financing sustainable infrastructure - · pdf file1.2 the explicit reliance of sustainable ......

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FinancingSustainableandResilientInfrastructurebyCreatingaNewAssetClassforInstitutionalInvestorsBasel,June2016DanielWiener,Chairman,GlobalInfrastructureBaselFoundation(daniel.wiener@gib-foundation.com)NathanaelDidillon,ResearchAssociate,GlobalInfrastructureBaselFoundation©GlobalInfrastructureBaselFoundation(GIB)TheSuRe®StandardisaregisteredtrademarkoftheGIBFoundationAreportfortheResilientCities2016BackgroundPapers

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ExecutivesummaryWhethertheSustainableDevelopmentGoals(SDGs)willbesuccessfulornotheavilydependsupontheextentofworldwideinvestmentsinsustainableinfrastructure,abackboneoftheeconomyandakey social fabric. In addition, incorporating sustainability into infrastructure can help alleviate ad-verseenvironmentaleffectsandmitigateclimatechangesoastocontributetothesafeandresilientdevelopmentofnations.Currentfiguresunfortunatelyhintatatremendousgap:USD1.0-1.33tril-lionwillbemissinggloballyeveryyearthrough2030accordingtoG20(2014).Becausegovernmentsendeavourtoreducethedebt/GDPratio,theyareunlikelytosufficientlycontributetobridgingthisgap.Thus,privateinvestorsneedtostepin.Buttheireffortswillinevitablystumbleovertherigidityoftheirassetallocation:infrastructureequityanddebtaredissociatedinmainstreamportfolio,whiletheir respective shares are technically and legally required to remain marginal. Hence, only theemergenceofanewHybridSustainable InfrastructureAssetClasscanhelp fill the investmentgap.Associatinginfrastructureequityanddebtinthesamepocketofinvestment,itwillindeedsynchro-nise the conventionally opposite interests of equity and debt providers bymerging their incomesovertheentirelifespanofaninfrastructure,securingsustainablecashflowswitharisk/returnpro-filebetweendebtandequity.HolisticSustainabilityStandardssuchasGIB’sSuRe®Standardwillhelpsecurethe long-termperformanceof infrastructure.Theyarethusfundamentaltothisfinancial in-novation:thecreationofSustainableInfrastructure,anewhybridassetclassinaccordancewiththeterminologyoftheSDGsthatcontributestotheirsuccess.

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Content1 Introduction..................................................................................................................51.1 Definitionofconventionalinfrastructure.........................................................................51.2 TheexplicitrelianceofSustainableDevelopmentGoalsoninfrastructure.....................5

1.2.1TheSustainableDevelopmentGoals......................................................................51.2.2Thedrawbacksofconventionalinfrastructure.......................................................5

1.3 Definitionofsustainableinfrastructure........................................................................61.3.1Definition................................................................................................................61.3.2Risk-minimisation...................................................................................................61.3.3ContributiontotheSustainableDevelopmentGoals.............................................71.3.4Contextualisation....................................................................................................7

2 Theinvestmentgap...................................................................................................82.1 Publicinfrastructureinvestmentindecline.....................................................................82.2 Spatialinfrastructureneeds.............................................................................................82.3 Sectorialinfrastructureneeds..........................................................................................82.4 Themissinginvestments–thegap..................................................................................92.5 Thegap’scauses...............................................................................................................93 ThePortfolioBottleneck...............................................................................................93.1 Thenecessaryprivatecontribution..................................................................................93.2 TheallocationpotentialofSustainableInfrastructure...................................................103.3 Theportfoliobottleneck.................................................................................................103.4 Thetechnicalconstraints................................................................................................123.5 Thelegalrequirements...................................................................................................123.6 Urgentlylookingforinnovation......................................................................................124 TheemergenceofanewAssetClass:SustainableInfrastructure.................................144.1 BridgingtheconflictbetweenEquityandDebt..............................................................14

4.1.1Theconventionaldebt-equityantithesis..............................................................144.1.2Themergerofdebtandequityincomes..............................................................144.1.3Theprofitabilityofanintegratedapproach.........................................................16

4.2 FutureProofingwithSustainability................................................................................174.2.1TheHolisticSustainableStandards.......................................................................174.2.2Securingperformance..........................................................................................174.2.3TheSuRe®standardasbuildingthenecessarytrust............................................184.2.4ThecreationofanewAssetClass:SustainableInfrastructure.............................20

4.3 ThefinancialcharacteristicsofSustainableInfrastructure............................................204.3.1Non-correlation....................................................................................................204.3.2 Inflation-hedged...................................................................................................20

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4.3.3Liquiditypremiumorgreaterliquidity..................................................................214.3.4Lowoperationalcost............................................................................................214.3.5Higherresidualvalue............................................................................................214.3.6 Increasedmanagementefficiency........................................................................214.3.7Enhancedworkerproductivity..............................................................................22

4.4 De-riskingwithSustainability.........................................................................................224.4.1Mitigationofpoliticalandsocialrisks...................................................................224.4.2Alleviationofenvironmentalrisks........................................................................224.4.3Greaterpredictability...........................................................................................23

4.5 TheternarydevelopmentofSustainableInfrastructure................................................234.5.1ThreestepsforanAssetClass..............................................................................234.5.2SustainabilityStandard.........................................................................................234.5.3HybridInvestmentVehicle...................................................................................234.5.4SecuritisationOption............................................................................................24

5 Policyrecommendations.............................................................................................256 Annexe.......................................................................................................................267 Glossary......................................................................................................................298 Bibliography...............................................................................................................29

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1 IntroductionInfrastructurerepresentsthebackboneofoureconomies.Itcreatesnetworksthatconnectpeople,helptransportgoodsandservices.Theyshapeourenvironmentsandlargelydetermineourliveli-hoodstodayandinthefuture,reasonwhyinfrastructureliesatthecoreoftheSustainableDevel-opmentGoals.Conventional infrastructurewillnotsuitthembest; instead,policy-makersaswellasstrategicassetallocatorsshallacknowledgetheirreplaceablecontributionofsustainableinfra-structuretoachievingtheSDGs.

1.1 DefinitionofconventionalinfrastructureInfrastructurehasnosingleuniversallyagreeddefinition.Nevertheless,overtime,ithascomecloseto describing the organisational backbone of the economy. Even though infrastructure is multi-faceted,onlythematerialaspectof infrastructure isconventionallyconsidered,which includeswa-ter, sanitation, energy, housing, transport, information and communication technologies (WorldDataBank,WorldBankGroup).But insteadof focusingonwhat infrastructuremaybe, it isworth-whileconsideringitsspecificities.Infrastructurecanbebettergraspedby lookingat itsspecificcharacteristics.AdaptingfromWeberandAlfen(2010),theyencompass8dimensions(seeAnnexe1).Eventhoughthis listseemsexten-sive,nocomprehensivenesswillbeclaimedhere.

1.2 TheexplicitrelianceofSustainableDevelopmentGoalsoninfrastructure

1.2.1 TheSustainableDevelopmentGoals

InSeptember2015,about190countriesaretoendorsetheSustainableDevelopmentGoals(SDGs)replacing theMillenniumDevelopmentGoalswhoseprerogativeshave come to anend. The SDGswillsetthenewdevelopmentagendafor2030amidglobaltrendsthatseegovernmentexpendituresshrink(see2.5Thegap’scauses),puttingthefinancialsoundnessoftheSDGsintojeopardy.Theydoindeedrelyonheavyinvestments,notablyininfrastructure.Theachievementofat least5outof17SustainableDevelopmentGoalsdoesdirectlyor indirectlyhingeupontheexpansionandimprovementofinfrastructure(seeAnnexe2).

1.2.2 Thedrawbacksofconventionalinfrastructure

AlthoughtheUnitedNations(2005)havelongstressedtheneedsforexpandingandimprovingexist-inginfrastructure1,doingitinaconventionalwaywillinevitablyentailsomedrawbacks.Indeed,con-1“Investmentsininfrastructure–transport,irrigation,energyandinformationandcommunicationtechnology

– are crucial to achieving sustainable development and empowering communities inmany countries. It has

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ventionalinfrastructuretendsnottoseekoptimalsocialbenefit.Thisispartlyduetocivilsocietybe-inghardlyinvolvedinthedecision-makingprocess.Moreover,conventionalinfrastructureislikelytounderestimatebothitsimpactontheenvironmentanditsexposuretoenvironmentalvariation.Suchplanningcanhaveadverseconsequencesnotonlyontheenvironment,butalsoontheprofitabilityoftheproject.TheGrandIngadamsinDemocraticRepublicofCongosubstantiatetosomeextenttheadverseef-fectsflowingfromconventionalinfrastructure.AccordingtoBrunn(2011),“GrandInga’spowerhasneverbeenconsidered for ruralelectrificationanddomesticuse”, showing that thesocialbenefitsarequestionable,atleastforsomelocalpopulations.Furthermore,sincetheriverCongofeedsdeepoceaniccurrentsintheAtlanticOcean,anydisruptionofflowislikelytohavedramaticconsequenceson the regional –andpotentially even global- hydrological cycle. Finally, therewould be economicdrawbacksforboththeownersofthedamsandthebusinessesaround:indeed,substantialsedimentloadshavebeenrecordedthatwouldrepresentamajorthreatduringtheoperationalphaseofthedams.Atthesametime,agriculturedownstreamwouldundergopainfulandirreversiblechangeassaltwaterwouldintrudeupstreamfor50km(Brunn2011).EventhoughSustainableInfrastructurecannotaddressalloftheseissues,itdoesatleastmitigatealargepartofthem.

1.3 Definitionofsustainableinfrastructure

1.3.1 Definition

Sustainableinfrastructure,ascomparedtoconventionalinfrastructure,minimisesunintendedsocial,environmentalandeconomicrisksandoffersadditionalbenefits,whicharerelatedtoachievingtheSustainable DevelopmentGoals, e.g. in the field of job creation, poverty alleviation, participation,gender,climatechange,biodiversity,orfinancialbenefitsforthepublic.TheaddedvalueofSustain-abilityismadeaccessibletocapitalmarketsthroughmechanismsandbusinessmodels(see4.5ThefinancialcharacteristicsofSustainableInfrastructure).

1.3.2 Risk-minimisation

Sustainable infrastructureminimisesspecificadversesocial,economicandenvironmental risks.Forinstance,sustainableinfrastructurewillendeavourtohavelocalstakeholdersinvolvedattheboard.Itwilltaketheiropinionsandneedsintoaccountduringallphasesoftheinfrastructurelife.Moreo-

longbeenrecognizedthatgrowthinproductivityandincomes,andimprovementsinhealthandeducationout-

comesrequireinvestmentininfrastructure.”(UnitedNations2015b)

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ver, itwillhavea soundeconomicmanagement,beaccountableand transparent, and respect thehighestworkconditionstandards.Fromanenvironmentalperspective,sustainableinfrastructurewillavoid harming biodiversity on site and try to drastically reduce its carbon and carbon-equivalentemissions.

1.3.3 ContributiontotheSustainableDevelopmentGoals

TheSustainableDevelopmentGoalsarebasedonthreepillars: theresilientandsustainableexten-sionoftheeconomy,thecultural,politicalandeducationaldevelopmentofsocietiesandthepreser-vationandprotectionoftheenvironmentanditsbiodiversity.Sustainableinfrastructureattemptstoincorporatethesethreeaspects.Infact,sinceitdoesdiminishawiderangeofrisks,itshallmaketheeconomymoreresilient.Moreover,itiscertainlycontributingtosocieties’cohesionsinceitensuresbetteraccesstoenergy,waterandinformationwhileincreas-ing stakeholder participation in decision-making. Finally, sustainable infrastructure helps mitigateclimatechangebyimprovingenergyefficiencyandreducingoverallenergyconsumption.Italsopar-ticipatesinconservingbiodiversity.(seeAnnexe3)

1.3.4 Contextualisation

Sustainableinfrastructureisacontextualisedinfrastructure,i.e.aninfrastructurethatsmoothlyinte-gratesinitsmilieu.Adoptingaholisticperspective,thismeansthatitwillfitintotheexistingfluxesinthisparticularenvironmentwithoutdramaticallyalteringthem,betheynatural,socialoreconomic.Onthecontrary,itwillbenefitfromtheseconnectionsanddynamisetheexchanges.Asaresult,thebenefitsfromsuchinfrastructurewillbemultiplied:systemicbenefitswillbedeliveredthatoutreachthesumoflocalspecificbenefits.Forexample,notonlyaimstheSilkRoadFundatconnectingtwoparticulartownstogether,butalsowillitestablishanentirerail,road,airandmaritimenetworkthatshallboosteconomicdevelopmentacrossEurasiaandenrichculturalexchanges.This isthe“addedvalue”ofsustainability.TheachievementsofthemedievalHouseofZähringerofferamodelofintegrateddevelopment:theyfoundednumberofSwissandGermanBlackForestcitiesthatrepresentcrucialknotsintoday’sre-gionalfabric.Thankstothehighefficiencyoftheinitialadministration,Bern’seconomysoaredanditbecameanautonomouscity–FreieReichsstadt–in1218,only27yearsafterthefirstbuildingswereconstructed.Suchrapiddevelopmentcouldnothaveoccurredwithoutan integratedplanning: it isonlybecause the Zähringer settlements fit into a structurednetwork that they couldbenefit fromeachotherandinitiatetheculturalandeconomicdynamicsthatsawthemblooming.Similarly,sus-tainable infrastructureexploitsalltheavailableresourcestodeliverthebestservicewhileensuringthatitsoperationissustainable,i.e.itdoesnotdamagethenetworkitrelieson.

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2 TheinvestmentgapDespite tremendous investments in thedevelopmentof infrastructure, the infrastructure invest-mentgapremainsenormous:USD1.0-1.33trillionwillbemissinggloballyeveryyearthrough2030accordingtoG20(2014).

2.1 PublicinfrastructureinvestmentindeclineAccordingtoG20(2014),USD45trillionwillhavebeeninvestedby2030,equivalenttoUSD3trillioninaverageannualspending.Ofthisamount,thevastmajorityiscurrentlyexpectedtocomefromthepublic sector. Indeed, therehasbeena long traditionof statesplanning, financinganddevelopingtheir infrastructure. To Adam Smith (1776), it was the state’s duty to construct andmaintain themaininfrastructurethatwouldbenefittheentiresociety.Atthattime,itwasunrealisticforaprivatebusinesstobearthe initialcostoftheseheavy investmentssuchastheconstructionofabridgeorthedigofacanal.Today,privatelydevelopedinfrastructureaswellastheinfrastructurecreatedbyexpandingpublicprivatepartnershipsaddtopublicfunds.

2.2 SpatialinfrastructureneedsThe considerable needs for funding infrastructure vary spatially across the world. According toMainelli and vonGuten (2015) the total infrastructure financing needs equal toUSD2.256 trillionevery year. The annual regional infrastructure financing needs in Africa amount to USD 93 billionwhiletheyareashighasUSD750billioninAsiaperyearbetween2010and2020andUSD560billioninEuropeannuallyuntil2030.Moreover,theyfindthattheneedsreachUSD23billioninAustralasia,USD320billioninLatinAmericaandUSD510billioninNorthAmerica.

2.3 SectorialinfrastructureneedsThefinancingneedsalsodependontheinfrastructuresector.Inthetransportsector,theOrganisa-tionforEconomicCo-operationandDevelopment(OECD)(2011)statesthataggregateinvestmentinairports,ports,rail(inclusivemaintenance)andoil&gastransportanddistributionovertheperiod2010-2030sumuptoUSD8,815billion.By2030, theannualglobal roadandrailnewconstructionrequirementsarepredictedtoreachrespectivelyUSD292.3billionandUSD58.1billion(OECD2011).TheenergysectorfacesglobalelectricityinvestmentneedsofaboutUSD9.789trillionfortheperiodfrom2003to2030whiletheannualwaterinfrastructureinOECDcountriesandBRIC5willbetanta-mount toUSD 1 trillion by 2025 (OECD 2006). These figures do not claim comprehensiveness buthighlighttheextraordinaryandspecificneedsforinfrastructureacrossseveralsectors.Infrastructurefinancingneedsaredramaticandconcernallpartsoftheworldaswellasallsectors.

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2.4 Themissinginvestments–thegapHowever,despitealreadylargepublicandprivatefundsallocatedtoinfrastructureconstructionandmaintenance,a tremendous investmentgap threatens theworlddevelopment ingeneral, theSus-tainableDevelopmentGoalsinparticular.Infact,G20(2014)predictsthattheequivalentofUSD1.0-1.33trillionwillbemissinggloballyeveryyearthrough2030.

2.5 Thegap’scausesThereasonsforthisgapareplenty,butsome,suchasinsufficientfunds,aremoreprominent.Publicsupportisnotlikelytoincreaseinthedevelopedworldasgovernmentsareputunderstrainbytheireffortstoalleviatetheirindebtedness.AndapartfromfewexceptionssuchasthenascentAsianIn-frastructureInvestmentBank(AIIB),multilateraldevelopmentbanksarenotexpectedtodramatical-lyincreasetheirexpenditureeitherduringthenextdecade.Thecauseextendsfromlackingfundstotheinefficiencyandineffectivenessofinvestmentsthatdis-couragefutureallocation.G20(2015)firstblamespoorprojectselectionandplanning.SincePublicPrivatePartnerships(PPPs)arerelativelyrecentinmostcountries,governmentsmaybelackingtheexpertise to present bankable projects likely to attract private investors.G20 also ascribes amongothers the investment gap to inefficient delivery due to time-consuming regulatory approvals andtheabsenceofdesign-to-costanddesign-to-valueprinciples.Indeed,accordingtoAlbino-Waretal.(2014),stronginstitutionsandbettermanagementarecrucialtoimprovetheefficiencyofoilexport-ers inMideast, Caucasus, and Central Asia. Eventually, G20 sees in the systematic preference forgreenfieldprojectsinsteadoftheupdatingandoptimisationofexistingassetsthereasonofunnec-essaryincreasesinoverallinfrastructurecosts.

3 ThePortfolioBottleneckBecause governments endeavour to reduce the debt/GDP ratio, they are unlikely to sufficientlycontributetobridgingthisgap.Thus,privateinvestorsneedtostepin.Buttheireffortswillinevi-tablystumbleovertherigidityoftheirassetallocation:infrastructuredebtandequityaredissoci-atedinmainstreamportfolioswhiletheirrespectivesharesaretechnicallyandlegallyrequiredtoremainmarginal.

3.1 ThenecessaryprivatecontributionNotenoughmoneyisinvestedintoinfrastructure.Butthenecessarycapitalwillnotcomefromgov-ernments.NeitherwillsubstantialfundscomefromMultilateralDevelopmentBanks(MDBs)orothernot-for-profit development institutions. Sufficient capitalmust therefore flow fromprivate institu-

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tionalinvestorssuchaslargepensionfunds,sovereignwealthfunds,privatecapitalmanagers,familyoffices,grant-makingfoundationsandinsurances.

3.2 TheallocationpotentialofSustainableInfrastructureThesestrategicassetallocators,managingphenomenalwealth,seektoinvestinrobustprojectsthatoffersignificantreturnswhileentailingreasonablerisks.AccordingtoDuvalletal.(2015),“thepoolofcapitalavailableisdeep.Acrossinfrastructurefunds,institutionalinvestors,publictreasuries,de-velopmentbanks,commercialbanks,corporations,andevenretailinvestors,weestimatethatmorethanUSD5trillionayearisavailableforinfrastructureinvestment.”Sincegovernmentsindevelopedcountrieshavereactedtotheslowdownofthefinancialcrisiswithexpansionarymonetarypolicies,interest rates have lowered as a consequence of Central Banks increasing the demand for bonds,therebyloweringpublicinterestrates,i.e.thebenchmarkforotherinterestrates.Asaresult,institu-tionalinvestorswhichfaceshorttermpayments–monthlypensionsforexample-tracktheopportu-nitiesthatofferbetterreturnthanstructureddebtandlessriskthanlistedequity.Sincesustainableinfrastructurenormallymeetssuchexpectations,largeamountsofcapitalshouldflowintheinvest-mentgapandhelpnarrowit.

3.3 TheportfoliobottleneckHowever, the tremendous capital pool faces a dramatic portfolio bottleneck. Infrastructure assetscurrentlyonlymake0.46%of totalAssetsunderManagement (AuM). In fact, infrastructureassetsrepresentUSD296billion(Moylanetal.2015),whiletotalAuMareestimatedtohavereachedUSD63.9 trillion in 2012 according to PwC (2014). Since the annual infrastructure investment gapamountstoUSD1,000-1,330billion(G20,2014),InfrastructureEquitywithinAlternativeInvestmentswouldhavetoscaleupatleast33timesinordertocoverit.Suchexpansioninportfolioallocationtoinfrastructureequityordebtisveryunlikelybecauseoftechnicalconstraintsandlegalrequirements.

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Figure1.CurrentshareofInfrastructureEquityintotalAssetsunderManagement

0.46%InfrastructureEquityCashandLoans

StructuredDebt

AlternativeInvestments

ListedEquity

(Moylanetal.2015,PwC2014)

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3.4 ThetechnicalconstraintsThe technical constraints are featured by the conventional dissociation of infrastructure debt andequitymanagementintheinstitutionalinvestor’sportfolio.Infact,infrastructuredebtoftenbelongstothe“StructuredDebt”AssetClasswhileinfrastructureequityconstitutesasmallshareof“Alterna-tiveInvestments”.Suchhermeticseparationcanbeexplainedbythediscrepancyoftimehorizonsforequityprovidersanddebtholders.Whilethefirstseektomaximisethecashflowsovercomparative-lyshorterperiods,the lattertrytominimiserisks inthe longerterm,sometimesholdingdebtovertheentirelifespanoftheinfrastructure.Thesetwoobjectivesareoftenantitheticandhamperthere-forethemutualmanagementofinfrastructuredebtandequity.Asaresult,withinconventionalassetmanagement,infrastructureallocationisdoomedtoremaindividedandtoforgothebenefitsfromacommonmanagement.

3.5 ThelegalrequirementsLegalrequirementssubstantiateasecondhurdle.Quantitativeportfoliorestrictionsinseveralcoun-triesrestrictindeedtheshareoftotalassetsaninstitutionalinvestorsuchasapensionfundcanallo-catetoinfrastructureinvestments.Forexample,BVV2inSwitzerlandcompelsthedomesticpensionfundsnottoallocatemorethan15%oftheirassetstoalternativeinvestments,whichincludeinfra-structureequity(BVV2Art.55).Moreover,theabsenceoflegalrequirementdoesnotmeanthereisnohurdle.Infact,suchabsenceonlytellsthat infrastructureallocationiscurrentlytoominusculetorepresentanimmediatethreattoportfolioperformance.Often,onlyequitiesand foreignassetsare indeedconsideredworth theregulationeffort(LeapeandThomas2011).Hence,regulationauthoritieshardlytakeAlternativeIn-vestments intoaccount,and infrastructureequity toaneven lesserextent.However, that there iscurrentlynoquantitativeportfoliorestrictiononinfrastructureequitydoesnotmeantherewillnotbeone inthefuture.Suchperspectivecanonlythreatthenecessary increaseoffundsallocatedtosustainableinfrastructure.

3.6 UrgentlylookingforinnovationInnovativefinancialmechanismsarethereforeurgentlyrequiredto liberatetheportfolioallocationtoinfrastructure.Bothinfrastructureequityanddebtfacetootighttechnicalandlegalconstraintstoeffectivelyachievethisgoal.Thus,“weneedto juggleout infrastructurefromthatcrazyboxcalled‘AlternativeInvestments’andestablishitasanewAssetClass,somewherebetweendebtandequi-ty”(LaurenceFink,CEOofBlackRock,September2013).

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“Weneed to juggleout infrastructure fromthat crazy box called ‘Alternative Invest-ments’andestablishitasanewAssetClass,somewherebetweendebtandequity.”

LaurenceFink,CEOofBlackRock,September2013

CaseStudy1.NatixismanagesthefirstEuropeanprojectbondfordigitalinfrastructurein2014In supportof France's superfast broadbandplan (France TrèsHautDébit),which is "theGovern-ment's biggest infrastructure programme", Axione Infrastructureswas helped by Natixis in con-ductingtheveryfirstissueinEuropeof"projectbonds"indigitalinfrastructure,aninnovativeformoffinancelaunchedbytheEuropeanCommissionandtheEuropeanInvestmentBank(EIB)in2012,theaimofwhichistospeedupthemobilisationofprivatecapitalforEuropeaninfrastructurepro-jects,inparticulartheroll-outoffibreopticsinsparselypopulatedareas("publicinitiativeareas").Actingasfinancialadvisor,ratingadvisorandmarketaccessadvisorforAxione,Natixisstructuredtheoperationandmanagedthe ratingprocesswithMoody’s.As solebookrunner, leadmanager,agentandaccountbank,Natixisarrangedandsuccessfullyplaced,withinstitutionalinvestors,the-seprojectbonds,whichaimat refundingAxione Infrastructures’existingseniordebt.Theopera-tion provided Axione Infrastructures with €189.1 million in bond finance (European InvestmentBank2014).Thesuccessofthebondissueshowsinvestorattractionforthisnewassetclass.ItalsoconfirmsNatixis’ leadership inadvisingandstructuring infrastructurefinanceanditsabilitytosetupinnovativeoperations.

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4 TheemergenceofanewAssetClass:SustainableInfrastructureOnly theemergenceofaHybridSustainable InfrastructureasanewAssetClass canhelp fill theinvestmentgap.SustainableInfrastructuremustbecomemoreprofitableforinvestors;inpractice,an integrated long-term management of Sustainable Infrastructure maximises the overall cashflows.Butthetraditionaloppositionbetweendebtholdersandequityprovidersrenderssuchap-proachimpractical.Hence,thenewSustainableInfrastructureHybridInvestmentVehiclewillsyn-chronisetheinterestsofbothequityanddebtinvestorsbysecuringthehigherlongtermreturnswithrisk-returnprofilesbetweendebtandequity.

4.1 BridgingtheconflictbetweenEquityandDebt

4.1.1 Theconventionaldebt-equityantithesis

Therisk-returnmodelofInfrastructurein“AlternativeInvestments”naturallyprioritisesequityhold-ers’profitsoverdebtproviders’returns,resultinginaverylimitedriskappetite.Conventionally,itisconsideredafinancialaberrationforstrategicassetallocatorstopossessequityanddebtinthesameinfrastructureproject,thefirstreasonbeingtheopposingviewsonthelevelofdebtreturntheinfrastructureshalloffer.Debtholdersofcoursedesirethehighestlevels;theequityproviders, though,want them tobeas lowaspossible as theydirectly reduce the volumeofdivi-dends.Indeed,dividendscorrespondtotheremainingturnoverthatisleftonceallcharges,includingreturns, arepaid.Hence, the larger the returns, the lower thedividends; there is a clear trade-offbetweenthedebtholders’interestandtheequityproviders’.Moreover, financial hardships may oppose the views of debt and equity holders. “If a companyshouldcomeunderfinancialstrainthenequityanddebtinterestsceasetobealigned”(MarkGilligan,UBSHeadofInfrastructureEurope).Inotherwords,equityholderslookatmaximizingthecashflowevenifitmeanstheinfrastructuregoesbankrupt,situationthatdebtholderswanttopreventbyallmeans– they lookat thedefault rateandendeavour to keep thebusiness afloat.Hereagain, theperspectivesdiverge,and itmakes littlesensefora traditionalassetallocatorto invest in thedebtandequityofasingleinfrastructureproject.

4.1.2 Themergerofdebtandequityincomes

Theequity-debtantagonismcanonlybeovercomeby solving thedebt return conflict. Inpractice,thismeansgatheringSustainableInfrastructuredebtandequityintooneproduct,SustainableInfra-structureHybridInvestmentVehicle(SIHIV).ThisHybrid InvestmentVehicle connects the financial needsof the sustainable infrastructurewiththemoneyinvestorswishtoallocate.Theinfrastructuredevelopersandmanagerswouldstillneedtofinancetheiractivitiesthroughissuingdebtandofferingequity,buttheinvestorswouldnotchoose

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between them. In fact, theSIHIVwouldpool these financialneeds intooneproductwhosemixofdebtandequityisnotnecessaryknowntoassetallocatorswhowouldonlybeconcernedabouttherisk-return profiles of the different SIHIVs – derived from the Holistic Sustainable Standards (see4.2.1.HolisticSustainableStandards).

Regardingtheperformance,SustainableInfrastructureisahybridAssetClass.SincetheSIHIVscom-binedebtandequity, theyare less riskyandyield lowerreturns thanequity,but theyofferhigherreturnsthandebtfortheyaremorerisky.Comparedtorisksandreturnsofequityanddebtinvest-ments,SustainableInfrastructurethereforerepresentsamiddleground.InvestinginSIHIVsisalong-termengagement. Indeed,there is little interest inowningtheassetforashorttime.Thefinancialbenefitsonlysubstantiateoverthelongerrun.

ThelevelofdebtreturnopposesinfrastructuredebtandequityholdersStrategicassetallocatorsdonotpossessequityanddebtinthesameinfrastructureproject.Infact,infrastructureequityinvestorscanbeseenasdebtorswhileinfrastructuredebtholderscorrespondtocreditors.However, sincedebtors seek low interest ratesand creditors theopposite, i.e. highinterests,infrastructureequityinvestorsanddebtholderswillhavepotentiallyoppositeinterests.Suchasituationisfarfromoptimalbecauseoverallreturnsarenotmaximised.Indeed,sinceinfra-structureprojectsandtheassociatedinvestmentcyclesstretchoverthelongterm, itparticularlyneedsacoherentandintegratedapproachtoyieldmaximumreturns.Butsincestrategicassetallo-catorshavedivergent interestswhen investing in infrastructuredebtandequity, they shouldac-cordtheirstrategiestofittheinfrastructuremanagement.Asaresult,itappearsthattheonlywaytoattractmassive investmentsfromstrategicassetallocators is tocombine infrastructureequityinvestorinterestsanddebtholderinterests.“Ifacompanyshouldcomeunderfinan-cialstrainthenequityanddebtinterestsceasetobealigned.”

MarkGilligan,UBSHeadofInfrastructureEurope,July2015

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4.1.3 Theprofitabilityofanintegratedapproach

Anintegratedapproachyieldsthehighestreturns.Indeed,whenstrategicassetallocatorssuperim-posetheir investmenttimehorizonoverthelifespanoftheinfrastructure,this infrastructure’spo-tentialisbestfulfilledwhilethegainscollectedbytheinvestorsareattheirapex.Thereasonisthatmaximisingtheoverall levelsofdividendandreturnshouldbegreaterthanthesumoftheirshort-termmaximisation.MarkWiseman, CEO of Canada Pension Plan Investment Board, strengthenedsuchassumptionduringaninterviewwithMcKinseyin2012:„wedon’tactuallybuildinexitassump-tions.Literally,whenwebuyanasset,weassumethatwewillholditindefinitelyoruntiltheendoftheconcession“(Kirkland2013).Theexistenceofsustainable infrastructurestretchesoverthe longtermbynature.Hence,itneedsalong-lastingandcomprehensivemanagementsoasexploititsen-

CaseStudy2.Meridiam’sintegrateddevelopmentofresidentialfacilitiesatUniversityofHertfordshireTheProject isa£214mtransferof theUniversity’sexisting residencesandcomprises thedesign,build,financeandoperationbyMeridiamof2,511newstudentaccommodationbedroomsandtheassociatedsocialspacesandinfrastructureworksoncetheprojectiscompletedinSeptember2016(BouyguesDevelopment2014).Theschemewillobtain fromBREEAM, aworld leader indesignand assessmentmethod for sus-tainablebuilding,outstandingandTrueZeroCarbonratings,makingitamongthefirststudentac-commodationschemesintheUKtoachievesuchaccreditation.Theinnovativelongtermbondfinancingofthisprojectisafirst-of-itskindinEuropeforinfrastruc-ture.FundinghasbeenarrangedbyMeridiamEuropeIIthroughanindexlinkedunwrappedprivatebondplacement (Meridiam . This innovative project bond financingmaximizes the financial effi-ciencyoftheprojectforthebenefitoftheUniversity.Theconcessionperiodbeing50years,Meridiam,willhavecoveredallofthesocialinfrastructure’sphases, from the identification of infrastructure needs and project design to the operation andmanagement of the infrastructure asset over the long term,working jointlywith the University.Thisintegratedapproachnotonlybenefitstheinfrastructurewhosegoodconstructionandperen-nialoperationarecontractuallyguaranteedbutalsoMeridiam,theinvestor,whocanbestantici-patethecashflows.TheprojecttherewithbecomesbothusefulfortheUniversity’sstudentsandprofitableforassetallocators.

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tirepotentialanddeliver themaximumbenefits. In fact,manywouldagreethataclearand long-termvisionenhancestheefficiencyofresourceallocationandtheeffectivenessofanybusinessop-eration.

“When we buy an asset, we as-sume that we will hold it indefi-nitelyoruntil theendof the con-cession.“

MarkWiseman,CEOofCanadaPensionPlanInvestmentBoard,November2012

4.2 FutureProofingwithSustainability

4.2.1 TheHolisticSustainableStandards

Suchlong-termanalysiscanonlybetrustworthyifbasedontheFutureProofingofholisticSustaina-bleStandards.InitsOutcomedocumentoftheThirdInternationalConferenceonFinancingforDe-velopment:AddisAbabaActionAgendainJuly2015,theUNclearlystressestheimportanceofestab-lishingsuchstandard:"Wecallonstandard-settingbodiestoidentifyadjustmentsthatcouldencour-agelong-terminvestmentswithinaframeworkofprudentrisk-takingandrobustriskcontrol."Oneofthese bodies, Global Infrastructure Basel (GIB), developed the Sustainable and Resilient (SuRe®)StandardforInfrastructureunderISEAL-methodologies.

4.2.2 Securingperformance

Sustainable Standards enable and secure the long-termperformanceof sustainable infrastructure.Thecleardashboardprovidedbythestandardsgivesmanagersthenecessaryinformationtolifttheinfrastructure to thehighestperformance level. Themoreaccurate thedata, the lower theuncer-tainty regarding theexpectedevolutionandhence, thebetter theallocationof internal resources.The overall result is a better understanding of the infrastructure particularities and an enhancedmanagement.

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4.2.3 TheSuRe®standardasbuildingthenecessarytrust

TheSuRe®standardisdesignedtobuildtrustbetweenassetallocators,investmentagencies,NGOsandgovernmentsbyevaluatingenvironmental,socioeconomicand(financial)corporategovernancecriteria.Withincorporategovernance,itassessesthebankabilityandmanagementquality,theleveloftransparencyandaccountability,thestakeholderengagementandthesustainabilityandresiliencemanagement of the firm. When looking at the socioeconomic impact of infrastructure, severalthemesaretakenintoaccountsuchashumanrights,workingconditionsandlabourrights,jobcrea-tion, customer focus or community impact. The SuRe® standard also evaluates the environmentaleffectsoftheinfrastructureproject,includingbiodiversity,environmentalprotection,impactsontheclimateandtheavailabilityofnaturalresources,modificationoflanduseandlandscape.TheSuRe®standard and other standards thus represent the tools needed to synchronise infrastructure debtandequityinterests.

Dimension Theme

1.GOVERNANCE

1.1.ManagementandOversight

1.2.SustainabilityandResilienceManagement

1.3.StakeholderEngagement

1.4.Anti-corruptionandTransparency

2.SOCIETY

2.1.HumanRights

2.2.LabourRightsandWorkingConditions

2.3.CustomerFocusandInclusiveness

2.4.CommunityImpacts

2.5.SocioeconomicDevelopment

3.ENVIRONMENT

3.1.Climate

3.2.BiodiversityandEcosystems

3.3.EnvironmentalProtectionNaturalResources

3.4.NaturalResources

3.5.LandUseandLandscape

Table1.GIBStandardforSustainableandResilientInfrastructure–CategoriesofAssessmentCriteriaInpractice,theSuRe®standardofferstwoservices:duringtheinitialplanningphase,itcanbeusedasanearlystageassessmentwhileitlaterservesasaratingsystem.Unfortunately,theratingpartof

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theSuRe®standardstillbeinginthedevelopmentphase,itistooearlytoillustrateitappropriately.Sufficientinformationanddataexistfortheearlystageassessment,though.Theobjectiveistodis-playtheproject’spredictedperformancewithrespecttoallthemesofthestandardandtoindicatehowwelltheprojectdoesatthisinitialpoint.Theprojectdeveloperscaneithersubsequentlymodifytheir plansorbe satisfiedwith thedeeper awareness gained through the standard. The Followingdiagram is a randomexample; it indicates that the standard is less demanding regarding Environ-mentalProtectionorLandUseandLandscapesinceitishardertoachievethanCustomerFocusandInclusiveness,andnotasessentialasrespectingtheHumanRights.

Figure3.TheSure®earlystageassessment

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4.2.4 ThecreationofanewAssetClass:SustainableInfrastructure

Byassociating sustainable infrastructureequityanddebt in the samepocket of investment,overthelongterm,anewHybridSustainableInfrastructureAssetClassiscreated.Itrepresentsastrategicallocationbecauseofseveralfinancialadvantages.

4.3 ThefinancialcharacteristicsofSustainableInfrastructure

4.3.1 Non-correlation

SustainableInfrastructureenjoysonlylimitedcorrelationwithotherbondsandequity,withmarketperformanceandwithbusinesscycles.Itishardlyornotcorrelatedwithbondsandequitysincein-frastructure cash flows are generated by tariffs from end-users or public funding such as serviceagreementsortaxes–thatarenotaffectedbytheaforementionedbondsandequity.Forinstance,revenuesfromtheSantanderCycles inLondonaregeneratedbytheuserswhoeither“payastheypedal” or have subscribed to a yearlymembership. Additional revenues come from the advertise-ment feethatSantanderpaysTransportofLondon.Highwaysunderconcessionarepredominantlyfinancedbytheroad-tolls.Similarly,cars,lorries,motorbikesetc.arechargedtocrosstheviaductofMilauinFrance.InUganda,universitiesandothereducationinstitutionsfinancetheacademicclass-rooms, thestudenthostelsandother facultyhousingconstructedbytheChristieCompany. InTur-key,rentalfeepaidfor25yearsbytheHealthMinistrywillfinancetheAdanaIntegratedHealthcareCampus,aPublicPrivatePartnership.SustainableInfrastructureisnotcorrelatedwithstockmarketperformance.Thereasonisthatinfra-structuredebthasfixed interestrates;nomatterhowvolatilethestockmarketmayturnout,sus-tainableinfrastructurewillpayafixedreturn.SustainableInfrastructurethusoffersafirst-choicedi-versificationopportunitytostockholders.NeitherisSustainableInfrastructurecorrelatedwithbusinesscycles.Infrastructureisacentralpieceoftheeconomy–someevenargueitisitsbackbone–,whichmeansthatinfrastructurewillbethelastbusiness sector to shutdown. Infrastructure is indeed irreplaceable inmanyways:even if theeconomicflowsshrink,therewillstillbelorriesontheroads.Schoolswillhopefullycontinuetoteachpupilsregardlessoftheconjecture.Informationwillcontinuetotransitthroughthecommunicationnetworksevenifthecountryisheavilyindebted.Infrastructureshallthereforebeasafeinvestmentopportunity,withlimitedrisk.

4.3.2 Inflation-hedged

SustainableInfrastructureisrelativelyinflation-hedgedthankstoa“licencetooperate”:itcanreadilyproceedtopriceadjustmenttocoverinflationlossesforitenjoyshigheracceptancebystakeholders.Inparticular,enduserswhoactivelyparticipateintheinfrastructuremanagementacknowledgethenecessityofsuchmeasuresifthewishtheservicetopersist.

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4.3.3 Liquiditypremiumorgreaterliquidity

Infrastructure investors receivea liquiditypremium, i.e. thepremiumthat ispaid to infrastructuredebt or equity holders as a compensation for bearing higher risks – the very notion of illiquiditymeansthattheassetisnotreadilytradableonthemarket,resultingingreaterexposuretomarketfluctuations,thushigherrisks.Thepremiummaytaketheformofhigherreturnspaidtodebtholdersas they can expect to lendmoney at higher interest rates. In case of equity holders, the liquiditypremiummaybeincorporatedinhigherprofitsthanforotherequities.ButgiventhatanoptionexistsforSustainableInfrastructureinvestorstosecuritisetheirassets(see4.5.4SecuritisationOption),theliquiditypremiummightfall.Thisdrawbackwouldnotcomewithouta benefit though; investors would enjoy an enhanced capacity to exchange infrastructure assets,meaningthattheriskassociatedwithinfrastructurediminishes.SustainableInfrastructuremaythusreveallessrisky,potentiallyhelpingthisfinancialproductattractmoreinvestors.

4.3.4 Lowoperationalcost

SustainableInfrastructurehaslowoperationalcostswhencomparedtoconventionalinfrastructure.Because ithasbeenbuiltwithmaterialofbetterquality, itwill incur fewermaintenancecosts.Forinstance,abridgewillnotneedtoberenovatedthatoften.Asustainableinfrastructureisthereforeexpectedtoquicklyoffsetitshigherupfrontcoststhroughthesavingsmadeonmaintenance.Therearealsosavingstobemadeontheenergyconsumption:sincesustainablebuildingsmeethighenvi-ronmental standards, their levels of insulation – such buildings are sometimes even energeticallypassive–dramaticallyreducestheheatingandcoolingcosts.

4.3.5 Higherresidualvalue

Furthermore, at the endof its lifecycle, a sustainable infrastructure typically has a higher residualvaluethanaconventionalinfrastructure.Thismeansthatsocietyasawholeparticularlyvaluesthisinfrastructureforthediverseservicesthatsurviveattheendoftheoperationphasesuchasinitiallyplanned.Itmaybethataschool’sstructureisstillsolidenoughtoberefreshedandturnedintosocialhousing.ItmayalsobethatthefoundationsofformerrailwaysaresostablethatacyclingpathcanbeconstructedonthemsuchasthepaththatconnectsBristoltoBathinEngland.

4.3.6 Increasedmanagementefficiency

SustainableInfrastructureenableshigherresource-efficientmanagement.Infact,sincetransparencyandaccountabilitylieatitsverycore,theinternalmanagementaswellasthewiderpublicwillscru-tiniseallrevenuesandexpensessoastocrackdownoncorruptionandresource-wastingwork.Asaresult,savingsaremade,businessisrunquickerandfairer,andtheinfrastructure’svalueincreases.The reputational benefit from transparent and accountable management is proportional to thedrawbacksofaprojectburdenedbycorruption.NotonlydidABBhavetopayUSD58millionin2010

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tosettlethebriberycaseinMexicoandinIraqbutalsohadittoinvestincleaningitsimage,byup-datingandstrengtheningitsanti-corruptionpolicyforinstance.

4.3.7 Enhancedworkerproductivity

Superiorworkerproductivitycanbeexpected insustainable infrastructure.Managingasustainableinfrastructureimpliesthatmanagerscloserlistentotheworkersdemands.Theycanthenintegratethesecommentssothatworkingconditionsbettermatchtheemployees`skillsandproducehigherlevelsofoutput,therebygeneratingPositiveoutcomesforbothemployerandemployee.Swanbergetal.(2008)findapositivecorrelationbetweenflexibleworkinghoursandtheproductivityofwork-ers.Ontopofthefinancialadvantages,SustainableInfrastructurehelpsminimiseavariousarrayofrisksso as to build resilient and diversified portfolios. Here it is important to notice that financial ad-vantagesandlowerrisksaretwodistinctpoints.

4.4 De-riskingwithSustainability

4.4.1 Mitigationofpoliticalandsocialrisks

Exposuretopoliticalandsocial risks is lowerwithSustainable Infrastructurethanwiththeconven-tional.Asignificantpartofsustainabilityfocusesontheacceptanceoftheprojectbysocialandpolit-icalgroups.Byinvolvingthelocalcommunitiesandstakeholdersduringtheentirelifetimeofthein-frastructure, thecleargoal is to limitoppositionoraddress itas soonaspossible incase it shouldarisenonetheless.Sustainableinfrastructurewillseektoobtainguaranteesfromthepoliticalspherenottobreakorrenegotiatethe infrastructureprojects. Itaimstomitigatethechangesonthegov-ernmentalagendathatinevitablyoccurincaseofpoliticalcycles.Itevenanticipatessomechangesinthe law. In thecomingdecade, the legislation isexpected to raise theenvironmental standardsallbusinessneedtocomplywith,includingtheconstructionandoperationofinfrastructure;SustainableInfrastructurewillhardlybeaffected,though,sincethisriskwasincorporatedfromthebeginningoftheplanningphase.

4.4.2 Alleviationofenvironmentalrisks

Sustainable Infrastructureendeavours to renderenvironmentvariationsa lesser threat to thepro-ject. In fact, unlike conventional infrastructure, the range of environmental changes and potentialimpacts ismuchmore comprehensive.Whenconstructinganew road,notonlywill theengineerslookatthe localtopographybutalsowill theymodelthefutureflowsthatwillalterthe infrastruc-ture, includingthepredictedhydrologicalcyclesandthewindpatterns.Thisspecialattentiontoallenvironmentalfactorssignificantlylimitstheenvironmentalriskstheinfrastructureisexposedto.

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4.4.3 Greaterpredictability

Backtrackingandbenchmarkingwillallowstrategicassetallocatorstogeneratepredictablereturnsfrom a new source. Thewidespread use of holistic sustainable standardswill soon offer investorsconsiderabledatatoanalyse.Theywilldrawmoreaccurateriskprofilessothatuncertaintycanbebetter gripped. Sustainable Infrastructure may be a new product in the financial universe; it willdoubtlessproveattractiveverysoon.

4.5 TheternarydevelopmentofSustainableInfrastructure

4.5.1 ThreestepsforanAssetClass

ThedevelopmentofSustainableInfrastructureasanAssetClassrequiresthatthreestepsbemade.

4.5.2 SustainabilityStandard

The initial step will witness the broadcast and establishment of the SuRe® standard –or similarstandard. The standardwill provide the comprehensive tool toassess infrastructureat theprojectlevel.Itshallgivelimpidunderstandingofthewidestrangeoffeatureswhileremainingsynthetic.Itisalsomeanttograsptheentirelifespan,predictthecosts,anticipatetherevenuesandassessthewiderimpactonthecommunitiesthattheinfrastructureserves.Notably,thestandardshouldclarifyits different externalities and their nature–whether they improveemployment for example, or iftheydynamisethetouristiceconomybyprotectingthisthreatenedandpreciousspecies.Thestand-ardshouldcomprehensivelyanalysetheinfrastructureinprojectlevelandoveritsentirelife.

4.5.3 HybridInvestmentVehicle

TheinfrastructureprojectsshallbegradedagainstallthecriteriagatheredintheSuRe®standard–oranyotherhomogeneousandsolidstandard.Thismeticulousprocesswillproduceprofileswithsimi-larrisk/returncharacteristics,allowing investorstocreatehomogeneousbundlesofprojects, facili-tatinginvestmentinSustainableInfrastructure.Giventhesedetails,assetallocatorswillbegiventhetoolstotailortheirSustainableInfrastructureInvestmentstotheirriskappetite.TheemergingAssetClasswillenjoyincreasedclarity,andthentrust,bothofwhichcanonlyattractnewstrategicinves-tors.

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4.5.4 SecuritisationOption

Using the standardisation of the infrastructure assessment and the project bundles subsequentlycreated,thefinancialsectorhasthepossibilitytoincreasetheliquidityofSustainableInfrastructurebysecuritisingthebundles.Suchachievementwillhelpcontradictoneoftheinfrastructurecharac-teristics,i.e.itsilliquidity.Iftheliquiditypremiumshalldiminishasaresult,thisdrawbackislikelytobelargelyoffsetbytheexpansionofthesectorandtheentailedbusinessopportunities.Thisprocessshallmakesurethatsustainabilitydoesn'tcomeatanadditionalcost; inthiscase it iseventheactualenablerof investmentsandtheproviderof returns.At thesametime,SustainableInfrastructurecontributestoachievingtheSustainableDevelopmentGoals.Hence,theimplementa-tionanddevelopmentof thisnewAssetClasswillnotonly revealhighlyprofitable for institutionalinvestorsbutalsowillitenhancethecommongood.Thereisanefficientandprofitablewaytohelpdevelopandprotecttheworld;itiscalled“SustainableInfrastructure”.

CashandLoans

ListedEquity

InfrastructureEquity

AlternativeInvestments

HybridSustainableInfrastructure

StructuredDebt

TheexpansionofSustainableInfrastructure,Outlookto2030

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5 PolicyrecommendationsCorporateandgovernmentpolicymakersonalllevelsshouldnotonlyacknowledgethetremendousinfrastructuregap.Werecommendthattheytakeseriousactionforharmonisingandstandardisingthe infrastructuresectorsoastoimproveprojectcomparability.Thiswouldattractmassiveaddi-tional funding. For the successof this harmonization, it is crucial that standards for infrastructureprojectevaluationare created.While the ideaofproject financeas thebackbone foranew infra-structure asset class is well on its way, the standardization of documentation and disclosure re-quirements,whichiscurrentlyunderdiscussion,needstobecomplementedwithadditionalsustain-abilitycriteria.Severalsustainabilitystandardsforinfrastructuredebtandequity(namelyprojectfinance)willprob-ablyemerge,butwerecommendthatonlystandardsdevelopedunderthe ISEALmethodology–anon-governmentalorganizationwhosemission istostrengthensustainabilitystandardssystemsforthebenefitofpeopleandtheenvironment–shouldbeapplied.TheindependentSure®Standard,forexample,providesagenericandtransparentmeasurementoftherelevantresilienceandsustainabil-itycriteria.Theseareofparticular importance for investors,because infrastructureprojectsarebynatureassetheavyandlongterm.The“futureproofing”,standardizationandbundlingofsuchprojectswiththehelpofanindependentand credible sustainability and resilience standard provides thegroundwork for the creation of asustainable and resilient infrastructure asset class, which is particularly attractive to institutionalinvestmentswith long-term liabilities, suchaspension funds, insurancesor familyoffices.Thesus-tainableandresilientinfrastructureassetclassalsospeakstotheneedsofimpactinvestors.Creatingtrustinequityaswellasdebtinvestmentinsustainableandresilientinfrastructureforthisbroad variety of potential funderswill allow for a significant contribution of applied sustainabilitycriteriainbridgingtheglobalinfrastructureinvestmentgap.Certified,high-qualityinfrastructurepro-jects represent large-scale, main-stream investment opportunities with attractive returns, whilehelpingtoachievetheSustainableDevelopmentGoals(SDGs).

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6 Annexe

Annexe1

The8characteristicsofinfrastructure(adaptedfromWeberandAlfen2010)

(1)Infirstinstance,infrastructurerepresentsakeypublicservice.Infrastructureassetssupportthedevelopment of societies since they deliver fundamental public services such as the provision ofcleanwaterorelectricity,improvemobilityofpersonsandgoods,enhancepeople’shealthandedu-cation,andofferefficientcommunication.(2)Infrastructureisalsocharacterisedbyalowelasticityofdemand.Thismeansthattheuseofin-frastructureisoftenindependentfrombusinesscycles. Indeed,as itplaysfundamentalroles intheeconomy,itwillbethelastsectoraffectedbyeconomicfluctuations:forexample,therailandroadnetworksareusedevenduringdownturns.Hencedemandforinfrastructureservicesisexpectedtoremainrelativelyconstant.(3)Afurtherdimensionofinfrastructureisitsquasi-monopolysituationwithhighbarrierstomarketentry:giventhattheupfrontcostofnewinfrastructurecanbetremendous–sometimesamountingtosomeUS$billions–andthatthereareimportantreturnstoscale–oncethenetworkexists,con-nectingonemorehouseholdisrelativelycheap–,incumbentfirmswillseektocovertheentiremar-ket.Competitionisthereforelimitedoreveninexistent.(4)Asadirectconsequence,infrastructuremaybesubjecttoregulation.Infact,incaseoflittleornocompetition,regulatoryauthoritiesdocorrectthemarket.TakingtheexampleoftheEuropeanelec-tricitymarket,sinceFrenchelectricityproviderÉlectricitédeFrance(EDF)enjoyedanuclearrentthatpreventedfirmstoenterthemarket,ithadtosharepartofthisrent(Percebois,2013).Alternatively,authoritiescanfixepriceswhilecompensatingtheinfrastructureholderthroughasetofguarantees.(5)Longservicelifeisanotherparticularityofinfrastructure.ThecurrentroadnetworkinEuropeisstillpartlybasedonpatternslaidoutbytheRomanssome2,000yearsago,alludingtothelongtermlensesthroughwhichtolookatinfrastructure.Thismillenniumexampleiscertainlynotrepresenta-tive,butinfrastructureassetsoftenhaveservicelivesofasmuchasacentury.Ofimportanceforin-vestorsisthentoamortisetheirinvestmentwithintheassociatedlifespan.(6)Inadditiontothefeaturesmentionedabove,infrastructureprovidesadegreeofinflationprotec-tion:revenuesare likelytobetiedto inflationadjustmentmechanisms,be itthroughregulatedin-

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comeclauses,guaranteedyieldsoranyothercontractualguarantees.Whenrevenuesaregeneratedbyusercharges,pricestypicallyfollowtheConsumerPriceIndex(CPI)orGDPgrowth.(7)Regular,stable,yetlatecashflowsalsocharacterise infrastructure.Afteraninitialconstructionphase, infrastructureassetsare likely toproduce regularand stable cash flowsduring theiropera-tional phase. Thus, they are generally perceived as relatively safe investmentopportunity for risk-averseinstitutionalinvestors.(8)Infrastructureisoftencharacterisedbyrelativeilliquidity.Indeed,infrastructureprojectsusedtobetoodissimilartoallowthecreationofhomogeneousproductsbearinganalogousrisk.Asaconse-quence,thereiseitheranon-existingorunder-developedmarketonwhichtoexchangeownershipparticipations.Thelegalframeworkmayalsobeahurdlethatmakesinfrastructureilliquid.Annexe2

TheachievementoftheSustainableDevelopmentGoals (SDGs)hingesuponthedevelopmentofinfrastructure

“Goal6:Ensureavailabilityandsustainablemanagementofwaterandsanitationforall”highlightstheneedforbetterwaternetworks.Inparticular,itrequiresfurtherdevelopmentofwatercleaningstations,replacementofleakingoldleadpipesandconstructionofnewtubes,andtheintroductionofsmarttoolsthatwouldreducewaterwastewhileincreasingconsumptionefficiency.“Goal7:Ensureaccesstoaffordable,resilient,sustainable,andmodernenergyforall”stressestheurgeforbothlargerandcleanerpowergeneration.Aimingtousemodernformsofenergyandsimul-taneouslydecreasetheenergysector’senvironmentalfootprintimpliestheexpansionofelectricity.Inpractice,small-scalepowerplantsshallbeconstructedforinstance,smartelectricitynetworkstoo.“Goal8:Promotesustained, inclusiveandsustainablegrowth,fullandproductiveemploymentanddecentworkforall”canhardlybeachievedwithoutthedevelopmentofadenseinfrastructurenet-work,rangingfromfreightrailwaystoairportsincreasingworkforcemobility,fromfibre-opticcablestonewgeostationary satellites,bothboosting the transmissionof information. Infrastructuredoesindeed facilitate themobilityofhumans,goodsandservices, improvingeconomicproductivityandhumanwellbeingalike.“Goal9:Buildresilientinfrastructure,promoteinclusiveandsustainableindustrialisationandfosterinnovation”unambiguouslystressesthenecessitytofurtherdevelopinfrastructure.Itwouldbenefitfromthetechnologicaldiscoveriestoadapttoachangingenvironment;simultaneously,itwouldim-

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provethestateoftheindustrialproductionsystemsoastosecureresilientandinnovativeoutputsthatcontributetoincreasingpeople’squalityoflife.“Goal11:Makecitiesandhumansettlementsinclusive,safe,resilientandsustainable”isagoalinfra-structurecancontribute to. Indeed,enhancedpublic transportswill ameliorate theconnectivityofdifferent areas, reducing spatial inequalities.Moreover, adequate and well-thought infrastructurethat includes flooding areas for example helpsmitigate the effects of severe storms. The ThamesBarrierincarnatestheresilience-advantageforamegalopolissuchasLondon.Annexe3

BenefitsfromSustainableInfrastructureforachievingtheSustainableDevel-opmentGoals(SDGs)withrespecttothethreepillarsofsustainability

Economy Society Environment

Goal2–agri-

culture

Increasedefficiencyandresili-

enceassmall-scalefarmsknitadensenetwork

Localproductionresultsinhigher

employmentanddiminishingmi-grationinurbanareas,betterco-hesion

Increasedefficiencyimplieslow-

erecologicalfootprint

Goal6–wa-ter

Bettermanagementofscarceresourcebenefitsindustrypro-ductionandsupplytohouse-

hold

Preventionofseverehumanitariancatastrophesanddroughts(cf.California)

Bettermanagementofground-water,reductioninsurfacerun-off

Goal7–en-ergy

Idem Possibleempowermentofpeople,improvementinliteracyrateswhen

householdpossesseselectricityandlight

ReductioninGHGemissions,smallerimpactbypowerplants

(astheyareofsmallerscale)

Goal8–growth&employment

Solowmodel:infrastructure=capital,hencegrowthSustainableinfrastructureena-

blessustainedandresilientgrowthwithemploymentGreenjobsshallalsobelinked

toimprovedworkconditions.

Integrationof“new”populationwhilemaintaining/improvinglivingstandards

Aimsatdecouplingeconomicgrowthfromenvironmentalim-pact

Goal9–in-frastructure

Increasesresilienceandeffi-ciencyofeconomicactivity

Improvemobilityandconnectivity Chanelfluxesmoreeffectively,withlowerspillover

Goal11–cities

Greateravailabilityoflabourforce–bettertransports/densercities

Kremerianmodel:thelargerthepopulation,themoreideastoincreaseTFP

Multi-cosmopolitanism,coopera-tion

Smartcitiesreducetheirecologi-calfootprint

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7 GlossaryDebt-to-GDPratio:theratiobetweenacountry’sgovernmentdebtanditsGrossDomesticProduct.Thelowertheratio,themorewealthacountry’seconomyisabletoproduceinayearwithoutsignif-icantlyaddingtotheexistingdebtlevel.GDP:TheGrossDomesticProductmeasuresthewealthcreatedwithinacountryoveroneyear.Us-ingtheexpendituredefinition,GDP(Y,i.e.production)isthesumofconsumption(C),investment(I),governmentspending(G)andnetexports(X–M):Y=C+I+G+X-M

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G20,2014,B20InfrastructureandInvestmentTaskforcePolicySummary,AccessedonlineonJuly,11th2015http://www.b20australia.info/Documents/B20%20Infrastructure%20and%20Investment%20Taskforce%20Report.pdfKirklandR,2013,“Rethinkinginfrastructure:Aninvestor’sview“,McKinsey&CompanyInsightsandPublication,AccessedonlineonJuly27th2015http://www.mckinsey.com/insights/engineering_construction/mark_wisemanLeapJ.andL.Thomas,2011,“PrudentialregulationofforeignexposureforSouthAfricaninstitution-alinvestors”,CentreforResearchintoEconomics&FinanceinSouthernAfrica,LondonSchoolofEconomicsAccessedonlineonJuly13th2015http://www.treasury.gov.za/documents/national%20budget/2011/CREFSA%20Prudential%20Regulation%20of%20Foreign%20Exposure.pdfMainelliM.andCvonGunten,2015,“FinancingtheTransition:SustainableInfrastructureinCities“,Z/YenGroup,LongFinanceandWWF,MoylanM.,T.ShortO.Harmsworth,H.Kenyon,C.MullenandL.Weller,2015,2015PreqinGlobalInfrastructureReport,London,UK,PreqinLtd.OECD,2011,StrategicTransportInfrastructureNeedsto2030,Paris:OECDPublicationsAccessedonlineonJuly,10th2015http://www.oecd.org/futures/infrastructureto2030/49094448.pdfOECD,2006,Infrastructureto2030:Telecom,LandTransport,WaterandElectricity,Paris:OECDPub-licationsAccessedonlineonJuly,14th2015http://www.keepeek.com/Digital-Asset-Management/oecd/economics/infrastructure-to-2030_9789264023994-en#page4PricewaterhouseCoopers,2014,AssetManagement2020:AbravenewWorld,PwCLtd.AccessedonlineonJuly,14th2015http://www.pwc.com/gx/en/asset-management/publications/pdfs/pwc-asset-management-2020-a-brave-new-world-final.pdfPerceboisJ.,2013,“TheFrenchParadox:Competition,NuclearRentandPriceRegulation”inSi-oshansiF.P.,1stEdition,EvolutionofGlobalElectricityMarkets,NewParadigms,NewChallenges,NewApproaches,NewYork;ElsevierAcademicPressSmith,A.1776,AnInquiryintotheNatureandCausesoftheWealthofNations,London:W.Strahan

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