Infrastructure investors, like investors in other asset classes, are trapped by the tyrannical pressure of capital markets to produce short-term returns, Jan Corfee-Morlot, Head of Climate, Environment and Development Unit of the OECD, says, seriously hindering the creation of a sustainable world based on long-term value. Corfee-Morlot was the lead author and lead technical coordinator of a report: The Sustainable Infrastructure Imperative, which was published in October by the New Climate Economy (NCE), the flagship project of The Global Commission on the Economy and Climate, which examines how countries can achieve economic growth while dealing with the risks of climate change. It is chaired by the former President of Mexico, Felipe Calderón, and comprises former heads of government and finance ministers and leaders in the fields of economics and business.
The report warns that, given an expiring carbon budget, infrastructure investment, with its long duration, locks in today high levels of carbon intensity that will play out over the long term. The time window to a fundamental change in direction is closing; the next two to three years will be critical to choose the path to a sustainable world over dangerous climate change by financing long-term, low carbon projects using state-of-the art technologies allied with sustainability-driven business models.
Corfee-Morlot says: “If we remain on the current pathand if we continue current investment in fossil fuel intensive, energy intensive, or fossil fuel energy using infrastructure, then we can’t possibly be creating long-term value for an economy that is going to become increasingly fragile and exposed to climate change.”
The NCE report says tackling fundamental price distortions is the number one priority to make the transition to a low carbon economy happen. About 30 countries have already started to reform their fossil fuel subsidies, it says. The G7 nations have announced 2025 as a deadline to exit fossil fuel subsidies. Should this momentum continue and the global community take drastic steps and transition to a maximum 2 degree rise path within five years, a “carbon price revolution” would happen, Corfee-Morlot says. This would mean major energy shifts within the time frame of an infrastructure investment. An effective carbon price four times that of today’s level and coverage would be a breakthrough: “It would shift the ground. It shifts the viability from a conventional energy to an energy efficient clean energy investment,” Corfee-Morlot says, while recognising that such a rise in the price of carbon requires strong political backing, which does not exist today.
But she believes forward looking and innovative corporate leaders who understand that the political urgency to act will inevitably rise the more time passes, have begun to position and hedge themselves against this risk: “Over 1,000 companies have now adopted an internal carbon price or plan to do so soon”, the NCE report says.
Getting down to brass tacks, the reports says that to put global infrastructure investment on a sustainable path, $90trn of allocation is needed. The report gives concrete guidance on how that could happen and examples of how infrastructure is already being greened: “It’s not just about leadership but also about building the evidence case. Increasingly, we have that, but it hasn’t necessarily filtered into our institutions or hearts and minds to change the inner workings of relevant institutions,” Corfee-Morlot says.
Development Finance Institutions, including Multilateral and Bilateral Development Banks, can be the key players in enabling that financing. An example for such leadership already taking place is the The New Development Bank – formerly referred to as the BRICS Development Bank – a multilateral development bank established by the BRICS states. It launched investments for clean energy projects totalling $811m in April 2016. A few months later, in July 2016, it issued green bonds worth $450m.The Global Commission is also calling on the G20 countries to use the work of the Task Force on Climate related Financial Disclosures, whose report will be released on December 14, as a foundation for building mandatory disclosure standards into corporate governance.
Corfee-Morlot says: “If we can move ahead to get mandatory disclosure standards, for example, that are harmonised across all the businesses and investor operations worldwide, then what you are going to see is opportunities for the leaders in this space and the value that they are creating, and for investor decisions made on that basis.”
She adds that all market actors, whether they be business leaders, investors, law makers, or citizens have a responsibility to lobby governments to move forward with sustainability rules and regulations that create market opportunities and bring value to sustainability investments over time and create a viable future.