New foundations: why cross-sector partnerships on infrastructure are key to building a greener future
In July this year, Earth experienced the three hottest days ever recorded and with them the extreme weather events we’ve grown all too used to, proving once again that climate change demands urgent action. At an EY webinar, sector experts tackled the topic from an infrastructure perspective – and discussed why collaboration is so imperative
As of now, there are 150 countries around the world committed on paper to reaching net zero by 2050. Together, they have mobilised some US$75 trillion towards achieving this goal. However, according to research by EY and the International Federation of Consulting Engineers (FIDIC), this leaves an almost equal investment gap of US$64 trillion. To help close the gap, global annual spend will need to increase from US$2 trillion to US$5 trillion a year in the next seven years.
And in the short term at least, the pressures of climate change are set only to rise. As Jonathan Morris, director of infrastructure at EY, pointed out at the start of the discussion, emissions are expected to increase by a further 30% globally by 2050. Reaching the goal of limiting global warming to 1.5 degrees above pre-industrial levels is therefore unlikely. In fact, we are on course to breach 2 degrees before 2050.
“The modelling we’ve done in EY has demonstrated that over 50% of all global emissions come from either advanced countries or advanced emerging economies like the US, China, India, and the UK. And there is a significant disparity between the ability of advanced emerging economies to be able to find the right path through to net zero,” he said.
The challenge is to decarbonise advanced economies while allowing developing nations the scope to achieve economic growth without carbonising. Striking this balance will require the sharing of best practice and of what’s working and what isn’t. Governments will play a key role in sponsoring priority infrastructure projects, particularly those that remove the most carbon from the atmosphere the soonest.
Graham Pontin, director of policy and external affairs and communications at FIDIC explained that his organisation’s collaboration with EY is set to extend into the coming 12 months, during which time they will seek to better grasp how digital technologies can reliably measure impact.
He stressed the importance of teamwork. “We’ve got to bring together the whole infrastructure community, everybody from outline projects right through to final delivery and decommissioning, to actually make sure that we achieve [net zero] going forward,” Pontin said.
Jodie Parmar, head of project development for Western Canada at Canada Infrastructure Bank (CIB), a crown corporation, spoke next about how the bank has been mobilising capital for infrastructure for the public good of Canadians.
CIB does not provide grants (which are among the policy tools used by other parts of the Canadian federal government), instead undertaking investments that combine private and institutional capital to “catalyse action towards the necessary actions required to mitigate the impact of climate change”. By lending against future revenue streams associated with projects, CIB fills investment gaps and allows the Government of Canada to act in a fiscally prudent manner.
“We have partnerships across the country [and] the bank has deployed US$10bn to date. And that has allowed us to leverage private and institutional capital, plus some grant funding from various levels of government in Canada. So, our US$10bn has capitalised just under US$30bn of projects across the country,” Parmar explained.
Cost benefit analysis: one link in the chain
Next to offer their perspective was Jennifer Jenkins, associate director of project advisory and evaluation at Infrastructure Australia, the independent infrastructure adviser to the Australian government. Its two main functions are evaluating the business cases for infrastructure proposals – covering the transport, water, energy and communications sectors – seeking more than AUD$250m (US$159m) in funding from the Australian government; and undertaking research and providing advice to the government on “broader opportunities to improve infrastructure decision-making”.
Earlier this year, Infrastructure Australia published what Jenkins described as a high-level guide to assessing greenhouse gas emissions “at the infrastructure projects scale”.
The guide assesses infrastructure proposals on the basis of cost benefit analysis and includes “requirements to quantify and monetise greenhouse gas emissions”.
“In infrastructure proposals, it’s very much one link in the chain. Sadly, cost benefit analysis is a blunt policy instrument, much to the disappointment of us economists,” she said.
She pointed out that while governments are against the clock when it comes to achieving their emissions targets, economic pressures are leading some countries to freeze sustainable infrastructure projects. These decisions lead to a “false economy” that sacrifice long-term benefits for short-term gains, she warned.
But there are positives on the collaboration front. With a background as an economist and over 10 years’ experience in policy development and environmental economics within government, Jenkins said it had “been interesting… to see the amount of work and energy and collaboration that’s happening across infrastructure and other sectors. It’s really been amazing to see how much this has driven action, and tangible results, to work towards achieving those goals”.
Supporting public sector decarbonisation efforts
The first question from the webinar’s audience concerned how best to catalyse public sector decarbonisation efforts, such as retrofitting housing stock, where investors are unlikely to make a good commercial return.
“For public sector social housing, we would be prepared to provide up to 70% of the overall capital, the other 30% would have to come from private or institutional capital. And then our pricing for our investment is tied to the reduction in greenhouse gases (GHGs),” Parmar explained of the CIB’s approach to such projects.
Elaborating further, he said that if a 30% GHG reduction is achieved, CIB provides its financing at the Government of Canada rate, plus 100 basis points; if a 40% reduction is achieved, CIB provides that financing at the Government of Canada rate; and if the reduction is 50% or greater, including net zero, CIB provides its financing at the Government of Canada rate, minus 100 basis points.
“We’re providing an incentive to go deeper. And in addition to everything from the low hanging fruit, like lighting and HVAC [heating, ventilation and air conditioning] systems, we’re trying to capitalise deeper retrofits [and] also switching from fossil fuels to electrification, and other low carbon fuels,” he added.
Pontin offered his perspective: “There will always be projects that are more difficult, but across the globe there are various mechanisms that are used. For example, several countries have started using land values and capital values to turn around and help drive investments. And fundamentally, over time, the prices and finances around investing in things like social housing do change.”
The insurance industry is going to play an important role in this, he said.
“If you’re not investing in your property, and things aren’t improving, you’re static compared to everybody else who is moving as society changes. The economics do change over time, and… there will be shifts in the way investment occurs.”
Achieving a better future for all
The next question addressed the three main goals associated with climate change: net zero, climate resilience and a better future for all. How were the speakers and their organisations integrating these into infrastructure development?
In Jenkins’ opinion, there is a need to focus on “building back better” not just for current climate impacts but for those that are likely to occur 20 or 30 years’ time and which we can’t yet foresee.
“That may involve looking at some minimum requirements for our ‘CP levels’, and testing climate impacts at the project scale [and] at the local scale to assure that they’re accounted for and that there’s deeper engagement with local communities in designing infrastructure that is responding to future climate impacts,” she said.
For Parmar, working for an impact investor means constantly being “mindful of the broader cost benefit analysis that is undertaken”.
“That broader mindfulness helps us achieve the other objectives that have been highlighted through this question,” he said. “In [terms of] broadband, the pandemic clearly demonstrated the need for connectivity for people’s social wellbeing, for health, for education. We’re counting those numbers of households that we’re giving that opportunity for digital connectivity.”
EY’s Morris had the last word. Treating sustainability as a path to “saving people money, enhancing their quality of life and giving them clean air” would, he said, make integrating all three goals easier for the infrastructure community.
“We also have a policy in the UK of building back better, post-pandemic, as well as levelling up around the country for economic inclusion, and the green industrial revolution… creating the new green industries that allow us to deliver sustainable infrastructure. [Both are to do with] making it inclusive for as many people as possible from a social and an economic perspective. So, I think we can tell a much stronger story… a much more positive story about this brings everyone together, unlocks the dry powder of funding that’s already out there and drives faster action.”
The ‘Getting to net zero: how governments and infrastructure players can close the gap’ webinar took place on 31 October and was hosted by EY with support from Global Government Forum. You can watch the webinar in full here.
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