Why infrastructure will be key to a green recovery

Why infrastructure will be key to a ‘green’ recovery

Alex Araujo, fund manager at M&G Investments

Alongside an immediate priority to protect health, governments around the world are looking to ensure that the pandemic does not do irreversible damage to the global economy. Huge fiscal stimulus packages, amounting to trillions of US dollars, have been pledged since 2020 to prevent a protracted recession. 

Take a look at our glossary for explanations of the investment terms used throughout this article.

Infrastructure investment is high on the agenda, not only because it can lay the foundations for long-term economic growth but also because it is essential. Indeed, reversing decades of chronic underinvestment in US infrastructure is a key pillar of Joe Biden’s presidency.

As the urgency to move towards a zero-carbon economy has grown, the requirement for new and improved infrastructure has come into focus. I believe that calls for a ‘green’ recovery will only accelerate investment in solutions that support the low carbon transition.

‘Building back better’

In Europe, the issue of sustainability is central to the €750 billion “Next Generation EU” recovery plan, which promotes investments that help cut greenhouse gas emissions and advance renewable energy and energy efficiency.

It is hoped that large-scale public investment, combined with regulatory changes, will galvanise the private sector investment needed for the bloc to reach its goal of being climate neutral by 2050, in line with 2015 Paris Agreement commitments.

In the US, where infrastructure greatly needs repair and improvement, it is proposed that more than US$2 trillion will be spent on rebuilding and enhancing it over the next ten years. The White House pledges that “every dollar spent… will be used to prevent, reduce, and withstand the impacts of the climate crisis”.

The infrastructure built today will determine whether climate targets are met. After all, the OECD estimates that more than 60% of global greenhouse gas emissions are related to physical infrastructure.

A transformation of the systems that form the backbone of modern society is therefore urgently needed. To meet the climate and development objectives articulated in the UN Sustainable Development Goals (SDGs), the OECD has estimated that US$6.9 trillion needs to be invested each year until 2030.

The need for cleaner energy

It is unsurprising that the energy sector is a top priority for decarbonisation, given power generation accounts for around 40% of global CO2 emissions. 

Encouragingly, the shift away from burning coal, the most polluting fossil fuel, makes economic sense. The cost of wind and solar electricity generation has tumbled over the past decade, relying ever less on subsidies to be competitive. According to the International Renewable Energy Agency, replacing much existing coal-fired capacity with new solar farms would very quickly pay for itself.

Yet the scale of the challenge is enormous, especially as global demand for electricity is set to keep rising. The International Energy Agency estimates that around US$1.3 trillion a year needs to be invested if SDG 7 – affordable and clean energy for all – is to be achieved by 2030.

Low-carbon electricity is a cornerstone too for more sustainable transport, which accounts for around one-quarter of global CO2 emissions. Beyond electric cars, the long-term trend towards growing urban populations creates a need – and an opportunity – for efficient mass transit systems and the electrification of heat.

Lessons from the pandemic

The experience of the pandemic has also revealed the critical importance of the infrastructure that connects us digitally. Without the network of data centres, masts and fibre optic cables, the ‘work from home’ economy would not have been possible. 

Digital infrastructure can also be a ‘green enabler’, in the sense that better digital connections can reduce the need for travel and improve access to opportunities. Further investment is needed to enhance digital connectivity, which is a key ingredient to meeting SDG 9 – building resilient infrastructure, and promoting inclusive and sustainable industrialisation. 

We must also not overlook the vital need to invest more in the social infrastructure that supports our communities. The world has come to realise that healthcare infrastructure, for instance, must improve to accommodate the kind of crisis that we are going through. Indeed, the need to upgrade hospitals, as well as homes and schools, is an important part of the US infrastructure plan. 

Opportunities in the ‘green’ recovery

Commitments to invest in a ‘green’ recovery should prove to be a powerful tailwind for companies that own and develop physical infrastructure assets, like wind farms, solar parks and electricity grids, all of which are necessary to transition to a lower carbon future. Likewise, for the businesses that own the digital and social infrastructure on which modern economies depend.

I believe infrastructure companies exposed to the structural shift towards a more sustainable economy are well placed to prosper for decades to come.

The value and income from a fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested.

The views expressed in this document should not be taken as a recommendation, advice or forecast.