- A massive global infrastructure investment of $66 trillion is needed in emerging economies before 2030.
- The Belt and Road Initiative offers a new development paradigm through green investment in low-carbon infrastructure.
- A new report by the World Economic Forum and PwC highlights how finance, low-carbon technology and policy frameworks can support this transition.
Today’s infrastructure investment decisions will lock in emissions trajectories for decades and could make or break the world’s ability to achieve the Paris Agreement objective of limiting global temperature rise to well below 2°C.
Emerging market and developing economies (EMDEs) face rising energy needs as they grow, industrialise, and urbanise. Electricity demand in EMDEs is set to grow at around three times the rate of advanced economies. Between 2020 and 2030, for example, electricity demand is expected to grow by over 50% in Southeast Asia and Africa, and by over 60% in India.
Each country will have its own unique circumstances, priorities and resources. A complex ecosystem of public and private stakeholders will be needed to facilitate bankable infrastructure projects, supported by international standards and forward-looking climate policies.
1. Viable and competitive low-carbon technologies
Low-carbon technologies, from solar and wind power to battery storage and electric vehicles (EVs), are technologically feasible and commercially viable. A surge in Belt and Road Initiative (BRI ) projects that deploy these technologies would be in line with China’s September 2021 pledge to “support developing countries in developing green and low-carbon energy and not build new coal-fired power projects abroad.”
For example, as the levelized cost of electricity (LCOE) for solar and wind is falling to levels at or below that of electricity produced using fossil fuels, these technologies are increasingly preferred for economic as well as environmental reasons. In the Internationally Energy Agency’s (IEA) Net Zero Emissions (NZE) scenario, solar and wind power capacity are expected to increase 20-fold and 11-fold, respectively, by 2050.
Current examples of this transition include JinkoSolar and its expansion of Southeast Asia's solar PV supply chain – through outbound investments in solar PV manufacturing – bringing economic growth, jobs and innovation. Also, The Silk Road Fund is investing in renewable power assets across Africa and the Middle East. For example, Noor I will be the world’s largest single-site renewable project in terms of investment value and the largest CSP complex in terms of capacity. This example of clean technology will make renewables more bankable. Lastly, Huaneng is financing and building Europe’s largest battery storage project.
2. Shifting finance from brown to green investment
Financial institutions have a vital role to play in the low-carbon transition. They must manage transition risks as the use of fossil fuels declines over time, while at the same time developing innovative financing mechanisms and intermediary channels to support the build-out of low-carbon infrastructure.
EMDEs will require annual investments of $400 billion in wind and solar power, $26 billion in battery storage, $300 billion in transmission and distribution, and $133 billion in EVs and EV chargers during 2026–2030.
Green investment finance mechanisms have grown rapidly over the past decade but remain at a nascent stage. For example, labelled green bonds account for only about 1% of the global bond market. Significant innovation is still needed to transform sustainable infrastructure into a mainstream asset class.
What's the World Economic Forum doing about the transition to clean energy?
Moving to clean energy is key to combating climate change, yet in the past five years, the energy transition has stagnated.
Energy consumption and production contribute to two-thirds of global emissions, and 81% of the global energy system is still based on fossil fuels, the same percentage as 30 years ago. Plus, improvements in the energy intensity of the global economy (the amount of energy used per unit of economic activity) are slowing. In 2018 energy intensity improved by 1.2%, the slowest rate since 2010.
Effective policies, private-sector action and public-private cooperation are needed to create a more inclusive, sustainable, affordable and secure global energy system.
Benchmarking progress is essential to a successful transition. The World Economic Forum’s Energy Transition Index, which ranks 115 economies on how well they balance energy security and access with environmental sustainability and affordability, shows that the biggest challenge facing energy transition is the lack of readiness among the world’s largest emitters, including US, China, India and Russia. The 10 countries that score the highest in terms of readiness account for only 2.6% of global annual emissions.
To future-proof the global energy system, the Forum’s Shaping the Future of Energy and Materials Platform is working on initiatives including, Systemic Efficiency, Innovation and Clean Energy and the Global Battery Alliance to encourage and enable innovative energy investments, technologies and solutions.
Additionally, the Mission Possible Platform (MPP) is working to assemble public and private partners to further the industry transition to set heavy industry and mobility sectors on the pathway towards net-zero emissions. MPP is an initiative created by the World Economic Forum and the Energy Transitions Commission.
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Many financial institutions are setting targets through initiatives such as the Green Investment Principles for the Belt and Road (GIP) and the Glasgow Financial Alliance for Net Zero (GFANZ) to scale up financing for green infrastructure while reducing their exposure to carbon-intensive sectors.
With global consensus on the need to reduce fossil fuel use, financial institutions with investment, lending or other exposure to the sector could face growing risks. In the IEA NZE scenario, total energy supplied by coal, oil and gas decline by 89%, 76% and 56%, respectively, between 2020 and 2050.
Financial institutions that are taking action include the Bank of China with its board-level commitment on green finance which is important for assessing financial institutions’ climate-related transition risks. Singaporean bank DBS is committed to exiting thermal coal by 2039 and has implemented the world’s first bank-issued sustainable and transition finance framework and taxonomy. Swiss Re is shifting away from the most carbon-intensive producers and AIIB has applied a strict ESG approach to help make projects into bankable investments.
3. Policy frameworks and the enabling environment
To capitalize on the increasing global appetite for green investments, host countries need to put in place a conducive policy and regulatory framework, and improve the conditions that help make projects “bankable”. Low-carbon energy and transportation infrastructure is increasingly competitive with fossil fuel alternatives, but usually entails higher upfront investment costs that are offset over time by lower operating and fuel expenses. Financing costs can thus become the decisive success factor for green investment in infrastructure. But for EMDEs, debt financing costs can be 700–1,500 basis points (a basis point is equal to 1/100th of a percentage point) higher than those in the US and Europe. Project-specific risks related to policy, currency, curtailment, etc. can further increase the cost of finance.
To manage these risks, a supportive enabling environment is needed, which includes effective national policies on climate change and green investment, supplemented by conducive sectoral legal and regulatory frameworks in energy, transport and other relevant sectors. Multilateral development banks play a critical role in helping to improve confidence and de-risk financing, mobilizing investments towards projects that are otherwise unable to attract funding from capital markets and commercial lenders.
Taking action to finance the green transition
Since the launch of the GIP, our member institutions have invested extensively in green projects in emerging market economies. However, greater efforts are needed to help these economies achieve their climate goals. To support and nurture domestic enabling environments along the Belt and Road, the GIP plans to launch regional chapters through close collaboration with the World Economic Forum and other local partners in key regions with great potential and imminent needs for green investment.