Private investors are eyeing opportunities in sustainable infrastructure as the Biden administration makes the case for new legislation that provides much-needed funding for green infrastructure initiatives across the United States.
As infrastructure takes center stage, policymakers and investors alike are setting their sights on how to finance projects with a hefty price tag. The American Civil Society of Engineers (ACSE) recently gave the United States a C-minus score for the country’s current infrastructural conditions. In the report, the ACSE estimates the United States faces a $2.6 trillion shortfall in infrastructure needs. The new law allocates $550 billion to American infrastructure projects such as roads, highways, broadband, power and water systems, and climate resiliency over five years.
At the recent VERGE 21 conference, Melanie Nakagawa, senior director for climate and energy at the National Security Council who has advised President Joe Biden on his climate plan, emphasized the importance of forming partnerships between private investors and the government to tackle the monumental task of meeting the country’s infrastructure needs.
"Trillions are needed from private investors to fill the [financial] gap," Nakagawa said. "The way we [the government] see it and how we are trying to address it here is first, to scale up infrastructure investments to fill the gaps. And second, ensure that existing money, current investments, are aligned with net-zero pathways."
Redefining bankability
The momentum provided by the infrastructure bill comes at a time when private investors are looking toward sustainable infrastructure as a way to diversify their portfolios with stable, inflation-linked cash flows, all while contributing to a greener future.
During the VERGE 21 conversation, which assessed the role of private investment in sustainable infrastructure, panelists discussed overcoming bankability, a primary barrier to increased private investment. In order to draw more private investors, David Naftznger, who serves as the executive director of the Great Lakes St. Lawrence Governors and Premiers, identified the need to create green project pipelines.
"Globally, you have $35 trillion being invested in sustainable infrastructure, $17 trillion of which is in the United States … you have a huge reservoir of capital looking for investible deals. In order to put that reservoir to use, we need to present models and deals that work consistently for investors," Naftznger said.
Globally, you have $35 trillion being invested in sustainable infrastructure, $17 trillion of which is in the US … you have a huge reservoir of capital looking for investible deals.
In a study assessing institutional investment in green infrastructure, the Organization for Economic Cooperation and Development makes the case for the establishment of green project pipelines, arguing that this creates more certainty for investors that there will be follow-up investment-grade green infrastructure projects as opposed to one-off projects that are less attractive investments. According to Naftznger, such pipelines, presented in tandem with other opportunities such as securitized products, can help provide a framework for potential investors to rely on when gauging risk as well as shaping the future market for infrastructure projects.
Avoiding information bottlenecks
Shilpi Kumar, a partner at the investment platform Urban Us, noted the importance of transparency and accessible information in streamlining private investment into green infrastructure.
"In order to avoid information bottlenecks, we need to provide investors with a breakdown on what is happening in each sector," Kumar said. "With the infrastructure bill, we need to be thinking about what categories and line items private investors should be thinking about. For example, with water, you have things like clean water, piping servicing and long-term water supply given climate change. In order to increase investment, we have to expand understanding of the project space."
Private-public funding provides launchpad for innovation
While panelists pointed to energy storage assets, solar energy and carbon capture and storage as categories to watch, Neal Rickner, current managing partner of Elevation Ventures who has previously led teams at Google on projects such as wind turbine technology, advised investors to look toward the innovation being fostered by private-public partnerships. Rickner explained that recent government funding has encouraged entrepreneurs to pursue opportunities in the infrastructure space, driving a surge in startups in the field.
"Public money serves as a catalyst, [generating] investment and excitement in the private sector," Rickner said. "In consideration of opportunities for innovation, entrepreneurs are throwing their hat in the ring. Through a combination of private and public funding, entrepreneurs can move quicker, driving infrastructure according to investor interests."
Boring is beautiful
In order to scale sustainable infrastructure, however, Naftznger argues that it is necessary to address what investors are looking for: stable returns.
"I always say, ‘Boring is beautiful.’ There is a lot of animation and that’s terrific; investing in new ideas and technologies is transformational," Naftznger said. "However, there is value in traditional boring returns. There are trillions of dollars that are looking for long-term predictable returns and are trying to base their investment decision-making around these cornerstones of the portfolio. Infrastructure could provide that."
Nakagawa agreed, echoing that on the government end it is often the less exciting changes that can make the largest impact. She used the recent 2030 Climate Clean Energy Partnership between the U.S. and India as an example.
"I served in the Obama administration as well, and while it was a 175-gigawatt renewable target then, today it is 450 gigawatts," Nakagawa said. "If you are a renewable developer, India has your attention. But how you facilitate the actual scale of renewable development and investment is in the boring things. So we’re providing commercial paperwork and shifting supply chains to allow for acceleration."
"These investments are opportunities to transform the way we live our lives," added Naftznger of the future of private investment in sustainable infrastructure. "Infrastructure has changed drastically over the past 20 years. Investors care about making this change as much as the everyday people that benefit from them. So it’s important to show investors what’s repeatable and … practical pathways to achieving what we all want."
