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Construction Corner: Green financing taking root among national leaders

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by Korky Koroluk

The concept of green financing got an important boost last month when leaders of the G20 nations received a report from a Green Finance Study Group.
Korky Koroluk
Korky Koroluk

The national leaders present, Prime Minister Justin Trudeau among them, pledged that they would invest in infrastructure as a means of boosting economic growth.

The study group had been set up almost a year ago, after the idea was advanced by Chinese President Xi Jinping.

China, with its heavy reliance on coal for power generation, has often been cast as an international outsider, a nation that emitted huge amounts of greenhouse gases and didn't seem to care.

But Xi proved amenable to overtures from United States President Barrack Obama and the two countries were early signatories to the Paris Agreement, in which nations agreed to try to limit global warming to something under two degrees above pre-industrial levels.

In order to do that, the world needs to limit its burning of fossil fuels and to build clean, sustainable and resilient infrastructure. That would not only benefit the global climate, it would help boost the global economy as well.

The plight of the infrastructure in most countries is an old, sad story. The McKinsey Global Institute's research tells us that the world still invests only US$2.5 trillion annually in transportation, water, power and telecommunication networks, well short of the estimated $3.3 trillion needed simply to keep up with current trends.

In fact, McKinsey noted, most G20 countries actually invest less for infrastructure today than they did before the 2008 financial crisis, even though national leaders acknowledge that such investments can spur growth.

Brendan Bechtel, the new CEO of construction giant Bechtel Group, wrote an op-ed article recently in which he called on the U.S. congress to increase infrastructure spending and to take advantage of non-traditional financing tools like public-private partnerships. That, he wrote, can shift responsibility for financing and maintenance to the private sector while allowing public organizations to stretch their limited budgets to include more infrastructure projects.

He said that is essential in light of a study by the American Society of Civil Engineers, which estimated that the U.S. is facing an infrastructure funding gap of US$1.44 trillion — a gap that could skyrocket to US$5.18 trillion by 2040.

Interest rates in the industrialized world are at historic lows, which should make municipal bond issues more attractive to investors. Some local governments have invested, but afraid of political backlash, many others have continued to put off large increases in infrastructure spending.

There have been many studies illustrating the benefits of such spending. One of the more recent ones was reported in Bloomberg. In that article, writer Matthew Winkler said that when plans were made 30 years ago to invest US$2 billion in the Denver International Airport, taxpayers pushed back.

But the project went ahead and now provides an annual economic benefit of $26 billion, Winkler said, adding that, over time, it has created more than 270,000 jobs. He also said that in the last five years, investors who bought the bonds issued to finance the project, had a total return of 19 per cent.

Results like that make it hard to understand the hesitation in launching infrastructure projects. But the reluctance may be fading, helped along by the notion of "green" bonds, or "climate-aligned" bonds, the kind of investment instruments envisaged by China's Xi Jinping when he suggested the Green Finance Study Group.

And Barclays PLC, the large international banker, recently referred to the growth in infrastructure projects as "the story of the year," and predicted that municipal bond issues might reach $400 billion in the U.S. by the end of this year.

Investors also have the option of investing in Canadian green bonds. That's a little-reported story that I'll come back to next week.

Korky Koroluk is an Ottawa-based freelance writer. Send comments to editor@dailycommercialnews.com.

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