At the Petersberg Climate Dialogue in April, the IMF Managing Director, Kristalina Georgieva, was unequivocal about the need for a green recovery, which she described as a bridge towards a more resilient future.
Ms. Georgieva stressed that the decisions made now will shape our economies and societies and the future of humanity given the climate crisis.
Among the three tools she highlighted for the recovery are the promotion of green finance and green bonds, which can help to mobilize private sector finance for sustainable infrastructure projects.
To reduce the threat of a global depression investment in sustainable infrastructure are critical
Sustainable infrastructure can play a vital role to reduce the threat of a global depression and help ensure a sustainable recovery. This path can help to create quality jobs, attract investment and improve public services, while tackling the overlapping ecological, social and climate crises.
In Latin America, there has been some progress on prioritizing sustainable infrastructure such as renewable energy, sanitation and public transport systems, but the region is still far away from mainstreaming these projects.
The OECD estimates that USD 6.3 trillion of investment in infrastructure globally is needed every year between 2016 and 2030 to meet global development needs. An additional USD 600 billion will make these investments climate compatible, a relatively small increase considering the gains in growth, productivity and well-being.
To meet Latin America and the Caribbean’s growing demand for quality public services and infrastructure, which are sustainable and climate-friendly, investments need to increase by at least 2% of regional GDP. This is roughly USD 250 billion per year, which requires a considerable fiscal effort and increase in the participation of the private sector.
How to unlock greater private sector investment in sustainable infrastructure
In a new report by the IDB in collaboration with South Pole and Sitawi, we look at the effectiveness of existing public and private sector investment vehicles and regulation for investments in infrastructure through capital markets.
It demonstrates that the region has not yet embraced capital market tools to drive the shift to sustainable infrastructure. Even if these instruments are driven by market-led initiatives, a crucial next step is to support regulators to stimulate sustainable infrastructure investment.
To boost sustainable infrastructure investments, we identify key steps including stimulating innovation in and adapting existing regulation and investment vehicles by developing green, social and sustainable labels for types of instruments other than bonds. There is also a need to create incentives as targeted risk mitigation mechanisms (e.g. currency risk mitigation, first-loss provisions, viability gaps, and liquidity facilities) and labeling standards for issuances of sustainable infrastructure capital market instruments.
This report builds upon the IDB’s framework on sustainable infrastructure, which promotes decision-making on infrastructure that is economically, financially, socially, environmentally and institutionally sustainable. We suggest that establishing a regionally accepted sustainable infrastructure taxonomy relevant for all stakeholders of the infrastructure ecosystem would further stimulate such investments.
This can help boost the nascent participation of the private sector in the transition to net-zero emission and climate resilient economies.
In Latin America, financial sectors have responded in a variety of different ways to this transition. The report evaluates the actions taken by the six major capital markets in Latin America (Argentina, Brazil, Chile, Colombia, Mexico and Peru) and the effectiveness of existing public and private sector investments vehicles in infrastructure projects.
The report confirms that bank financing plays a key role in the region and catalogues 55 different instruments across the 6 countries, which show that capital market instruments are improving and expanding. These instruments have emerged in a general lack of government regulation dedicated to infrastructure investment. To improve the situation, we find three key regional recommendations that can apply to countries under different approaches:
Stimulate participation of investors by adapting regulation to promote involvement of institutional investors including pension funds.
Pension funds are a key investor group across Latin America, owning up to 60% of capital market assets. Assessing the large investment potential of key investor groups such as pension funds would make a strong case for adapting regulation and unlock investment. Engaging pension fund and insurance companies in LAC to invest in green, social or sustainable instruments is vital to support a sustainable recovery.
In Argentina’s National Securities Commission (CNV by its Spanish acronym) resolution 764 establishes requirements for bonds, investment, and trust funds to be in accordance with the international standards for Green, Social and Sustainability Bond issuance. Countries should consider that adapting regulation for domestic institutional investors may facilitate the diffusion of funds focused on sustainable infrastructure.
There is a need to differentiate sustainable and regular assets through labels.
There is a pressing need for labelling of sustainable investments beyond bond-type instruments. Only bond-type instruments currently have a sustainability label. This practice should be expanded to other infrastructure investment instruments as clear and distinguishable labeling of sustainable investments can stimulate the market. Dedicated infrastructure instruments such as Mexico’s FIBRA E, can facilitate sustainability labeling specifically targeting infrastructure. Mexico is also exploring sustainability labels for other instruments such as trust securities and this practice should be considered elsewhere in LAC.
Re-design and innovate with investment vehicles.
Countries should further explore innovation as a catalyst for sustainable infrastructure investments. The definition of infrastructure or sustainable infrastructure as a separate asset class could promote the development of dedicated sustainability labels. In Brazil, dedicated infrastructure ‘debentures’ (dedicated infrastructure bonds) have had significant success and in particular those that were issued as green bonds. A great example is the green bond issued by an electricity transmission company for the construction of transmission lines. Innovation may also mean importing and adapting successful schemes. In Peru, recent regulatory innovations, such as the creation of two financial instruments for real estate investments, FIRBI and FIBRA were based on successful experiences in Mexico.
Let’s prioritize shovel-ready pipelines of sustainable infrastructure projects
As countries plan to reactivate their economies, this is a critical moment for LAC finance ministries and private investors to prioritize shovel-ready pipelines of sustainable infrastructure projects to create jobs, attract investment and make the system stronger and more resilient to future pandemics and climate disasters. Building a bridge to a sustainable recovery is only possible if the private sector is among the chief engineers.
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