1. Green Infrastructure in the decade for delivery

Energy, water, health and other infrastructure are critical for the socio-economic development of our societies. Infrastructure systems form the backbone of our economies and their availability and quality are important determinants of collective well-being. Yet, the sector suffers from declining investment globally in both developed and developing countries. The recent COVID-19 public health emergency is a telling reminder of the risks of underinvestment in essential infrastructure. Among other things, underinvestment in infrastructure can compromise the economy’s ability to effectively respond to systemic challenges.

At present, global infrastructure faces an investment gap of some USD 2.5-3 trillion annually (OECD/The World Bank/UN Environment, 2018[1]). Despite infrastructure cost-reductions achieved through technological advancement, infrastructure investment continues to fall short of annual needs, enlarging the aggregate deficit. Annually, an estimated USD 6.3 trillion is needed in total infrastructure investments through 2030. The lion’s share - USD 4 trillion - is required in developing and emerging economies (NCE, 2016[2]). Emerging Asia1 alone needs investments of USD 1.7 trillion yearly to ensure sustained socio-economic development (ADB, 2017[3]). With 60% of global population projected to live in urban areas by 2030, 60% of the urban infrastructure needed is yet to be built (UN, 2018[4]).

Infrastructure plays a central role in meeting climate as well as wider environmental and development objectives. Energy, transport and water infrastructure together are responsible for 60% of global carbon emissions (OECD/The World Bank/UN Environment, 2018[1]). Current practices in developing and using infrastructure are accelerating environmental degradation, including through greenhouse gas emissions, air and water pollution, waste production and biodiversity loss. Given the long lifecycle of infrastructure assets, investment decisions today will have lasting implications for long-term emissions as well as the ability of the wider system to achieve the sustainable development goals (SDGs2). The combined emissions intensity of existing and planned infrastructure implies that all infrastructure going forward must be aligned with emission reduction targets to be able to deliver on global climate commitments (Hepburn et al., 2020[5]; Smith et al., 2019[6]). The lack of resilience in current infrastructure assets (Koks et al., 2019[7]; Nicolas et al., 2019[8]) has generated substantial extant costs. This points to an imminent need to adapt the current as well as future stock of infrastructure to weather the effects of climate change.

Infrastructure investments form an essential component of COVID-19 recovery packages provided by governments. The potential for rising momentum behind private-sector infrastructure investing coupled with an increased willingness from the public sector to support projects provides a critical opportunity to build back better (OECD, 2020[9]).

The OECD estimates it would take only a 10% increase in yearly investment (from USD 6.3 trillion to USD 6.9 trillion3) to develop infrastructure aligned with the goals of the Paris agreement (OECD, 2017[10]). The incremental investment, driven to a large degree by decarbonisation of the energy sector, is low compared with the benefits of avoiding long-term high-carbon growth trajectory. Timely investment in green infrastructure4 can generate up to USD 4.1 trillion in net benefits by 2030 (Global Commission on Adaptation, 2019[11]). This investment would also be more than offset by savings from forgone fossil fuel expenditure (USD 1.6 trillion per year) (OECD, 2017[10]; NCE, 2014[12]).

While the economic case for additional public and private investment in infrastructure is clear, shrinking fiscal space and debt ceilings in many countries is increasingly constraining public sector investment. As we enter the ‘decade of delivery’ of global climate and development commitments from 2020-2030, the imperative to mobilise private capital is stronger than ever.

Both the public and private sector have made efforts to increase private investment in infrastructure5. Nevertheless, the scale and pace of investment falls far short of what is required to ensure sustainable and inclusive growth. The private sector accounted for only 17% of global infrastructure investments in 2017 (World Bank, 2017[13]). Going forward, infrastructure development will increasingly be dependent on successful mobilisation of private finance. Given the size of their assets under management, institutional investors6 represent an important, even essential, pool of capital for scaling up infrastructure investment.

In recent years, low risk-adjusted returns on traditional assets like stocks and bonds have increasingly led institutional investors to pivot towards alternative investments, including infrastructure (CIBC Mellon, 2019[14]), which can be a useful choice to match long-term assets to long-term liabilities. For pension funds, persistent low yields only amplify the need to invest in higher yielding alternatives to overcome funding gaps (World Economic Forum, 2017[15]). This is especially true given the increased pressure on pension funds through lower returns as a result of the COVID-19 crisis (Allianz, 2020[16]) as well as generally in countries with persistent funding gaps such as the United Kingdom and the United States (OECD, 2018[17]; OECD, 2019[18]). Infrastructure assets that offer long-term, stable and inflation linked cash flows align well with the long-dated liabilities of such investors. According to a recent survey by EDHEC Infra and the Global Infrastructure Hub, 79% of surveyed investors7 intend to increase their allocation to infrastructure over the period 2020-2023 (EDHEC Infrastructure Institute-Singapore, 2019[19]). This trend, together with rising institutional interest in sustainable investing (KPMG, AIMA, CAIA, 2020[20]), suggests that green infrastructure has the potential to fulfil return expectations of institutional investors.

The role that institutional investors can play in global infrastructure development is well documented (Della Croce, 2014[21]; Röttgers, Tandon and Kaminker, 2018[22]; Della Croce, 2011[23]). Several organisations, including the OECD, have further identified and analysed the modalities to direct institutional capital towards infrastructure (OECD, 2015[24]; Inderst, 2016[25]; Nelson and Pierpont, 2013[26]; Della Croce and Yermo, 2013[27]; Youngman and Kaminker, 2016[28]; Inderst, 2016[29]; Kaminker, 2016[30]; G20/OECD, 2013[31]). These analyses particularly point out institutional investors’ role as ‘recyclers of capital’, taking operational assets off balance sheets of short-term financiers, thereby freeing up capital for new investment.

Despite much research in recent years on institutional investors’ potential to expand investment in infrastructure, progress to date appears to be marginal (G20/OECD, 2019[32]). Deeper analysis and evaluation of how to mobilise institutional investment in infrastructure has been constrained by the lack of granular data and information on institutional investment in infrastructure. This is especially true for current holdings and on non-green investments. A number of fundamental questions remain partially or fully unanswered: How much is invested? Through which instruments and vehicles? Into which sectors? In and from which regions?

Efforts to shift institutional investment towards infrastructure require a concrete quantitative assessment of how much can be shifted as well as to which types of investments. More precise knowledge of the current investment landscape can: (i) permit in-depth and detailed diagnostics; (ii) provide a more reliable and granular evidence base to guide policymaking; and (iii) help devise investment options and rationales targeted to specific investor categories and attributes. This quantitative assessment of current and potential investment would of course have to be interpreted in the context of more qualitative factors. Importantly, beyond potential for growth in specific investment channels, investments have to be in the best interest of savers, i.e. have a risk-return and other characteristics that fulfil fiduciary duty.

This report presents OECD’s latest efforts to map, as comprehensively as possible, current institutional holdings in infrastructure, i.e. their stock of investment. The mapping provides first of its kind detail and aims to plug crucial data gaps identified in the literature (G20, 2018[33]), The quantitative exercise conducted for this report contributes to wider efforts to enhance data quality and availability (Global Infrastructure Hub - Quality Infrastructure Database, 2020[34]; Private Participation in Infrastructure (PPI) - World Bank Group, 2020[35]; Infrastructure Data Initiative, 2020[36]). Results of the quantitative mapping are presented in Chapter 2, with methodological notes in the chapter’s Annex. Notwithstanding these efforts to provide a comprehensive mapping, important data gaps remain, as discussed in Chapter 2.

Institutional investors in OECD and G20 countries have at least USD 64.8 trillion8 in assets under management (AUM) -- a measure against which policies and other mobilisation efforts are often evaluated. However, considerations regarding diversification, portfolio concentration, fiscal stability (as institutional investors are holders of government bonds) and quantitative limits on asset allocation (for pension funds and insurance companies) mean that not all AUM are available for infrastructure investments.

Developing effective and targeted mobilisation efforts requires a more nuanced frame of reference than high-level estimates of AUM. Regulations governing investment activities of institutional investors are a good starting point. This report has developed an estimate9 of the maximum institutional capital that, in theory, could be channelled towards infrastructure investments given current regulations (“investable AUM”).

Given the regulatory framework in OECD and G20 countries, pension funds and insurance companies can allocate at most ca. USD 11.4 trillion through unlisted funds or directly through project-level equity and debt. These instruments are central given their potential to direct capital to the real economy (new asset finance as well as refinancing and acquisition of operational assets), and are the focus for asset owners-related analysis of this report. The estimated USD 11.4 trillion highlight the amount that will be available for infrastructure, if pension funds and insurance companies invested the maximum amount they are allowed to invest through unlisted funds, project-level equity and project-level debt in infrastructure. Investing the entire investable AUM in infrastructure is of course unlikely given the need for portfolio diversification (OECD, 2019[37]; OECD, 2015[38]). Further, quantitative limits prescribed in certain jurisdictions do not distinguish between infrastructure and other assets that can be accessed through unlisted instruments. This means that part of the USD 11.4 trillion is likely to be invested in assets other than infrastructure e.g. private equity, hedge funds etc.

In spite of this caveat, an estimate of investable AUM advances the discussion in two important ways:

First, estimated investable AUM provides a more accurate reference point to measure progress and anchor expectations around the role of institutional investors. To illustrate, according to the empirical work undertaken for this report, (presented in Chapter 2) current infrastructure investment by pension funds and insurance companies through unlisted funds and direct investments amounts to USD 450 billion. This equals 4.1 % of the investable AUM under current regulatory limits. However, it amounts to a mere 0.7% if measured against the total AUM – a figure that includes assets that cannot be invested in unlisted infrastructure under present regulations.

Second, there is plenty of room to expand infrastructure investment under current investment limits. The estimate of investable AUM suggests that extant regulations governing investment activities of pension funds and insurance companies generally is not a significant limiting factor for infrastructure investment. In the majority of countries, limits exceed the currently invested capital by far. Institutional investment in infrastructure has appreciable room to grow within the confines set by current regulations.

Regulations beyond investment limits in some jurisdictions may indeed hamper institutional infrastructure investment. Some regulation of institutional investment, e.g. the EU’s Solvency II regulation on capital requirements of insurance companies, tend to be singled out as barriers to institutional investment as they may constrain capital flows to these investments (HSBC, 2019[39]; IEIF, 2019[40]). However, there is no reason to believe that simply “fixing the regulation” on its own will trigger massive institutional investment or specifically an influx of institutional capital into the infrastructure sector. Hence in addition to an analysis of regulatory barriers, it is key to investigate more effective market-based instruments and commensurate policy measures (see Chapter 3 for details).

The estimate above appears to be the first estimate of its type. It focuses on unlisted instruments given their potential to direct capital to the real economy. Further research could refine and improve the estimate, e.g. by investigating the debt and equity distribution within the investable AUM for direct project-level investments. The underlying methodology might also be leveraged to develop annual estimates.

The rest of the report is structured as follows:

Chapter 2 presents the results of the empirical mapping undertaken for this report, including pragmatic definitions used for the purpose of this report of infrastructure and green. The new data developed and presented in chapter 2 allows a detailed assessment of the investment behaviour of asset owners and managers.

Guided by the findings in chapter 2, chapter 3 develops an analytical framework to identify levers and policy priorities to scale-up institutional investment in green infrastructure. This chapter incorporates insights from six in-depth interviews with stakeholders representing institutional investors.

Investment activities of institutional investors are regulated in most OECD and G20 jurisdictions. Requirements regarding diversification, concentration and quantitative and qualitative10 limits on asset allocation mean that not all assets under management (AUM) will be available for infrastructure investments. To inform policymaking and analysis to catalyse institutional investment in sustainable infrastructure, this report provides estimates of the maximum institutional capital that, in theory, could be channelled towards infrastructure investments given current regulations. Framing investment mobilisation efforts in the context of such a maximum bound can: (i) allow a more accurate assessment of progress; (ii) provide direction to such efforts; and (iii) anchor expectations around the role of institutional investors including expectations regarding specific types of institutional investors.

These estimates are based on investment regulations in OECD and G20 countries. Regulations around investment activities of pension funds and insurance companies can be grouped broadly into: (i) those prescribing quantitative and qualitative limits on portfolio allocation into specific asset categories; and (ii) those prescribing the prudent person principle or a similar risk-based investment management principle.

Further, investments are often regulated by specific asset classes. Certain instrument and vehicles are more suited than others to channel infrastructure investments in the real economy, i.e. providing funds for new asset finance and refinancing and acquisition of operational assets. As unlisted funds and direct project-level equity and debt are primary asset classes for investments in the real economy, this report only provides estimates for capital that can be provided through these asset classes. The estimations are based on OECD records of quantitative limits, and uses industry data where necessary to cover jurisdictions which prescribe the prudent person principle.

For investors domiciled in jurisdictions that prescribe quantitative limits11 on portfolio allocation, the limit12 provided for private investment funds is applied. Where available, the estimation uses the limit on alternative investment funds (AIFs) or infrastructure investment funds instead, as it is more specific to infrastructure.

For actors domiciled in jurisdictions that do not prescribe asset-specific limits, the highest known ‘infrastructure allocation target’13 used by pension funds or insurance companies in a given country is applied14. The estimation takes the highest ‘infrastructure allocation target’ as a proxy for industry prudence given prevailing regulatory climate, business structures and risk-return preferences in that country. Where data on target allocation is unavailable, the estimation approach uses the highest known ‘allocation to infrastructure’15 (as a percentage of total allocations) instead.

For investors domiciled in jurisdictions that prescribe quantitative limits16, the estimation applies the limits provided for investment through unlisted equity. Where available, the limit on investment in Special Purpose Vehicles (SPVs) or similar structures is chosen instead, as it is more clearly associated with infrastructure investment. Where neither of these limits is available, the limit on private investment funds is used.

For actors domiciled in jurisdictions that prescribe the prudent person principle (for instance under Solvency II), the estimation employs a best in class approach. The best in class approach takes the highest known ‘infrastructure allocation target’17 by pension funds or insurance companies in a given country. The estimation takes the highest ‘infrastructure allocation target’ as a proxy for industry prudence given prevailing regulatory climate, business structures and risk-return preferences in that country. Where data on target allocation is unavailable, the highest known ‘allocation to infrastructure’18 (as a percentage of total allocations) is chosen instead.


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← 1. A set of 45 Asian countries as listed in appendix 4.4 in ADB (2017[3]), excluding Japan, but including the OECD and G20 countries China, India, Indonesia and Korea.

← 2. For a full list of the UN Sustainable Development Goals, see https://sdgs.un.org/goals.

← 3. Under an IEA scenario achieving 2 degrees with 66% probability.

← 4. Note that green infrastructure includes low-carbon and resilient infrastructure. Please see chapter 2 for the more detailed ad-hoc definition this report uses in the empirical analysis.

← 5. For example the Climate Investment Coalition (https://www.climateinvestmentcoalition.org/), the Institutional Investor Group on Climate Change and the Net-Zero Asset Owners Alliance (https://www.unepfi.org/net-zero-alliance/alliance-members/).

← 6. Unless stated otherwise the term “institutional investors” include pension funds (public and private), insurance companies (life and general) and sovereign wealth funds.

← 7. The survey includes responses for 300 asset owners and managers. 130 asset owners with a combined AUM of USD 10 trillion participated in the survey.

← 8. Based on (Preqin, 2020[57]) and authors’ research, based on pension fund and insurance company data only; downloaded late February 2020.

← 9. Please see the Annex A for methodology.

← 10. E.g. rating requirements or capital requirements for investee companies.

← 11. Limits are prescribed in percentage form in regulations.

← 12. Some jurisdictions prescribe different limits for different types of pension funds (or among their sub-funds) and insurance companies (life insurance vis-à-vis general insurance). In such cases, pension funds and insurance companies were classified into categories provided in the relevant national regulation and were assigned the corresponding limits. This approach permits a more granular estimate. Actors were classified on best effort basis.

← 13. Based on Preqin data on infrastructure investments through unlisted fund of direct participation.

← 14. Under risk based regimes, allocation targets by investors may vary depending on riskiness of the assets they invest in. The different sizes and investment processes of investors imply that certain investors might have greater access to low-risk projects (domestically as well as abroad) and/or ability to manage such risks. This may lead to certain investors setting higher targets for infrastructure allocation than may be possible for other similar investors from the same country. The methodology presented herein ignores this distinction largely due to the unavailability of requisite data.

← 15. Based on Preqin data on infrastructure investments through unlisted fund of direct participation.

← 16. Certain jurisdictions prescribe different limits for different kinds of pension funds (or among their sub-funds) and insurance companies (life insurance vis-à-vis general insurance). In such cases, pension funds/ insurance companies were classified into categories provided in the relevant national regulation and corresponding limits were taken. This approach permits a more granular estimate. Actors were classified on best effort basis.

← 17. Based on Preqin data on infrastructure investments through unlisted fund of direct participation.

← 18. Based on Preqin data on infrastructure investments through unlisted fund of direct participation

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