The Trillion-Dollar Question: How Can We Unlock the Money Needed to Transition to a Low-Carbon Economy?


Editor’s Note: This is the third installment in a special series published in collaboration with the Raisina Dialogue, which kicks off on Jan. 8 in New Delhi. 

At a time when nationalism is rising and individual countries are facing a growing array of threats, it is critical that we recognize a shared and unprecedented global challenge: We need to nearly double our infrastructure in the next decade to meet global development needs, while at the same time achieving a systematic shift away from business-as-usual, carbon-intensive options to low-emissions, resilient infrastructure, to avoid catastrophic climate change. Public finance alone cannot fill this investment gap. So the trillion-dollar question is how to attract private sources of capital in support of the transition to a low-carbon, resilient economy.

The recent special report by the UN Intergovernmental Panel on Climate Change (IPCC) on the impacts of global warming of 1.5 degrees Celsius above pre-industrial levels reminded us that achieving climate and sustainable development objectives requires urgent climate action. The impacts of climate change are already happening. We experienced extreme weather events this year, from catastrophic floods in Kerala and Japan to wildfires in California. These weather events are merely a taste of how climate change could spin out of control, threatening human wellbeing and our planet. Climate action is needed to avoid degradation of biodiversity and ecosystems as well. For instance, according to the IPCC report, coral reefs are projected to decline by a further 70 to 90 percent at 1.5 degrees Celsius, and by more than 99 percent with a global warming of 2 degrees Celsius! These ecosystems provide food, support biodiversity and deliver economic benefits estimated at $170 billion a year. Shifting investments away from carbon-intensive assets is also critical to reduce local air pollution and associated health costs. A recent study found that more than 90 percent of the world’s children breathe toxic air every day. Air pollution now causes more deaths annually than tobacco.

Regardless of climate concerns, trillions of dollars need to be invested in infrastructure anyway to meet development goals. The Organisation for Economic Co-operation and Development (OECD) estimates that around $6.3 trillion of investment in infrastructure is required annually between 2016 and 2030, to meet global development needs. This requires almost doubling current annual infrastructure spending of $3.4 to $4.4 trillion. Most of the global infrastructure investment required to meet development needs will be in emerging economies (60 to 70 percent). Asia alone will need to invest $1.7 trillion per year in infrastructure until 2030 to maintain its growth momentum, fight poverty, and address climate change

Making these investments “climate-compatible” is not significantly more expensive — only around 10 percent more. However, it requires a systemic shift away from carbon-intensive forms to low-emissions, resilient infrastructure.

Public finance alone cannot fill the infrastructure investment gap. Instead, governments and public institutions need to find ways to scale up and mobilize private sources of capital. A shortage of globally available capital is not the problem: Institutional investors in OECD countries alone manage up to $84 trillion in assets. Policymakers are thus naturally inclined to harness the financial weight of institutional investors to support climate and sustainable development objectives.

Institutional investors typically require stable and predictable cash flows to meet their liabilities. One positive development is that increasing numbers of institutional investors now recognize the potential for infrastructure investment to deliver inflation-linked, long-term, and stable cash flows. Another bit of good news is that institutional investors in Europe and other OECD countries increasingly try to integrate climate change risks (i.e. physical risks, transition risks, liability risks and reputational risks) in their governance, investment strategies, and risk management. One survey conducted by Mercer in 2018 found that 17 percent of European pensions schemes now consider the financial impact of climate change, a three-fold increase from those surveyed in 2017. According to another survey by HSBC in 2018, more than 60 percent of investors and 50 percent of issuers now have an environmental, social, and governance strategy in place.

Green infrastructure projects can appeal to institutional investors. Take clean energy projects for instance. Renewable technologies are increasingly cost-competitive. The costs of utility-scale solar photovoltaic electricity have fallen 70 percent since 2010. However, the share of institutional investment in green infrastructure remains very small, and concentrated in developed countries. Only 1 percent of large public and private pension fund assets surveyed by the OECD are invested directly in infrastructure, and only a fraction of that percentage is invested in green infrastructure, mostly in developed countries.

Institutional investment in green infrastructure isn’t flowing faster to emerging economies and developing countries because of four main outstanding policy and market barriers, as summarized in Table 1. Policymakers have a critical role to play in addressing each of those barriers, in co-operation with development finance institutions, investors, project developers, and civil society.

Table 1. Key barriers to green infrastructure finance and investment in emerging and developing countries, and the role of policymakers

Barrier Role of policymakers
1. Insufficient risk-adjusted return of green infrastructure projects due to unsupportive domestic conditions Strengthen domestic enabling conditions for individual green infrastructure projects in emerging economies and developing countries
2. Lack of pipelines of bankable green infrastructure projects Create pipelines of bankable green infrastructure projects in emerging economies and developing countries and align financial regulations with climate and development goals
3. Barriers in the countries of institutional investors to increasing portfolio allocation to green infrastructure assets Provide information, capacity, training, and incentives to institutional investors in OECD (and non-OECD) countries
4. Mismatch between available pool of capital and bankable green infrastructure projects Set investment vehicles, de-risking financing instruments, and platforms for green infrastructure projects

First, policymakers have a critical role to play in strengthening domestic enabling conditions for green infrastructure projects, to improve the risk-adjusted return profile of individual green infrastructure projects relative to carbon-intensive alternatives. Policymakers need to set stronger and coherent policies to provide policy predictability needed to give investors the confidence to invest in green infrastructure. Relevant policies include for instance: clean energy targets; targeted investment incentives; standards and building codes; explicit carbon prices; reform of inefficient fossil fuel subsidies; and targeted innovation incentives. OECD work and empirical research show that policymakers can also usefully address outstanding misalignments within broader investment conditions, including in terms of investment policy (e.g. in terms of land access), investment facilitation (e.g. linked to licensing and permitting procedures) and competition policy (e.g. to address grid capacity or lack of bankability of power purchase agreements). Other relevant policy areas include trade policy, financial market policy, public governance, and policies for encouraging responsible business conduct.

Second, private investment in green infrastructure is constrained by the lack of pipelines of bankable green infrastructure projects. Governments and other public institutions are essential actors in project pipeline development, in addition to investors, financiers, and project developers. A new OECD report shows that governments can greatly influence the development of project pipelines through emphasizing specific and upcoming investment opportunities in their countries, fast-tracking valuable projects, or supporting certain projects to overcome barriers to their development.

Third, institutional investors can face regulatory barriers and capacity gaps in their own countries, across OECD and non-OECD countries, that may constrain their ability to increase their portfolio allocation to green infrastructure assets. Policymakers across countries can help align the financial system with climate objectives, including by considering: possible unintended consequences of prudential and financial regulations such as Basel III; and capacity gaps, as institutional investors often lack internal capacity or knowledge of qualified external managers to invest in green infrastructure projects in emerging economies.

Fourth, there is also a mismatch between globally available pools of capital and bankable green infrastructure projects. Appropriate investment vehicles and de-risking financial instruments can help channel institutional investment into bankable sustainable infrastructure projects in emerging and developing countries. Policymakers, in co-operation with international and domestic financial institutions, and private investors, can facilitate access to financing through appropriate financial instruments and institutions. As suggested by work under the OECD Centre on Green Finance and Investment, these include: financial institutions such as green investment banks and national development banks; project-level risk mitigation interventions (e.g. debt subordination, blended finance, loan guarantees, credit enhancement, cornerstone investment and insurance); and transaction enablers (e.g. securitization and green bonds, loan warehousing, standardization of contracts, reporting and data collection).

International organizations, and international and domestic financial institutions can help address these barriers, not only by helping policymakers to strengthen domestic enabling conditions for green infrastructure investment and to create project pipelines, but also by facilitating engagement from institutional investors, by providing platforms and engagement between investors, project developers, and policymakers. They can also provide information, training, and capacity to institutional investors.

To this end, and building on a substantial body of OECD work, the OECD is launching in January 2019 a new Clean Energy Finance and Investment (CEFI) Mobilisation Programme, with financial support from the Government of Denmark. As part of this new five-year program, the OECD proposes to collaborate closely with key ministries and stakeholders in each of five emerging economies in South and Southeast Asia, to develop, and support implementation of, recommended measures to attract new sources of finance for clean energy projects, including renewable energy in the power sector and energy efficiency in buildings. In preparation for the program starting in 2019, the OECD is engaging with key financial actors to create a new investment mobilization network. In the context of the CEFI Mobilisation Programme, the network aims to bring together institutional investors, banks, and project developers interested in green infrastructure investment opportunities in South and Southeast Asia as well as providers of investment vehicles for such investments in the region. The OECD will kickstart the creation of the network during a dedicated session during the Private Finance for Sustainable Development (PF4SD) Week at the OECD on 16 January 2019. The OECD looks forward to further engaging key financial actors, policymakers and other stakeholders to help mobilize finance and investment in clean energy infrastructure in emerging economies, in support of the transition to a low-carbon economy.


Geraldine Ang is a policy analyst on green finance and investment at the Organisation for Economic Co-operation and Development (OECD).  Prior to joining the OECD, she conducted research on the economics of climate change mitigation for the Earth Institute.

Image: U.S. Air Force/Clayton Wear