Financing Sustainable Infrastructure

The relationship between business and sustainability performance continues to be controversial and unclear.

On one hand, there is the increasing social awareness on environmental issues; on the other hand, a business's success is measured by how much value it creates for all its stakeholders. IISD believes these views are not mutually exclusive. Compliance activities undertaken by businesses can contribute to competitive advantage, profitability and long-term shareholder value.

Building a Business Case for Infrastructure Sustainability

Potential benefits to public good range across a wide spectrum; they include: economic (e.g., employment, local purchasing, reduced demand for electricity generation through improved efficiency); social (e.g., indigenous employment and development, equity of access to public and economic assets); and environmental (e.g., lower greenhouse gas emissions, reduced use of non-renewable resources and potable water, less waste and enhanced biodiversity). Nevertheless, sustainability offers advantages not only to the communities surrounding the enterprises but to the enterprise itself. When embedding sustainability, there are six sources of business value that have the potential to enhance shareholder value:

• Positive effects on the company's image, reputation and brand strength.
• Positive effects on employee engagement—motivation, retention and recruitment.
• Cost efficiency/savings.
• New revenue sources, increased revenue from existing sources, and improved market share and pricing power.
• Risk reduction and management.
• Confirmation of a firm's "social license to operate."

Green Financial Products for Sustainable Infrastructure

Green financial products have the difficult task of attracting investment from the private sector. In order to achieve this, they have to meet the risk-adjusted return requirements of the investor. Green projects generally carry several risks—for example, new technologies are explored and the investment horizons are long term—thus their investment returns and risks are rarely on par with private sector requirements. To unlock private investment into this sector, several mechanisms and guarantees are being offered by governments and development institutions. For example, the International Finance Corporation (IFC) and the Department for International Development (DFID) have been exploring the possibility of using an eco-securitization mechanism for financing green infrastructure projects (energy, water, air, habitat, community) by linking sustainable management of resources with the funding capacity and requirements of asset-backed securitization. This innovative financing mechanism provides a risk-sharing arrangement for environmental projects. In this case, the IFC represents a structuring investor and guarantor since it buys all the tranches at the mezzanine level of risk, allowing institutional investors to buy the senior tranches with an interesting return and lower risks.

In this presentation, we discuss this and other examples of successful innovative mechanisms that are helping to unlock capital for green infrastructure projects.