Before tackling the “how-to” of financing sustainable infrastructure, this section first assesses the landscape of sources, actors and instruments of financing (see Figure 5). Section 2.2 then outlines the main barriers to shifting and scaling up the finance needed for sustainable infrastructure. Finally, section 2.3 outlines some of the solutions that are starting to take hold in some countries and sectors, which can be scaled up to deliver sustainable infrastructure investment.

This discussion is organised around the various public and private sources of finance, yet equally important is the question of whether the finance is external or domestic. For example, the majority of global capital flows targeting climate change are raised and spent within the same country (72%) at the moment, and this share rises to 92% when looking at private flows alone.¹ More generally, for all infrastructure investment in developing countries, domestic resources far outweigh external development finance.²As such, domestic sources of capital, both public and private, remain particularly important for sustainable infrastructure investment, which in turn highlights the need to get domestic policies right. External finance – both public and private – will also feature and can in particular help catalyse domestic investment. However, as it is largely a domestic challenge, financing sustainable infrastructure requires domestic leadership and bold policy reforms to take the agenda forward.

Public finance and funding

Public resources from national budgets have historically been a major source of funds and finance for infrastructure investments, and will remain so in the future, particularly for assets that deliver public goods. National budgets include the use of revenues that countries raise themselves, in particular through taxes, or other finance they are able to raise, for example through bonds and loans or, in some cases, funding provided through development finance institutions. In developing and emerging economies, 60–65% of the cost of infrastructure projects is financed by public resources,⁴although the total amount of public investments is often constrained due to inadequate fiscal revenues, given often low rates of taxation and challenges with tax collection, and limited access to debt financing. In advanced economies, public resources contribute about 40% of the total, an amount that has shrunk largely as a result of the global economic crisis.

Lately, subnational and local governments have been raising revenue finances of their own and have, in a number of instances, successfully issued infrastructure or green bonds. In this arena the main actors are typically those in the public sector, i.e. public corporations or state or municipal utilities. Public revenues may also be used to fund private concessions as infrastructure operators or other private entities – for example, using procurement mechanisms or public-private partnerships (PPPs).

The effectiveness of domestic funds is also critical to ensure that more positive impact can be achieved with the resources available. Auctioning for public procurement has emerged as a good example of how to improve efficiency in using limited public resources for sustainable infrastructure investment. For example see the Renewable Energy Independent Power Producer Procurement Programme in South Africa (Box 20).

Development finance institutions (DFIs), including multilateral development banks (MDBs), bilateral development banks and agencies, and national development banks (NDBs) are a key source of public finance for sustainable infrastructure. Though they sometimes operate on a commercial basis, DFIs are public institutions with a clear mandate to support implementation of national development plans and policies. They are well placed to work as a bridge between governments and private investors, and to use public finance to catalyse private financing. This is especially important for developing countries with limited access to capital markets; advanced economies tend not to rely on international public finance institutions.

Aggregate public investments in infrastructure in developing countries have benefitted from increased external borrowing and growing official development assistance (ODA), allocated through bilateral or multilateral institutions as well as by enlarging the fiscal space for domestic spending by national governments. Where national development banks are in place, they have the potential to leverage public funding to crowd in private co-finance for infrastructure investment (see Box 3). Beyond this, MDBs and bilateral development institutions also often act as sources of knowledge on sector best practices and technical expertise to support strategy development, ‎investment planning and project preparation. For example, to assist African countries with their capacity development for integration of climate change into their national development planning and design of long-lived infrastructure investments, the World Bank, the Africa Union Commission (AUC) and the United Nations Economic Commission for Africa (UNECA) have teamed up to develop a program of analytical work on Enhancing the Climate Resilience of Africa’s Infrastructure (ECRAI). A major outcome of the programme is the Africa Climate Resilient Investment Facility (Afri-Res), which will provide guidelines, training, advisory services, and data and other tools to help attract funding from various sources of development and climate finance to meet the incremental cost of climate-proofing Africa’s infrastructure.⁶

Newly established multilateral development banks, such as the Asia Infrastructure Investment Bank (AIIB) and the New Development Bank (BRICS Bank), are increasingly a source for financing infrastructure in emerging economies. The first four investments of the BRICS Bank, for a total of US$811 million in loans, as announced in April 2016, are in renewable energy or clean grid infrastructure development in Brazil, China, India and South Africa.⁷

NDBs, meanwhile, provide long-term capital finance for infrastructure that is more explicitly linked to specific government mandates. However, although the number of NDBs and their asset portfolios have been growing, especially over the last two decades, not all countries have NDBs, and only a small portion of NDBs play a role in infrastructure planning, development and financing (see Box 3).

Climate finance

At COP16 in Cancún in 2010, developed countries agreed to mobilise US$100 billion per year by 2020 for developing-country climate action, from both public and private sources. The Green Climate Fund was also established as an important vehicle for delivering climate finance; it was operationalised in 2014 after achieving US$10 billion in multi-year pledges.

An internationally agreed definition of climate finance is lacking, with estimates of how much is available already today varying depending on the definitions used. Based on recent analyses, DFIs play a key role, with multilateral and bilateral institutions disbursing about a third of climate finance, while another third is mobilised from private sources.  Direct public finance, in the form of grants and concessional loans, continues to provide the largest share for adaptation and mitigation, including performance-related funding to prevent deforestation and forest degradation, and to support increased deployment of renewable energy. While public international finance flows including official development assistance remain critical, these funds can be used to catalyse action and mobilise far greater sums of private and other public sources of investment, both domestic and international.

Catalytic use of public finance includes support for instruments to mitigate the risks faced by private investors, in order to attract private capital. Such instruments include partial risk, “first loss” and export credit guarantees, policy risk insurance and various kinds of pooled funds.40 DFIs, including the World Bank Group and other multilateral banks, have pioneered these, but scaling up existing instruments and funds and further developing new ones that can attract larger flows needs to be a priority.

Although it can be catalytic in nature, what is reported as climate finance is of course only a sub-set of what this report considers; this report aims to address the full range of investments and sources of finance needed to deliver sustainable infrastructure.

Private finance and related instruments

Private finance for sustainable infrastructure comes from many sources, but predominantly from corporate finance – companies’ balance sheets – and from project finance. It can also be raised and allocated through a variety of instruments, some of which are used to blend public and private finance to invest in sustainable infrastructure.

Project finance uses a limited-recourse financial structure (a separate entity, often called a “special purpose vehicle” or SPV) to borrow money for a project, and relies on the cash flow generated by the project to pay back the debt and equity used to finance it. The project is a self-standing entity that can be then be a vehicle to keep project debt off company or other investor balance sheets.¹¹ For infrastructure projects, both corporate and project finance rely largely on debt financing through syndicated bank loans (see below). In all instances, cost recovery is key to making a project bankable, and creditworthiness will make or break access to debt financing.

Corporate bonds and new equity are also used in private finance, but they have not been used much for infrastructure. Equity has particular potential to play a larger role in financing the early phases of projects. In the equity arena, it is utility companies, developers, commercial banks and other private investor groups that will drive decisions on infrastructure investment. Commercial banks, individuals and households, philanthropies and impact investors can also provide project finance. Alternative equity finance forms, such as crowdfunding are also beginning to emerge, allowing small contributions from a large number of individuals to be channelled, often using internet-mediated registries, to projects that require big investments. Abundance Investment¹² in the UK for example, has raised more than £10 million (US$13 million), and invested this sum in 14 different energy projects, with two of its largest projects being funded by 650 investors each.

Syndicated bank loans are the preferred instrument of private infrastructure finance because they allow for closer monitoring by banks with sector and other specialised expertise. This can be particularly critical during the more complex, riskier first steps of project planning and construction, when greater flexibility and time-bound interventions are needed, such as gradual disbursement of funds, or renegotiation and restructuring of loans in response to unforeseen developments.¹³ The arranging bank may be an official institution, for example a development finance institution (see below) or a commercial bank. Bond finance is less suited for the early stages however it can be used by municipalities, for example, to fund upfront capital investments. This is the case in the United States, where tax treatment favours municipal bonds. The largest potential for bond finance is to bolster financing for well-established sponsors, including multilateral development banks but also corporations, and for refinancing once projects reach their operational phase. The potential for bond finance is enormous once projects are operational and the underlying cash flows stabilise, effectively making infrastructure projects akin to fixed-income securities, because it can potentially tap into large capital pools from institutional investors.¹⁴

The overall volume of private finance has grown significantly over the last two decades. Assets under management (AUM) held by private investors through private banks, pension funds, insurance companies and investment funds are currently estimated at US$80 trillion (excluding around US$40 trillion in private bank assets), up from US$35 trillion in 2001.¹⁵ Except for a brief decline during the global financial crisis, they have maintained a robust growth trajectory, and the trend is likely to continue. However, despite this boom in private finance, very little of the increased pool of capital (less than 1%) is being directed towards long-term investment, and even less is being made available for infrastructure or sustainable infrastructure financing. There is some evidence that the share of non-bank private investment targeted at infrastructure projects is growing modestly, but much more is needed. Unless clear and strong environmental policies are in place to require investments to deliver environmental performance, any gain in private financing for infrastructure could lock in climate change and vulnerability rather than low-carbon and resilient sustainable development.

There are several inherent challenges to infrastructure finance, including increasing the scale and targeting of domestic and international public finance. To complement scaled-up public finance, a major challenge is to increase and guide private finance flows. A range of barriers exist that hamper private investment flows to infrastructure generally, based largely on the dynamic interactions between finance, policy, and institutions (see Figure 9).¹⁶ Ensuring that infrastructure is sustainable adds further challenges.

Unfavourable investment regulations and policies

Many policies persist that create market distortions, such as subsidies and tax breaks for fossil fuels – which fail to address externalities such as air pollution and GHG emissions – or steer public finance and investment into high-carbon, maladaptive infrastructure. Combined, they skew incentives to favour incumbent technologies, practices and fuels, and the infrastructure that supports them, over more sustainable options.

Uncertainty around tax policies can negatively impact infrastructure investment, making it difficult to project long-term net cash flows. The outlook for tax policies and subsidies that support sustainable infrastructure is often unpredictable, including for example for tax credits that support renewables, which are often short-term or liable to be reversed. Tax policies are often not structured to reward longer-term investment choices or reflect the lower climate-related risks associated with sustainable and resilient infrastructure.

Regulations on investment limits, capital adequacy, reserve requirements, the valuation of assets and liabilities, and limits on foreign investment can discourage investors from making longer-term and cross-border investments. Such regulations and policies have generally been put in place for specific reasons, such as to support financial stability or protect pensions. But governments should carefully monitor them for their unintended consequences, such as potential disincentives to long-term investment in sustainable infrastructure, and consider amending them accordingly as needed.

For example, concerns have been raised that the Basel III and Solvency II regulations may hamper infrastructure investments by banks and insurance companies. Basel III regulations of banks’ capital, leverage and liquidity intentionally discourages any mismatches in the maturity of assets and liabilities, which makes it harder and costlier for banks to issue long-term debt, such as project-finance loans. Solvency II is an EU directive that codifies and harmonises EU insurance regulation, treating long-term investments in infrastructure as having a similar risk profile to long-term corporate debt or investments, and thus requiring higher capital ratios.¹⁷ Whether the concerns about these two regulations are warranted remains to be seen. The relevant institutions should continue to monitor the impacts and maintain an open dialogue with banks and investors to ensure that capital and solvency rules among others do not inadvertently act as disincentives to participation by banks and institutional investors.

Lack of transparent and bankable project pipelines

There is broad consensus in the international financial community that neither capital nor projects are lacking. Instead, there is a lack of bankable projects – at least on terms that meet the expectations of those who steward the finance, with the most notable gap in lower-income developing countries.¹⁸ As discussed further below, many projects are not bankable because they do not appear likely to deliver high enough risk-adjusted returns to attract private-sector equity or debt (see Figure 6), or the costs and risks are insufficiently allocated across investors. Other projects lack the proper documentation to demonstrate their bankability and attract investors. Developing projects so they can successfully attract capital is a complex and time-consuming process. Box 4 describes the key stages and what it takes to structure an investment so that it is viable. Middle- and low-income countries also face challenges in finding the resources necessary to support project development.

In many markets, the financial community also lacks the knowledge and connections needed to properly evaluate projects and monitor them once they are under way. If a bank sees multiple opportunities in a specific geography or sector, it can invest in local staff and partnerships – but often they have little information to work with. Governments often fail to develop long-term plans for infrastructure, so how the project fits into the plan for future infrastructure – or in the case of developing countries how it fits into development plan and priorities – remains unknown. And even when there are long-term plans, the pipeline may not be well-developed or clearly communicated to investors: for instance, only half of G20 countries publish infrastructure plans or roadmaps.¹⁹ With sustainable infrastructure in particular, a further challenge is that investment will often need to be driven by public policy (e.g. a carbon price, pollution-control requirements, or efficiency standards), to ensure environmental performance. If the right policy signals are not in place, affordable finance for such projects is less likely to materialise.

The time-scale of infrastructure projects also complicates matters. Smaller-scale projects may take a few years to implement, but major infrastructure projects may take much longer: an average of 5 years from early conception to construction for very large projects; many MDB-financed projects take 9 years or longer.²⁰ Large-scale infrastructure projects in Africa can take 7-10 years to prepare and move to financial closure, then another 3-5 years for construction. This is 10-15 years for project preparation alone, whereas in advanced economies, project development involving the private sector may be much quicker, an estimated 2-8 years.²¹

Not all projects make it to closing and construction; some may fail to attract capital, for several reasons (see Figure 6). Further, if the preparatory process is prolonged, market conditions may change, so the original assumptions no longer hold and updates are required. For example, input costs (especially related to newer technologies) may increase or decrease, and market, regulatory and policy conditions may change.

The cost of project preparation is also substantial, typically 2.5–5% of total investment.²² Investing US$90 trillion in infrastructure would thus entail US$2–4.5 trillion in project preparation costs from 2015-2030, or US$150–300 billion per year.²³ Broken down by sector, estimated project preparation costs would be about US$1–2 trillion for energy and US$0.7–1.3 trillion for transportation. Project preparation costs may be higher where infrastructure spans several countries, as in China’s One Belt, One Road initiative, since there is a need to coordinate activities across jurisdictions. The World Bank has suggested that regional projects are about twice as expensive to prepare as national projects.²⁴

Inadequate risk-adjusted returns

Many investors do not finance infrastructure simply because it does not offer competitive risk-adjusted returns. Private actors that are well-positioned to perform due diligence and take on potentially risky investments, such as private equity firms, often require returns of 10-15% which is above what most infrastructure projects can offer. Other institutional investors, such as pension funds, may be willing to accept lower returns, but want relatively safe investments. To take on more risk, they would also seek additional returns.

Sustainable infrastructure can carry a higher upfront cost, and because the technologies and platforms are often newer, the risk is often perceived to be much higher. In order to make them an attractive proposition, investors can mitigate the risks through risk-sharing or broader cost allocation. In addition, while returns from sustainable infrastructure can be low relative to other investing options, better models to capture the positive returns from the lower total lifetime costs that sustainability implies, such as through enhanced resilience, lower operational costs, and fewer carbon emissions, can make them a more a more attractive option.²⁶

Lack of viable funding and business models

Many governments, particularly at the subnational level, have not built up their creditworthiness enough to access affordable debt finance. And as noted above, many infrastructure projects cannot deliver the rates of return needed to attract equity finance. Often, especially in middle- and low-income countries, utilities cannot collect enough money from users to allow full cost recovery; this may be due to high poverty rates, and/or to government policies. In some sub-Saharan African countries, for instance, as much as 70% of water infrastructure does not generate any revenue at all;²⁷ even water infrastructure that generates revenue is often highly subsidised, making it subject to fiscal risk and/or financial stability risk.²⁸

The split incentives of sustainable infrastructure are also worth noting: for instance, developers pay more to make buildings energy-efficient, but it is the homeowner or business that benefits from lower energy bills. Unless investors can capture enough of the savings to the operator or owner, they lack incentives to cover the higher upfront costs. And the positive externalities – cleaner air, reduced emissions, ecosystem services – can be hard to calculate and even harder to monetise to become a return for an investor.

High transaction costs

Infrastructure projects often involve inefficient bidding and procurement processes that discourage private investment. The standards applied can be diverse and inconsistent. Investors with limited resources, time and expertise, such as pensions and insurance companies, find it difficult to assess projects when standards are so fragmented. The capital costs of seemingly similar infrastructure projects can vary dramatically due to local conditions as well as differences in design, engineering, management, procurement and sourcing. Having to sort through these differences and tailor financing structures to each project increases transaction time and costs.²⁹

In that context, sustainable infrastructure projects that are based on new technologies can be particularly challenging, as they lack a track record of long-term investment returns. Scale is also an issue: some sustainable infrastructure projects, such as distributed and micro-generation renewable energy projects, comprise small-scale assets, and transaction costs can be very high unless a number of projects are bundled together. Streamlining project preparation and partnerships can help to lower transaction costs. It is also important to monitor and assess impact and performance for sustainable infrastructure investments, to establish a track record.

A huge part of capital investment today is handled through passive investing methods or funds that allocate capital based on the performance of stock market indexes looking across the performance of publicly traded companies. These investments are guided by robo-investment or automatic investment platforms. Attracting capital to companies that out-perform on both environmental and financial criteria is an important step to shifting financing toward sustainable infrastructure. A number of indexes already do this and more are emerging, providing a means to guide investors that choose to prioritise environmental sustainability in their portfolios. For example, see the MSCI ESG index, which currently uses standardised metrics to assess ESG governance risks; it scores and rates over 6,000 companies, 9,000 issuers and more than 350,000 equity and fixed income securities on a continuous basis.³⁰ There are other such indexes operating and more emerging (e.g. FTSE/Russell Sustainability and ET Index, which is focused specifically on low-carbon and fossil free performance and targeting institutional investors). These all aim to provide more data in context to empower investors and shareholders to make better decisions to shift capital into sustainable infrastructure. Recommendations are forthcoming on how to strengthen and move towards more harmonised standardised metrics through the Task Force on Climate-Related Financial Disclosures under the Financial Stability Board (FSB) – see further discussion in Section 3.

Efforts to overcome these barriers must start from a clear recognition that markets alone cannot provide effective infrastructure investments, and private investments often cannot be realised without some form of public support. Whether led by public or private sector, the complexity of financing infrastructure in general cannot be underestimated. For instance, financing for the US$1.3 billion Nam Theun 2 hydropower project in Laos, which went online in 2010, involved a staggering 26 financial institutions: four multilateral development banks, three export credit agencies, three bilateral financing agencies, nine international commercial banks providing finance in hard currencies, and seven Thai commercial banks providing finance in Thai baht. And that is even before taking fully into account all relevant sustainability performance issues.³¹

In general, projects in emerging markets and developing countries can be expected to face greater challenges. These include policy and institutional gaps, such as the absence of coherent and trusted legal frameworks; higher political and regulatory risk in countries with unstable regimes and/or high corruption levels; and limited institutional capacities and inadequate governance mechanisms. These issues of country and policy risk – combined with technology risk – can translate into higher costs, often because financial institutions seek higher returns to compensate for the risk. In India, for instance, the cost and terms of debt alone can add as much as 32% to the cost of utility-scale wind and solar PV projects. Thus, instead of unlocking opportunity, such finance adds to the barriers to investment. A final concern is that while all countries are exposed to climate change, many developing countries face particularly significant impacts and have very vulnerable populations. This has led the World Bank, for example, to highlight the importance of integrating climate change in the planning and design of power and water infrastructure in Africa.³²

We have identified four areas where concerted action can help overcome these barriers and boost investments in sustainable infrastructure. They are:

1. We must collectively tackle fundamental price distortions – including subsidies and lack of appropriate pricing especially for fossil fuels and carbon– to improve incentives for investment and innovation, and to generate revenue that can be redirected, for instance, to support the poor.
2. We must strengthen policy frameworks and institutional capacities to deliver the right policies and enabling conditions for investment, to build pipelines of viable and sustainable projects, to reduce high development and transaction costs, and to attract private investment.
3. We must transform the financial system to deliver the scale and quality of investment needed in order to augment financing from all sources (especially private sources such as long-term debt finance and the large pools of institutional investor capital), reduce the cost of capital, enable catalytic finance from development finance institutions (DFIs), and accelerate the greening of the financial system.
4. We must ramp up investments in clean technology R&D and deployment to reduce the costs and enhance the accessibility of more sustainable technologies.

We provide an overview of each area here. Section 3 of the report delves deeper into action area 3 as a cross-cutting area, and then the final three sections apply the other remaining action areas to the specific contexts of energy, cities and land use.

Tackle the fundamental price distortions

Correcting the pervasive and significant distortions in the pricing of climate risk, natural resource use and environmental harm is a key first step to creating an enabling policy environment for sustainable infrastructure. Those distortions – including the failure to price carbon or pollution, as well as a range of subsidies – strongly bias infrastructure investment towards fossil fuels and against cleaner energy technologies, encourage inefficient use of natural resources and wasteful consumption, and cause serious environmental impacts.

Globally, fossil fuel subsidies and tax breaks amounted to approximately US$550 billion in 2014.³³ This reflects a reduction from previous years, partly due to continuing low oil prices but also partly as a result of significant reforms that are underway or have been launched in various countries.³⁴ There is also growing momentum around pricing carbon. Around 40 countries and more than 20 cities, states and regions, including 7 of the top 10 economies, have implemented or scheduled an explicit price on carbon. Together they cover an estimated 7 Gt CO₂e, or about 13% of annual GHG emissions – triple the coverage of a decade ago.³⁵ In addition, more than 90 countries refer to some form of carbon pricing in their Paris Agreement pledges.

A concerted push can translate this momentum into decisive action and overcome political and economic barriers. The Commission welcomes the coalitions that are being built to tackle these issues (e.g. through the G20 or the Carbon Pricing Leadership Coalition), which can accelerate progress, provide political leadership, foster mutual learning, and help improve practices by developing guidance on technical, administrative, political and economic cooperation aspects of carbon pricing (see Section 4 – Energy).³⁶

Pricing reform should not, of course, be limited to the energy sector. Water subsidies, for instance, which are estimated at around US$450 billion globally, or 0.6% of global GDP in 2012, encourage inefficient and unsustainable resource use and strain public budgets.³⁷ Like energy subsidies, they are also often inequitable; for example, in India, Nepal, Nicaragua, and Cape Verde, the richest households got an average of US$3 worth of subsidised water for every US$1 worth provided to the poorest households.³⁸ Governments need to review prices across sectors to align them better with economic fundamentals, including externalities, and use more targeted measures to help the poor.

More broadly, pricing of infrastructure services should reflect the full costs of their provision, including where possible the social and environmental externalities. Lack of proper user charges for built infrastructure is a major impediment to attracting private investment, as private investors and operators require predictable and robust revenue streams to recover their costs. For public-managed infrastructure, lack of appropriate pricing limits the availability of funds for other uses, such as extending access to essential energy, water and sanitation services to those without, or properly maintaining the existing infrastructure. Overall, poor pricing leads to reduced service provision and quality. This can turn into a vicious circle, whereby infrastructure users are dissatisfied with the services, and thus reluctant to pay for them. For energy and urban systems, pricing is essential to reflect the social costs of externalities, for example the costs of air pollution from fossil fuel use as well as of congestion from urban vehicle use. For natural infrastructure and ecosystem services, pricing to reflect the value of these services can ensure efficient use, for instance, reducing wasteful use of water or access to timber, and help secure finances to invest in restoration or maintenance of the ecosystems.

Strengthen policy frameworks and institutional capacities

Establishing a well-defined and appropriately evaluated pipeline of projects means tackling major underlying policy problems, such as an absence of national strategies, weak legal frameworks to protect investments, promote competition and trade, poor planning, inadequate PPP frameworks and implementation, and skill shortages. There is also a need to better define what makes a bankable project; many infrastructure projects have high public-goods components that may never be considered viable using only financial assessment techniques designed to assess bankability from a private sector perspective. Overall the enabling policy environment in a country will determine the level of engagement from the private sector, but even in the best circumstances public investments will be essential to deliver sustainable infrastructure systems.

Given that a large share of the investment for sustainable infrastructure, especially in developing countries, is likely to come from the public sector, there is value in “investing in investment” –strengthening public investment management to drive growth and environmental performance. As noted earlier, in advanced economies, investing an extra 1% of GDP in infrastructure in a single year will yield, on average, a 1.5% gain over four years.³⁹ While the multiplier effect is smaller for developing countries, the sustainability impact of new infrastructure in places with large deficits can be enormous.

Improving the efficiency and performance of public investments should involve planning for sustainable levels of investment across the public sector, allocating investments to the right sectors and projects, and implementing projects on time and to budget. Unpacked further, a number of institutional and efficiency improvements can contribute to overall performance in public operations while also helping to attract private investment where relevant (see Figure 7). Key outcomes would be not just more efficiency in public investment, but also establishing the enabling conditions and a framework for private investment to lead in some spheres (e.g. in the energy sector).

Key outcomes would be not just more efficiency in public investment, but also establishing the enabling conditions and a framework for private investment to lead in some spheres (e.g. in the energy sector).

Improving financing and scaling up investment in sustainable infrastructure also requires better planning and policies to incentivise this investment. All countries require clear national, sub-national and sectoral development strategies, with accompanying infrastructure and investment plans to guide long-term public and private investments. Leadership will be needed to monitor progress and ensure these plans promote low-carbon and climate-resilient development and are aligned with country climate commitments, as reflected in Nationally Determined Contributions and the Paris Agreement’s long-term goal to keep average global warming below 2°C, while also reflecting the financial realities of each country. For many developing countries, such as those in Asia and Africa, the next few years are a chance to demonstrate leadership through these strategies and accompanying policies supported by a vision for how to build new sustainable infrastructure that leapfrogs the inefficient, sprawling and polluting systems that have become a drag on other economies. Early leadership to develop decarbonisation strategies along these lines is essential, including to integrate them in national economic and development plans and to provide a basis for project preparation. While investing in sustainable infrastructure makes good economic sense, many of the investments required will entail up-front financing. International support – in terms of finance, access to clean technologies, capacity building, etc. – will be essential to support developing economies in this transition.

At a practical level for all countries is the challenge of domestic resource mobilisation for sustainable infrastructure. The state of New South Wales in Australia provides a good example of instigating an asset recycling policy to boost infrastructure and growth. Combined with an improved regulatory environment, the policy is expected to reduce regulatory conflicts, improve efficiency and customer prices, and lead to more responsive service delivery. The Australian federal government is encouraging this policy with incentive payments for asset recycling that will deliver additional funding. In practice however, few governments have this capacity.

Policy will also be essential in managing PPPs, where innovative business models will be needed to distribute the risks and responsibilities amongst different partners – public and private – to ensure adequate returns for private sector partners while also not absorbing inordinate risk and losses on the public sector side.

Overall, governments have to make a greater effort to “invest in sustainable investment” – to improve public infrastructure planning, management, governance and policies, while ensuring that investment plans and project selection are solidly grounded in environmental and social sustainability criteria. These measures can help ensure that sustainable infrastructure projects are bankable. Governments should also develop and implement procurement processes that incorporate sustainability criteria. A number of countries have put in place elements of sustainable procurement, but there is a need to develop more systematic and consistent approaches and to disseminate good practice.

Allocating scarce resources effectively will depend on careful project appraisal and preparation in key sectors. Capacity in this area is crucial to solving the project pipeline problem discussed earlier. The international community has launched numerous capacity building, technical assistance and learning initiatives to tackle this gap, including through the G2072 and the Pilot Program for Climate Resilience focusing on adaptation to climate change (see Box 5). Governance challenges will also need to be addressed to ensure that the right projects are selected in the first place, to avoid spiralling costs.

Finally in implementation stages, timing deserves particular attention, as different issues may arise, and costs, including of finance, can vary over time (see Box 6). Ensuring availability of finance at reasonable cost is about ensuring the right finance is available for projects at the right stage of the project. And securing the right financing at the right time also begs the question of how and when to engage the private sector, recognising that most projects and many developers are local, but private finance could be local, national or international.

Transform the financial system

Meeting the infrastructure requirements of the next 15 years will require a combination of public and private investment. Ramping up public investment is immensely important, especially when it comes to investments that will benefit the broader public, like a number of investments to adapt infrastructure to the impacts of climate change. National budget allocations to support sustainable infrastructure investment should increase. Yet public investment cannot meet the total requirements alone. What it can and should do is to help crowd-in and guide private finance to fill the gap.

We need to transform the financial architecture globally and within countries to attract private investment. The broader financial system, through coordinated reforms across policies, institutions and practices, needs to adjust to reflect the realities of building a sustainable, low-carbon future. A wide range of priority actions are needed to mobilise private financing for sustainable infrastructure: strengthening local capital markets; developing and using viable financing models, risk mitigation approaches and blended finance; expanding the definition of fiduciary duty and strengthening reporting and disclosure; enhancing frameworks for climate risk management and project screening; establishing infrastructure as an asset class; and accelerating new tools and institutions like green bonds and green investment banks. DFIs, including MDBs, have an important role to play here as well, as they can boost the effectiveness of public resources and help to catalyse private investment.

In recent years, multiple new initiatives have started to focus in particular on mobilising green finance, including at the national level such as with the Green Finance Task Force under the People’s Bank of China, and at the international level through the Financial Stability Board’s Task Force on Climate-related Financial Disclosures and the G20’s Green Finance Study Group. Dozens of green investment banks have emerged at multiple levels of government, and issuances of green bonds have tripled since 2012. Still, much remains to be done to boost the profile of green finance in the financial system.

Ramp up investments in clean technology R&D and deployment

Over the next 15 years, more infrastructure will be built than all that is currently in place. To avoid locking-in to unsustainable and outdated technologies, we need to step up investment in clean technology development and deployment. Such investments can reduce the upfront costs of sustainable infrastructure and help overcome incumbent technology advantage. Supporting technology diffusion for rapid demonstration and uptake, including through time-bound incentive policies, can trigger rapid learning-by-doing, and thus lower the financial risks associated with investing in new and untried technologies. Europe’s experience with feed-in tariffs in the energy sector and solar and wind are a strong example of this.

South Korea provides a clear example of the benefits of increased clean-tech research and development (R&D) investment. Gross domestic expenditure on R&D is high, at over 4% in 2012, and favours a few, large-scale programmes in partnership with large firms. South Korea now has a Green Technology R&D plan as well as a renewables portfolio standard that was introduced in 2012, with planned investments of US$8.2 billion in offshore wind to grow generation capacity sixfold, to 2.5 GW by 2019.⁴⁵

Corporate partnerships are another essential part of R&D for clean technology. The Eco-Imagination partnership illustrates the types of activities and the scale of investment that the private sector can bring (see box 20 in section 4).

Investment in R&D and deployment of sustainable technologies needs to be scaled up far more still. Better public support, public-private initiatives, and enhanced international cooperation can help accelerate the innovations of the future. Promising efforts include the recently unveiled Mission Innovation: each of the 20 participating countries and the European Union will seek to double their governmental and/or state-directed clean energy research and development investment over the next five years. The US-India Partnership to Advance Clean Energy (PACE) has mobilised US$2.5 billion for clean energy deployment since 2009, is now mobilising another US$1.4 billion for Indian solar projects, and has spurred significant investments in India by US renewable-energy firms (see also Section 4: Energy).⁴⁶ In the private sector, the Breakthrough Energy Coalition led by Bill Gates brings together 28 major investors from 10 countries with a collective net worth of more than US$350 billion to finance research on promising, but higher-risk, clean energy technologies. The Low Carbon Technologies Partnership initiative (LCTPi), hosted by the World Business Council for Sustainable Development (WBCSD), brings together 150 companies and 70 partners to develop and implement concrete actions that go beyond business as usual to tackle climate change.⁴⁷