Green Infrastructure Investment: Mobilising Private-Sector Participation in Climate-Friendly Projects

Abstract

Investing in sustainable infrastructure is crucial for effective climate change mitigation and adaptation. However, relying solely on current public investment plans may not be enough to finance climate-friendly infrastructure, as private sector involvement is limited. Creating an enabling regulatory environment can attract long-term investors like insurers who offer life insurance and annuity products. These investors can match the steady revenue streams from infrastructure projects with their long-term liabilities. However, many insurance solvency regimes do not adequately treat infrastructure as a distinct asset class. The credit risk of infrastructure debt – based on a global sample of project loans originated over nearly four decades – suggests that current capital requirements could be lowered, especially for projects that would meet the use-of-proceeds eligibility criteria for green bonds. Such “green” infrastructure projects have lower default rates than “non-green” projects, particularly in developed economies. Therefore, insurance solvency regimes that are tailored to the specific and unique features of infrastructure could lower regulatory capital cost for long-term regulated investors. Acknowledging the diminishing downgrade risk of infrastructure debt over time could release capital to support more climate-friendly infrastructure projects and enable the transition to more sustainable economies.