The role of climate finance

At the same time, capital markets are increasingly looking at ESG as a necessity rather than a nice to have. For many core and core plus real estate investors, it’s an expectation that assets are energy efficient; for those looking for a value-add or opportunistic purchase, it’s common to improve its ESG value. In addition, with the era of zero interest rates over, this new era of Great Volatility favours a more active manager with stock selection crucial. Assets with strong ESG performance have better access to capital and lower borrowing costs – for assets with the worst ESG ratings, the cost of capital is around 120basis points (bps) higher than for those with the best ESG ratings, according to MSCI.

Against this backdrop of higher interest rates and volatility, investors have shown increasing interest in infrastructure as it provides stable and predictable cash flows; fundraising for infrastructure investment in 2023 was 43% higher than in 2013. This can be good news for the climate transition as green infrastructure is integral to achieving global and national climate goals. Not only is infrastructure investment important for the global green transition but for developing countries, improving and expanding infrastructure is necessary to continue wealth and population growth.

Infrastructure investment to support sustainable development

Developing countries are home to the world’s fastest growing cities, providing a new world of opportunities for owners and occupiers. Young, educated populations are magnets for growing and scaling businesses and this will underpin demand for offices, manufacturing and logistics space, while rising disposable incomes will drive demand for new retail and leisure destinations.

These growth hubs can learn from the challenges of today’s cities by developing sustainably. Public transport networks need to be invested in and expanded, biodiversity and green spaces need to be protected, and energy needs to come from cleaner and more sustainable sources. And the good news is that there are cities who have accomplished these things. In Utrecht half of all residents commute by bike on 420km of cycle paths, Singapore has kept around 50% of its land as green space, and Bergen is home to a 100% renewable shore power facility which dramatically reduces pollution from docked cruise ships.

Cities in developing countries provide investors with a unique opportunity for achieving high levels of growth. Although these cities aren’t guaranteed to become the global powerhouses of the future, there are other cities that have already overcome many of the obstacles that they face, providing blueprints to that success. At the same time, private capital is paying more attention to infrastructure, with energy-efficient assets a necessity for owners and occupiers alike. Increased collaboration between private investors and public initiatives is crucial in achieving a climate transition and ensuring a sustainable future for all.

FURTHER INFORMATION

Contact Charlotte Rushton

IMPACTS: Environment