Private capital must play a far greater role in green projects throughout the developing world if governments are to deliver on the U.N.’s Sustainable Development Goals (SDGs), S&P Global Ratings has warned.
A report by the influential credit ratings giant, “It’s Time For A Change,” argues significant levels of private capital is available to invest in sustainable infrastructure around the world. But it warns the sustainable finance sector is being held back by investors’ unwillingness to embrace some risks associated with projects in developing economies without the promise of higher levels of returns.
The company warns this reticence can make sustainable infrastructure projects relatively costly to fund.
The United Nations estimated that meeting the 17 SDGs will require global investments of between $5 trillion to $7 trillion each year up to 2030.
But while private capital waiting to be deployed into infrastructure investments is at a record high, investors are less interested in projects in low-income countries, which should be the key area of focus for meeting the bulk of the SDGs, the research suggests.As much as 97 percent of total private capital investments mobilized by multilateral lending institutions — such as the European Investment Bank (EIB) — occur in middle- or high-income countries. S&P said the failure to mobilize more investment in some of the world’s poorest countries is due to fears of higher underlying investment risks in emerging markets.
At the same time, there has been a modest but continuing reduction in sovereign capital support from governments for infrastructure development projects. S&P said it therefore expected multilateral lending institutions to increasingly seek private sector financing to plug the gap.
Consequently encouraging private sector investors to engage in a wider spectrum of risks and geographies will be “critical” for meeting the SDGs, the report concluded.It also argued a number of mechanisms exist that could help increase capital flows into emerging markets, such as credit enhancement instruments which offer a menu of risk and return options for investors. But it also warned such measures will not be sufficient on their own.
In order to increase private sector mobilization of capital, it explains, multilateral lending institutions likely would need to support private investors through advisory services and policy reform.
It also suggested multilateral development banks will have to assume the riskiest part of investments, particularly in the early stages of projects.
“We believe that to engage the private sector on a larger scale, it’s important to build a project pipeline to justify the costs of entering a new market or segment,” said report author Michela Bariletti, analytical manager for infrastructure ratings at S&P. “While local investors may be in a better position to cope with country-specific risks, we understand that for international investors to ramp up their investments and make a real difference, an improvement in the investment climate in low-income emerging markets, where only 3 percent of private capital is directed today, would be required.”