Luxembourg, July 12, 2019
Accelerating Sustainable Infrastructure Investment
Asia will require trillions of dollars for sustainable infrastructure in the next decade to meet the 2030 Agenda for Sustainable Development and commitments to the Paris Agreement. Delaying this transition risks missing the tipping point of climate impact and generating stranded assets—burdening investors and countries for decades to come. The question is not whether to transition to sustainability, but rather how to do so rapidly.
How can we accelerate sustainable infrastructure investment in Asia?
A recent policy brief we published with Dr. Thomas Hale at the Blavatnik School of Government, Oxford University, draws an analogy of the “flying geese” pattern from the Asian economic miracle in the 20th century as a framework to understand the 21st century transition to sustainability. All infrastructure investors and financiers agree on the importance of global commitments like the Paris Agreement and the sustainable development goals (SDGs). Some are more advanced than others as they are now reflecting the different capacities and missions of different organizations. As public organizations committed to global development, multilateral development banks (MDBs) naturally belong to the front of the “flock” of “geese.” This lead position means they not only need to accelerate their own transformation to sustainability, but also need to use this position to pave the way for others to follow as quickly and easily as possible.
We want to highlight two aspects of the sustainability transition.
First is the convergence toward high environmental, social and governance (ESG) standards. High standards are essential to ensuring that infrastructure investments contribute to, and do not detract from, the SDGs. International standards can also catalyze more investments by mitigating risks that may lead to project failure.
A single, unified standard may not be feasible given the specificity of each institution and its related governance requirements. Nevertheless, we can ensure that fundamental principles of high standards—such as those needed to meet global goals—are applied in all cases. Commonly agreed principles include transparency (such as open procurement and anticorruption), environmental sustainability (such as greenhouse gas and local pollution reduction), social sustainability (such as stakeholder consultation and the protection of legal rights) and economic sustainability. These four aspects of metrics are reflected in the G20 Principles for Quality Infrastructure Investment adopted in June 2019. Joint MDB working groups on climate change, gender and results management and others also add to these efforts in harmonizing methodologies and measurements.
Second is scaling up investment volumes on sustainability through innovative sources, products and partnerships. Here, MDBs can play an anchoring role. For example, MDBs were pioneers in the green bond market and may continue to be attractive ESG investors given their crucial role in the development and issuance of specialized green and social bonds. AIIB is also joining the effort of market transition. The AIIB Asia ESG Enhanced Credit Managed Portfolio approved in 2018 is a good example of being an anchor investor for proofs of concept.
Other potential sources to help the scale-up effort are large construction companies implementing major infrastructure projects through engineering, procurement and construction (EPC) contracts. In recent years, there has been an increasing trend for large EPC contractors also seeking investment opportunities in project financing. These companies come mainly from Asia (including China, Korea, Japan, Turkey and Malaysia) and they are competent, financially strong and globally active outside their home countries. These companies now have greater demand for, and will benefit from, sustainable investment. Partnership and the role of catalyst is crucial to bringing the “flock” toward a common direction.
As a 21st century MDB based in Asia, AIIB may yet be able to catalyze a regionwide acceleration toward sustainability across the infrastructure investment sector with respect to cofinancing, development and implementation of ESG standards. It may even accelerate the development of innovative financial products. Doing so will require strengthening and “orchestrating” the emerging array of partnerships and frameworks through which investors are working together to meet Asia’s sustainable infrastructure investment needs.
Today at the 2019 Annual Meeting in Luxembourg, AIIB is organizing a discussion on “Improving ESG Performance in Infrastructure.” The Bank continues to engage with major Asian and European associations of large construction companies and other key stakeholders, including infrastructure investors and bilateral development finance institutions. It would be interesting to see the Bank’s journey to “green” and how it could bring partners along in this journey.
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