realise these opportunities.

For inclusive development: Infrastructure is key to the delivery of a number of essential services. It provides a foundation for much of the SDGs’ vision for inclusive development. Infrastructure is directly addressed in SDG 9, which calls for resilient infrastructure and sustainable industrialisation. It is key to achieving multiple other goals, such as SDG 6, for instance, on clean water and sanitation and SDG 7 on affordable, reliable, sustainable and modern energy for all. Those basic components, in turn, make it possible to achieve SDG 8 on sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all. Sustainable infrastructure is also central to SDG 11 on safe, resilient and sustainable cities. And natural infrastructure is crucial to SDG 2 on ending hunger and to SDG 15 on protecting forests and biodiversity and combatting desertification.

For the climate: Infrastructure underpins all the major sources of greenhouse gas emissions: our energy systems, transport systems, buildings, industrial operations and land use. The existing stock of infrastructure and its use are associated with more than 60% of the world’s total greenhouse gas (GHG) emissions. The types of infrastructure we build – coal power plants vs. wind farms and solar arrays, for example, or mega-highways vs. public transit systems – will determine whether we stay on a high-carbon growth path or move towards a climate-smart future. Investing in sustainable infrastructure is thus critical to achieving SDG 13 on combating change climate and its impacts. Not only will it determine GHG emission levels, but it is crucial for resilience: infrastructure can help us withstand climate change impacts and extreme events, or it can increase vulnerability, particularly for the poor. Countries that are still building much of their basic infrastructure, such as in much of Africa and parts of Asia, have a major opportunity to build climate-smart from the outset, often at no or little additional cost, and avoid costly retrofitting later. They have an opportunity to lead the way on green development, leapfrogging some of the inefficient infrastructure developments that are now proving costly in other countries.

Growth, development and climate action are inextricably tied. Development is impossible without growth, and growth is pointless unless it lifts up the poorest. Climate change threatens both growth and development. If we don’t take ambitious action now, it is estimated that up to 720 million people could fall back into poverty by 20505 and the costs of adaptation could reach US$500 billion dollars per year, unravelling development gains to date.6 The future impacts of climate change on poverty relate to today’s policy choices. World Bank research shows that rapid, inclusive and climate-informed development, including sustainable infrastructure, can prevent most short-term impacts whereas immediate pro-poor, emissions-reduction policies can drastically limit long-term consequences.

Infrastructure can be the pillar upon which we base our growth, development and climate action, or it can crumble beneath us. If we want a prosperous, climate-resilient future, we must invest in sustainable infrastructure; it is the growth story of the future.

The world will invest more in infrastructure over the next 15 years than our entire current stock. To meet demand, which will rise further because of a growing population, faster urbanisation and advances in technology, the world needs to invest about US$90 trillion in infrastructure between now and 2030 – roughly doubling current global investment levels. While the next 15 years are critical, the investment choices we make even over the next 2-3 years will start to lock in for decades to come either a climate-smart, inclusive growth pathway, or a high-carbon, inefficient and unsustainable pathway. This is our chance to ensure that we build more infrastructure and the right kinds of infrastructure, to support economic, social and climate goals.

A key insight of Better Growth, Better Climate, the 2014 flagship report of the Global Commission on the Economy and Climate, was that low-carbon and resilient infrastructure does not need to cost much more than the “business-as-usual” alternatives. The report showed that a shift to low-carbon infrastructure would increase investment needs by as little as 5%, and those higher capital costs could potentially be fully offset by lower operating costs – for example, from reduced fuel use.

The first key step is to change how we finance infrastructure, to reflect the new global realities and show results on the ground. That is the focus of this report.

The approval of the SDGs and the signing of the Paris Agreement have made it clear that the transition to a sustainable, climate-resilient future is already under way. The challenge now is to ensure that it benefits all countries at all stages of development.

Achieving that is a task not only for governments, financial institutions and businesses, but for citizens as well, who not only use infrastructure, but also fund it through their taxes, pensions and personal investments. Already, individuals are making more informed decisions, joining shareholder movements and citizen groups to learn more about where their money goes and seeking to influence the direction of public and private investments alike. The awareness, involvement and support of individual citizens is crucial to enable the actions that will drive sustainable infrastructure investment.

---

» Download: The Sustainable Infrastructure Imperative: Financing for Better Growth and Development (PDF, 6.38 MB)