3 key enablers that support green investment in Belt and Road infrastructure

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.

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.

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.

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.

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.

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.

Read the report Advancing the Green Development of the Belt and Road Initiative: Harnessing Finance and Technology to Scale Up Low-Carbon Infrastructure.