Analysis: Avoiding the Tragedy of the Horizon: Financing Sustainable Infrastructure in Emerging Economies
Net-zero emission goals and global targets for better environmental, social and economic outcomes are found in the Paris Accord and the Sustainable Development Goals (SDGs). The 2015 agreements set clear guidance on the direction of change. What remains less certain is the pace of change in the policies, regulations and markets needed to reach these targets. For infrastructure investments, which are long-lived assets, this uncertainty exacerbates the inherent tension between today’s investment decisions and the impacts of long-term trends and risks.
In emerging markets, where demand for greenfield assets is greatest, the risk calculus is even more complicated. The infrastructure investment required in emerging economies is estimated between US$1.0 and US$1.5 trillion a year.1 Yet, these markets often lack political, economic and regulatory stability; they have limited access to long-term finance—particularly in local currency—and less efficient financial markets to allocate capital.
Three key elements are needed to help address the infrastructure needs of emerging economies successfully. These start with innovations in the financing and valuation of infrastructure assets, better targeting of investments to meet social and environmental goals, and, finally, incorporating new incentive structures that better align investments with sustainability goals.
Photo courtesy of Usukhbayar Gankhuyag.