Executive summary

Energy, water, transport, health and other infrastructure are critical for socio-economic development. Yet, infrastructure suffers from an estimated annual investment gap of around USD 2.5-3 trillion globally. The on-going public health emergency is a telling reminder of the risks of underinvestment in infrastructure. Among other things, underinvestment compromises our ability to effectively respond to systemic challenges, like climate change.

Given the long lifecycle of infrastructure assets, investment decisions today will have lasting implications for global climate and development trajectories. Delivering on international climate and development goals requires a shift to and scaling up of investments in green infrastructure. However, the COVID-19 crisis exacerbates the pressures on government budgets, revenues and debt that constrain public investment in many countries. Yet the need to mobilise private capital at scale towards critical infrastructure development is urgent.

The importance of institutional investors for infrastructure investment is well recognised. While much effort has been dedicated to increasing institutional investment in infrastructure, it still accounts for only a fraction of institutional portfolios. Persistent low returns on traditional investments like bonds and stocks, however, are motivating investors to look to alternative investments, including infrastructure. The momentum created by this trend, and increasing interest in sustainability among institutional investors, presents an opportunity to scale up institutional investment in green infrastructure.

A nuanced understanding of the current investment landscape and investment preferences is key to accelerate and shift institutional investment in green infrastructure. To address knowledge gaps in these areas, the three chapters of this report make the following key contributions:

  • An estimate of investable assets under management (AUM) of institutional investors (pension funds and insurance companies) to anchor expectations around institutional investment in infrastructure development;

  • A first-of its kind comprehensive empirical mapping of current holdings (i.e. stock, not flows) of infrastructure investment by institutional investors, from OECD and G20 countries; and

  • An analytical framework highlighting the key levers and identifying policy priorities to scale-up institutional investment in green infrastructure.

    For the purpose of the empirical analysis, this report adopts a pragmatic definition of green infrastructure. Given the lack of a widely accepted definition of green infrastructure, the adopted definition is based on a comparative analysis of multiple regulatory approaches, including the EU sustainable finance taxonomy.

This report finds that under current investment regulations in OECD and G20 countries, pension funds and insurance companies can allocate a maximum of USD 11.4 trillion towards infrastructure (investable AUM). This estimate should be treated as a theoretical regulatory upper bound. This estimate is far higher than institutional investors’ current investments, and suggests that regulatory limits are generally not a constraint. It also suggests that simply “fixing the regulation” will not be sufficient in itself to trigger massive institutional investment in the infrastructure sector.

Close to 60% of the urban infrastructure to exist by 2030 is yet to be built, so this report focuses on how to maximise the positive impact of institutional investments on the real economy. Thus, the bulk of the analysis is focused on holdings through unlisted funds, project-level equity and debt as well as securitised products with direct exposure to real assets. For completeness and comparison, the empirical mapping also tracks investment in infrastructure-related corporate stocks.

As the empirical mapping of this report shows, institutional investors hold USD 1.04 trillion in infrastructure assets (excluding direct investment in corporate stocks). Of this, USD 314 billion (30%) are attributed to green infrastructure.

Other key findings of the empirical investigation of institutional investment in infrastructure include:

  • Infrastructure allocations by asset owners target long-term capital appreciation. The majority of investments are held in illiquid assets offering an illiquidity premium.

  • Conversely, asset managers demonstrate a preference for liquidity in their allocations. The majority of investments are held through securitised products like YieldCos, REITs and INVITs. Notably, 49% of all institutional investment in green infrastructure is held through YieldCos alone.

  • Persistent low yields on traditional financial products and a rising risk appetite of asset owners suggest increased availability of construction stage capital going forward.

  • Institutional investors exhibit a strong preference for assets located within their own regions.

  • Cross-border institutional investment mainly targets assets located in mature markets.

Findings from the empirical mapping help identify levers and policy actions to shift and scale up institutional investment in green infrastructure. The analytical framework developed here highlights three pathways:

To address the lack of sufficient investment-grade projects, governments can scale up green project pipelines. For investors, the costs of building capacity are difficult to justify for one-off investments. If they have greater certainty that follow-on projects will be available, investors would be better able to gauge risks, invest in capacity building and help foster a market for infrastructure investment. Additionally, increasing the supply of investment-grade projects could help address currently high project valuations. Partnerships between investors and governments can also provide an effective way to share risks, achieve scale and establish a pipeline of investment-grade projects.

Mandates issued by asset owners offer a key pathway to scale up green infrastructure investments through unlisted funds. Asset owners’ selection of asset managers and investment consultants is critical to integrating climate and development objectives in investment decisions. Actions by regulators to clarify the relationship between fiduciary duty, duty of care and consideration of climate-related risks could encourage asset owners to issue “green” mandates.

Securitised products could appeal to investors with a preference for liquidity. In particular, securitisation could benefit from a shift towards defined contribution pension plans as well as passive investment and enlarge the investor base for infrastructure assets. In jurisdictions where regulators permit them, YieldCos, infrastructure REITs and INVITs, could be useful products in this regard.

Beyond these three pathways, the establishment of more precise and consistent definitions of which investments are “green” could facilitate investment by giving confidence and assurance to investors. A common understanding of ‘green’ and ‘sustainable’ infrastructure would accelerate investment flows by simplifying due diligence and investment decision making.

Institutional investors are increasingly conscious of the environmental impact of their investments, and are increasingly looking to make green investments. As governments and the private sector seek to ‘build back better’ and ensure a green recovery, this is an opportune moment for green infrastructure development. However, it will take committed and innovative policies to expedite investment flows towards green infrastructure.

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