1、 Allianz Research Green infrastructure investment The public sector cannot do it alone 30 August 2022 EXECUTIVE SUMMARY The war in Ukraine underscores that scaling up investment in climate-smart infrastructure is necessary to ensure energy and food security as we transition to a lower-carbon future.

2、Well-planned green infrastructure projects not only raise potential output growth and enhance resilience but can also help reduce the carbon footprint that comes with economic progress.However,current public investment plans alone will not be sufficient for strategic rebalancing toward climate-frien

3、dly infrastructure.Important investment gaps remain,especially in electricity and networks(in Europe ranging from the 1.6%and 1.3%of GDP per year in Spain and France,respectively,to 0.6%and 0.4%in Italy and Germany),where investment needs are the largest.However,public investment can be a catalyst f

4、or greater private participation,especially in green infrastructure.We estimate that a one percentage-point increase in public investment,private investment rises by 0.51pp.A green crowding-in“multiplier”is even larger.Greater private sector participation in the planning,construction and operation o

5、f infrastructure can help mitigate public sector constraints in funding the green transition.Life insurers and pension funds in particular will be critical to mobilizing private capital.Infrastructure investment can bring predictable yields and stable cash flows,providing a natural match to their lo

6、ng-term liabilities.Mobilizing long-term finance will require creating an enabling regulatory environment for green infrastructure investment.Our findings based on a comprehensive dataset of project loans suggest sufficient scope for lower capital charges to be applied to infrastructure investment,w

7、hich have a more favorable risk profile than corporate debt.Especially“green projects”seem to default only half as often over a 10-year period as“brown projects”,with a greater difference in emerging markets relative to advanced economies.Capital charges that recognize the declining downgrade risk o

8、f infrastructure debt over time could potentially free up costly capital in an environment of monetary tightening;this would help mobilize resources to finance infrastructurethus promoting the green transition.Andreas(Andy)Jobst Global Head Macroeconomic and Capital Markets Research andreas.jobst Pa

9、blo Espinosa Uriel Analyst pablo.espinosa-uriel Markus Zimmer ESG Expert markus.zimmer 2 The current energy crisis underscores the need to scale up green infrastructure investment The Covid-19 crisis highlighted the need for better infrastructure to enhance socio-economic resilience.1 Now,the implic

10、ations of the war in Ukraine underscore that scaling up investment in climate-smart infrastructure is essential for energy and food security as we transition to a lower-carbon future.2 As climate action remains critical over the next decade,it is important to direct infrastructure investment towards

11、 sustainable,inclusive and resilient economic outcomes amid rising geopolitical challenges.Governments are increasingly recognizing infrastructure investment as the linchpin in defining effective green transition pathways.Infrastructure currently accounts formore than two-thirds of global greenhouse

12、 gas emissions on average.Thus,well-planned infrastructure projects with a greater focus on climate change and the broader sustainability agenda not only raise potential output growth and enhance resilience but can also help reduce the carbon footprint that comes with economic progress.However,curre

13、nt public investment plans alone will not be sufficient to close the estimated green investment gap.As current plans do not cover all the sectors where green investment is needed(e.g.water,waste or buildings3),we have calculated sectorial investment gaps instead of a single one.These internal calcul

14、ations allow us to identify the needs of each sector to achieve different emissions targets,4 and to compare them with the distribution of the new plans(Figure 1).5 The various infrastructure stimulus plans launched during the Covid-19 crisis seem to partially address these changes.Comparing the act

15、ual investment needs by sector to current plans,we find that the latter seem to fall short in electricity and networks,where investment needs are the largest.6 We estimate the largest investment gap for the green transition in public infrastructure in the US at about 1.7%per year.In Europe,the large

16、st investment gaps are in Spain and France(1.6%and 1.3%of GDP per year,respectively),with more moderate numbers in Italy(0.6%)and Germany(0.4%)7.Germany can only meet estimated investment needs after considering the impulse from the“Easter Package”(Osterpaket)provided that funds are allocated effici

17、ently,and projects are implemented effectively(Figure 2).1 In our recent report on post-Covid public infrastructure investment,we estimated the investment need and potential crowding-in effect on private investment.2 For instance,according to our assessment of Germanys Easter Package(“Osterpaket”),t

18、he planned investment in climate-friendly infrastructure remain insufficient to meet the countrys ambition in tackling climate change.3 The new investment plans do partially cover the buildings sector,but they focus on residential rather than public buildings.To ensure consistency,as we exclude resi

19、dential investment from public infrastructure investment,we have excluded those parts in our analysis.4 For an in-depth analysis of specific sectorial paths of emission reductions please see our reports:buildings,agriculture and forestry,utilities,transport and energy.Nonetheless,this paper uses 1.5

20、C as the reference climate target.5 In 2017,the Global Infrastructure Hub(GIH)quantified a USD15trn investment gap until 2040(with current estimates now placing this as high as USD40trn out to 2030 only).6 As the new public initiatives do not always differentiate what part of the public investments

21、is infrastructure,we have put the focus on those that typically are infrastructure intensive.7 These figures are calculated by sector and then aggregated,without the possibility of offsetting a gap in one sector with an“excess investment”in another.For instance,in the case of Germany,we calculate a

22、gap of 0.4%,mainly coming from the networks sector,even though there is a“surplus”in the electricity sector large enough to offset it.3 Figure 1:Annual green public infrastructure investment(by sector,%of GDP)Sources:IEA,Global Infrastructure Hub,Allianz Research.Note:“invt.”=investment;most of the

23、investment plans do not go beyond 2027 while the needs are calculated for the full decade until 2030 and more for the 2031-2040.Figure 2:Announced annual green public infrastructure investment since 2020(%of 2021 GDP)1/Sources:IEA,Allianz Research.Notes:BBB=U.S.Build Back Better Framework;1/Although

24、 the plans contain other items(e.g.social transition),we have only selected those that relate to public infrastructure including the major provisions through the Inflation Reduction Act;2/The German Easter Package(“Osterpaket”)involves a significant investment in electricity,which is mostly public s

25、ince the government will take over the renewable energy levy from the utilities companies.Since most infrastructure represents a common good,the financial commitment to close this gap will largely fall on the public sector.However,budgeted infrastructure spending has been declining for years(Figure

26、3).The implications of the decades-long underinvestment in infrastructure are now painfully felt at a time when more investment in sustainable 0.0%0.5%1.0%1.5%2.0%2.5%Greeninvt.needsNewpublicinvt.Greeninvt.needsNewpublicinvt.Greeninvt.needsNewpublicinvt.Greeninvt.needsNewpublicinvt.Greeninvt.needsNe

27、wpublicinvt.USGermanyFranceSpainItalyNetworksTransportElectricity0.0%0.2%0.4%0.6%0.8%RecoveryplansBBBRecoveryplansOsterpaket2/RecoveryplansRecoveryplansRecoveryplansUSGermanyFranceSpainItalyNetworksFuels and tech.innovationTransportElectricity 4 infrastructure is essential to address climate change.

28、Reversing this secular decline will require maximizing the positive impacts of green infrastructure investment by increasing the scale,efficiency and affordability of such investment.8 Given the prevailing investment gap,we need a strategic rebalancing toward climate-friendly(or“green”)9 infrastruct

29、ure investments.Last years G7 Leaders Summit in the UK delivered a strong commitment to supporting more investment in infrastructure,and the way this can help combat climate change.This theme was continued under Germanys G7 Presidency on achieving the Sustainable Development Goals(SDGs)of the 2030 A

30、genda.Figure 3:Public infrastructure investment(%of GDP)Sources:OECD,Refinitiv,Allianz Research.Note:the calculation only accounts for gross fixed capital formation in“other buildings and structures”.(Green)crowding-in effects on private investment Public investment can be a catalyst for greater pri

31、vate participation,especially in green infrastructure.Our calculations show that for each percentage-point increase in public investment,private investment rises by 0.51pp.However,this multiplier varies depending on several factors,including differences in the output gap(the larger the gap,the highe

32、r the multiplier)and interest rates(the lower the rates,the higher the multiplier).10 A green crowding-in“multiplier”would be even larger.The fact that the green investment gap is larger than in other parts of the economy,and that these kinds of investments are mostly in an early stage of implementa

33、tion,suggests a higher return on capital.Table 1 shows how the crowding-in effect would help narrow the investment gaps in the subset of analyzed sectors.8 For instance,under the auspices of the G20,the Global Infrastructure Hub(GIH),in partnership with the OECD and the World Bank,is creating a fram

34、ework to achieve these goals,whichcontinues and complements previous G20 initiatives like theRoadmap to Infrastructure as an Asset Classand the G20 Sustainable Finance Working GroupSustainable Finance Roadmap,among others.9 We apply the attribute“green”in relation to the investment that would be nee

35、ded to limit the temperature increase to 1.5C above pre-industrial levels.10 Further details on the crowding-in effect can be found in Appendix I.5 Current private participation is concentrated in the energy and transport sectors,which allows some rent extraction through price discrimination.Both se

36、ctors represent about half of the total private infrastructure investment in the Eurozone and the USan increase of almost 20pp over the last 10 years.The largest increase of private participation in renewable energy projects was in Italy,Spain and the US,especially in solar and wind;however,there ha

37、s been also an increasing rotation towards renewable energy projects in France and Germany.Representing a much smaller share and outside our definition of green infrastructure,the telecommunications sector has seen an important relative increase of private investment(Figures 4 and 5).Table 1:Green i

38、nfrastructure investment needs vs.public plans and crowding-in effects Country Green investment needs(%of GDP)Additional public investment (%of GDP)Crowding-in private investment(%of GDP)Germany 0.8%0.87%0.51%France 1.33%0.13%0.08%Italy 0.79%0.46%0.25%Spain 1.65%0.20%0.11%US 2.1%0.45%0.21%Sources:Re

39、finitiv,Allianz Research.Note:covered sectors are transport,electricity generation and electricity networks.Figure 4:Advanced economiessectoral breakdown of private infrastructure Sources:Global Infrastructure Hub,Allianz Research.Note:“advanced economies”=Germany,France,Italy,Spain(EZ-4)and US;shar

40、es calculated based on the aggregated cost of the projects.31%15%29%16%4%2%3%2012 2020Renewable energygenerationEnergy-OtherTransportSocialTelecommunicationsWaste57%9%22%4%7%2%3%6 Figure 5:Private investment in energy infrastructure(%over total private infrastructure investment)Sources:Refinitiv,All

41、ianz Research.Notes:“Ren.”is used as abbreviation of renewables in“Other ren.”and“Other non-ren”;the category gas”includes LNG and regasification plants;the category“other renewables”includes geothermal,biomass and hydroelectric.A strong case for more private participation in infrastructure investme

42、nt Greater private sector participation in the planning,construction and operation of infrastructure can help mitigate constraints on public budgets and investment capacity.11 In this context,the concept of“quality infrastructure”is becoming ever more important,notably for institutional investors,wh

43、ose risk tolerance is limited and whose willingness to assume the management of assets is low.12 However,increasing the availability of external finance requires transforming the financial sector so that it better aligns the financing of the economy and the liabilities-driven investment of long-term

44、 investors.13 More investment in climate-friendly infrastructure will invariably encourage a practice of finance that(i)fully integrates sustainability considerations into its operations,including the full costing of positive and negative externalities from climate change under comprehensive disclos

45、ure,and(ii)facilitates the allocation of savings to productive capital that directly contributes to sustainable growth for resilient societies.Life insurers(and pension funds)will be critical to mobilizing private capital.Infrastructure investment can bring predictable yields and stable cash flows,p

46、roviding a natural match to their long-term liabilities.This has provided the impetus for the Allianz Infrastructure Debt Platform to collaborate on preparing,structuring,and implementing complex infrastructure projects that no single institution could handle on its own.14 11 For instance,Allianz Gl

47、obal Investors launched the Emerging Market Climate Action Strategy(EMCA)in a public-private partnership with the European Investment Bank.12 Quality means obtaining assets that are economically sound,are built and kept safe,and respond to sustainability requirements,providing additional layers of r

48、esilience to communities.13 See also IMF(2022).14 This initiative is also working on de-risking certain aspects of the infrastructure project life cycle.0%20%40%60%80%2010sPostCovid2010sPostCovid2010sPostCovid2010sPostCovid2010sPostCovidUSGermanyFranceSpainItalySolarWindOther Ren.Gas(broad)Fossil fu

49、elsOther non-Ren.7 However,theflow of private capital into infrastructure is stagnating(GIH,2021),with infrastructure facing greater competition from other asset classes as investors demand higher risk premia for less liquid assets as financing conditions have started tightening.Unfortunately,the ac

50、tual credit risk of infrastructure is often not well understood(Jobst,2018a);in fact,the resilient credit performance of infrastructure is not reflected in most regulatory frameworks,which tend to follow the historical default experience of corporate exposures.A more differentiated regulatory treatm

51、ent of infrastructure investment Creating an enabling regulatory environment for infrastructure investment can help mobilize long-term finance from long-term investors.Several G20 countriesand other countries with important insurance sectorshave only partial treatment,or no special treatment,for inf

52、rastructure.For instance,solvency regimes require insurers to allocate sizeable amounts of capital to cover infrastructure debt investments,especially for unrated transactions.Figure 6.Infrastructure project loanscumulative default probability(%)Sources:Jobst(2018a and 2018b),Jobst and Pazarbasioglu

53、(2018),Moodys Investors Service,Standard and Poors,Allianz Research.Note:PD=probability of default;the first chart shows data for all and only“green”infrastructure project loans whereas the second chart compares the performance of project loans in separate databases compiled by Moodys and S&P,respec

54、tively;green denotes project finance in industry sectors that meet the use-of-proceeds eligibility criteria of the ICMA Green Bond Principles;the sub-samples refer to(i)all EEA and OECD member countries(“EEA or OECD”)and(ii)all non-high income countries(“EMDE”)according to the sample selection in Mo

55、odys Investors Service(2018)over a study time period between 1995 and 2020.0510151245678910Cum.PDMaturity(years)EEA/OECD(project loan)EEA/OECD(green)EMDE(project loan)EMDE(green)Corporate(Baa3-rated),global051015201245678910Cum.PDMaturity(years)Project Loans,MoodysProject Loans,S&PInfrastructure Pro

56、ject Loans,MoodysInfrastructure Project Loans,S&PCorporate(Baa3-rated),globalCorporate(Ba2-rated),global 8 So far,the lack of data on the credit performance of infrastructure projects has hindered greater comparability to corporate exposures and a more differentiated regulatory treatment.Improving t

57、he availability of performance data on infrastructure projects for governments,regulators and investors would help widen the perimeter of a more favorable regulatory treatment.Following the earlier reduction of capital requirements for qualifying infrastructure investment by European insurers,effort

58、s are underway in other countries to extend this approach.15 This will be critical to bridging the current infrastructure investment gap,particularly in developing economies.Two reports specifically encourage the review of the regulatory treatment of infrastructure investment:The Financial Stability

59、 Boards evaluation of the impact of regulatory reforms on infrastructure finance.It was submitted to the G20 at the Buenos Aires Leaders Summit as part of its framework for the post-implementation evaluation of the G20 financial regulatory reforms.The Report of the G20 Eminent Persons Group(EPG)on G

60、lobal Financial Governance.It recommends reviewing the regulatory treatment of infrastructure finance for long-term institutional investors.Figure 7.Infrastructure project loanshistorical credit performance Sources:Jobst(2018a and 2018b),Jobst and Pazarbasioglu(2018),Allianz Research.Note:*/the defi

61、nition of“ultimate recovery rate”closely matches the definition of recovery rate in the Basel Accord framework for banks and Solvency II for European insurance companies;green denotes project finance in industry sectors that meet the use-of-proceeds eligibility criteria of the ICMA Green Bond Princi

62、ples;the sub-samples refer to(i)all EEA and OECD member countries(“EEA or OECD”)and(ii)all non-high income countries(“EMDE”)according to the sample selection in Moodys Investors Service(2018)over a study time period between 1995 and 2020.Our findings based on new data from Moodys Investor Services a

63、nd Standard and Poors(Jobst,2018a)suggest sufficient scope for lower capital charges to be applied to infrastructure investmentthrough project loanswithout altering the current(or planned)15 Similarly,the GIH is currently forming a coalition of banks to negotiate a risk-adjusted regulatory capital r

64、equirement for infrastructure-project finance as part of the reforms to the Basel framework.60%70%80%90%100%0%3%6%9%12%TotalEEA/OECDEMDETotalEEA/OECDEMDEGreenBrown10Y cum.default rate(lhs)Ultimate recovery rate*(rhs)9 calibration methods.While the initial default rate exceeds the level for investmen

65、t-grade corporates,it steadily declines as the loans mature.After about five years,the marginal default rate is consistent with solid investment-grade credit quality,creating a distinctive“hump-shaped”risk profile(Figures 6 and 7).The recovery rate is high,comparable to that of senior secured corpor

66、ate loans.This favorable credit performance is even more pronounced for projects in sectors that would fall within the scope of the eligibility requirements for green bonds(Jobst,2018b).In fact,on a global basis,green infrastructure projects seem to default only half as often over a 10-year period a

67、s“brown”projects,with a greater difference in emerging markets relative to advanced economies.Capital charges that recognize the declining downgrade risk of infrastructure debt over time could potentially free up capital;this would help mobilize resources to finance infrastructurethus promoting the

68、green transition.Hence,we believe there is scope for a discussion about how solvency regimes can better reflect the special features of infrastructure to reduce the regulatory cost to long-term regulated investors.10 References Batini,Nicoletta,Luc Eyraud and Anke Weber,2014.“A Simple Method to Comp

69、ute Fiscal Multipliers,”IMF Working Paper No.14/93(Washington,D.C.:International Monetary Fund),available at https:/www.imf.org/external/pubs/ft/wp/2014/wp1493.pdf.G20 Eminent Persons GroupEPG(2018)Making the Global Financial System Work for All,”Report on Global Financial Governance,October,availab

70、le at https:/www.globalfinancialgovernance.org/assets/pdf/G20EPG-Full%20Report.pdf.Financial Stability BoardFSB(2018)Evaluation of the Effects of Financial Regulatory Reforms on Infrastructure Finance,November,available at http:/www.fsb.org/2018/11/evaluation-of-the-effects-of-financial-regulatory-r

71、eforms-on-infrastructure-finance/.Global Infrastructure Hub,2021.Infrastructure Monitor,available at https:/www.gihub.org/infrastructure-monitor/?_cldee=xA5guGBtxNiDN_ST5q8ggGjbMbCeJueR9eAt1UwooMAVdbS_aMkNCCSaFBB96PaI&recipientid=contact-bf6f42e78aedec11bb3c002248104231-6e71e47fdcbd4fe4acf4b695148bf

72、12a&esid=efdb748a-2e03-ed11-82e6-002248104231).Georgieva,Kristalina and Tobias Adrian,2022,“Public Sector Must Play Major Role in Catalyzing Private Climate Finance,”IMF Blog(August 18),available at https:/blogs.imf.org/2022/08/18/public-sector-must-play-major-role-in-catalyzing-private-climate-fina

73、nce/.Jobst,Andreas A.,2018a,“Credit Dynamics of Infrastructure Investment:Considerations for Financial Regulators,”Policy Research Working Paper No.8373,March 22(Washington,D.C.:World Bank Group),available at http:/documents.worldbank.org/curated/en/606411522326750586/pdf/124720-PUBLIC-Infrastructur

74、e-Regulation-Report-Mar28.pdf._,2018b,“Green Infrastructure Investment:Implications for Insurance Regulators,”Report No.131044,October 10(Washington,D.C.:World Bank Group),available at http:/documents.worldbank.org/curated/en/819691539907598556/Green-Infrastructure-Investment-Implications-for-Insura

75、nce-Regulators._ and C.Pazarbasioglu,2019,“Greater Transparency and Better Policy for Climate Finance,”Financial Stability Review No.23,June 13(Paris:Banque de France),pp.85-99,available at https:/ Appendix I.Methodology for measuring the crowding-in effect To simplify the adjustments at country lev

76、el,we take as a reference the“conjunctural factors bucket approach”by the IMF for the calculation of fiscal multipliers.For simplicity,we take the output gap and the yields of the 10Y bond as indicators of the business cycle and financing conditions.Multipliers tend to be larger when the economy is

77、far from potential and when the credit conditions are more favorable.Table A1.1.Crowding-in effects of public sector infrastructure investment in private sector(non-residential)infrastructure investment(1Y).Base coefficient Output gap1,2 10Y Yield3 Final coefficient France 0.51-2.1%1.73 0.56 Germany

78、-0.3%1.12 0.59 Italy-2.0%3.35 0.53 Spain-3.8%2.28 0.54 US-1.2%2.93 0.47 Sources:Refinitiv,Allianz Research.1/As calculated by the IMF for Q1 2022.2/Scores and yields are not taken directly into the model,but via z-scores relative to historical values(e.g.although Spain has a large output gap,it is s

79、maller than it was in 2010s).3/as of July 15,2022.However,this approach does not consider the green nature of the investment.This multiplier could be therefore refined by using the green gap,andin the case they are differentthe credit conditions for green investments.Elements that would make the gre

80、en crowding-in effect larger are:Existing infrastructure is operating under capacity.This does not only refer to the green gap,but also to the existence of labor that would be capable of working with the technology,of private savings and of facilities that are not operating at 100%;Government should

81、 intervene directly by financing the infrastructure that by its nature does not attract private investment and attract investments in those areas where private investor can be attracted(via tax cuts,subsidies);and Appealing return on investment.12 These assessments are,as always,subject to the discl

82、aimer provided below.FORWARD-LOOKING STATEMENTS The statements contained herein may include prospects,statements of future expectations and other forward-looking statements that are based on managements current views and assumptions and involve known and unknown risks and uncertainties.Actual result

83、s,performance or events may differ materially from those expressed or implied in such forward-looking statements.Such deviations may arise due to,without limitation,(i)changes of the general economic conditions and competitive situation,particularly in the Allianz Groups core business and core marke

84、ts,(ii)performance of financial markets(particularly market volatility,liquidity and credit events),(iii)frequency and severity of insured loss events,including from natural catastrophes,and the development of loss expenses,(iv)mortality and morbidity levels and trends,(v)persistency levels,(vi)part

85、icularly in the banking business,the extent of credit defaults,(vii)interest rate levels,(viii)currency exchange rates including the EUR/USD exchange rate,(ix)changes in laws and regulations,including tax regulations,(x)the impact of acquisitions,including related integration issues,and reorganizati

86、on measures,and(xi)general competitive factors,in each case on a local,regional,national and/or global basis.Many of these factors may be more likely to occur,or more pronounced,as a result of terrorist activities and their consequences.NO DUTY TO UPDATE The company assumes no obligation to update any information or forward-looking statement contained herein,save for any information required to be disclosed by law.