Future-fitting infrastructure: Let’s start building back better

Zurich’s Head of Responsible Investment, Johanna Köb shares her thoughts on supporting SDG9

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The definition of infrastructure that forever stuck in my head was the playful answer of a colleague who had heard somewhere else that “infrastructure is everything that typically gets destroyed in a Hollywood blockbuster.” Roads, bridges, trains, ports, buildings and energy networks all appeared simultaneously in my mind.

But the UNDP’s Sustainable Development Goals requires investors to think beyond just physical infrastructure in its Goal 9: ‘Industrial Innovation and Infrastructure’.

SDG9 calls on us to “build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation”. This is a broad definition that also focuses on mobility and accessibility; increasing the access of SMEs – the backbone of most economies – to markets and capital; upgrading and retrofitting infrastructure and industry to make them climate-friendly; advancing R&D, scientific research, and innovation; facilitating infrastructure development in emerging markets; and guaranteeing universal and affordable access to the world wide web around the globe.

This is an ambitious agenda, that allows for ample entry points for impact investors. So, here are five angles for investors that are worth keeping in mind when addressing SDG9:

1) Infrastructure needs to be built where there is under-development or lack of access. This holds especially true for emerging and frontier markets and creates ample opportunity to leapfrog directly to the newest technology standards. A recent report estimates infrastructure-related investments in emerging markets at $2.2trn annually for the next 20 years, including an investment opportunity of around $920bn annually for institutional investors. The focus will lie on Asia, as well as clean energy and health infrastructure.

2) Existing infrastructure is at increasing peril from the mounting effects of physical climate change, such as increased extreme weather, heat and cold waves, wildfires, floods and ultimately sea level rise. Adaptation and resilience upgrades will require investments, taking into account that on average every dollar spent in prevention will save up to five dollars in recovery. Industry fora such as the Coalition for Climate Resilient Investments are taking that challenge head on.

3) Climate change mitigation efforts rest heavily on technology upgrades and retro-fitting of existing infrastructure, especially in the energy generation, transport and building sectors, offering important connectors to SDGs 7 (Affordable and Clean Energy) and 13 (Climate Action).

4) Not all technologies necessary to decarbonise, maintain prosperity and decrease inequality have been developed yet to a level that allows for deployment at scale, which poses the challenge to advance R&D and innovation to that aim.

5) COVID-19 and the resulting unprecedented volume of relief funds provides the opportunity to address all of the above by investing in a way that ‘builds back better’, toward a more sustainable and inclusive economy. Research by a group of economists argues that a host of stimulus policies that are directly connected to SDG9 are "perceived to deliver large economic multipliers, reasonably quickly, and shift our emissions trajectory towards net zero". This includes clean physical infrastructure investment in the form of renewable energy assets, storage (including hydrogen), grid modernization and carbon capture and sequestration (CCS) technology, as well as education programmes and R&D for the industry mix of tomorrow.

In short: there’s a lot to do. The question for every type of investor to consider is: how do I translate the needs of SDG9 into investment opportunities for my set up? After all, there should be a mix of asset class and topical focus that makes SDG9 investable to everyone.

At Zurich Insurance Group, impact investing is a crucial element of our responsible investment strategy. We committed to deploying $5bn to an impact investment portfolio that will help avoid five million tons of CO2 emissions and benefit five million people on an annual basis. Zurich mainly invests in infrastructure through direct private debt. In doing so, we consider all main infrastructure sectors in both brownfield and greenfield deals.

Zurich’s definition of social and green ‘impact infrastructure’ is based on the Green and Social Bond Principles categorisation. Project developers must be committed to report on relevant impact metrics in line with the manager’s investment strategy. In this way we have deployed over $700m to hospitals, schools, low-carbon transport and renewable energy generation.

Our largest impact investing asset class – green, social and sustainability bonds – in which we have invested almost $4bn, also targets many projects in direct support of SDG9: from green and social infrastructure development and upgrades in both emerging and developed markets to retrofitting buildings and water systems to more resilient levels vis-à-vis climate change; increasing access to finance for SMEs, and a large host of social bonds issued to support SMEs and local health facilities in dealing with the consequences of COVID-19.

R&D and innovation tend to best be addressed through private equity and venture capital vehicles, but some corporates also dedicated their use-of-proceed bonds to these tasks.

As for most SDGs, reaching the aims of SDG9 will heavily rely on the collaborative effort of private sector actors, especially impact-minded, long-term investors, development finance institutions and governments. The good news is that many of the tools to be deployed are already at our fingertips today.

As COVID-19 has brought the world as we knew it to a halt and has disrupted everything from international trade, travel, our lives and habits – we should take the chance to build on the question climate change has already posed to the world community: How do we want our future inclusive, thriving and climate-neutral society and economy to look? And what is the infrastructure and industry mix needed to support it? Infrastructure is inherently there to last. Let’s start building the version that will support our future state. Today.

Johanna Köb is Head of Responsible Investment at Zurich Insurance Group