Photo: cegoh | Pixabay
In my line of work, we have a Holy Grail that many brilliant people have spoken, written, and toiled to achieve: attracting international institutional investors to infrastructure projects in emerging countries.
Yet, according to the recent World Bank Group report, Contribution of Institutional Investors to Private Investment in Infrastructure, 2011–H1 2017, the current level of institutional investor participation in infrastructure investment in emerging markets and developing economies (EMDEs) is only 0.7 percent of total private participation.
This Bank Group report estimates that emerging countries need to invest $836 billion per year, or 6.1 percent of current service level of existing assets. Meanwhile, the International Monetary Fund (IMF) estimates that more than $100 trillion is held by institutional investors—with around 60 percent of assets held by pension and insurance funds from advanced economies—making the amount mobilized for EMDE infrastructure look even more paltry.
But the siren song still rings clear—
Photo: Grzegorz Zdanowski / Pexels Creative Commons
Some regard institutional investors—with their deep pockets—as the white knights filling the huge investment gaps in infrastructure development in emerging markets and developing economies (EMDEs). The IMF estimates that some 100 trillion dollars are held by pension funds, sovereign wealth funds, mutual funds, and other institutional investors. Unquestionably, the long-term nature of their liabilities matches the long-term financing requirements of infrastructure projects. So, it’s no surprise that institutional investors are seen as the white knights of infrastructure finance.
Mats Andersson, CEO of Swedish pension fund AP4, spoke at the World Bank Group about the importance of transparency for investors and the impact of a carbon price in shifting investment to cleaner, more sustainable development.
Here is a trillion dollar question: How will the portfolios of long-term asset managers like pension funds, foundations and endowments be affected by climate change? These institutions, in contrast to commercial banks, are legally obligated to take a long-term view in managing their returns. A new report by Mercer, a leading consulting and investment services firm, provides the first look at yet another window on the complex consequences of climate change—the implications for strategic asset allocation.
A headline result of the study is the estimated increase of up to 10 % in overall portfolio risk, primarily due to policy uncertainty—equivalent to as much as US$8 trillion by 2030. Traditional equity and bond holdings—usually the most conservative forms of hedging against uncertainty –- are most at risk of underperformance. In contrast, carefully selected investments in climate- sensitive sectors may actually reduce overall portfolio risk.
The International Finance Corporation (IFC) and UK’s Carbon Trust, along with 14 institutional investors collectively managing over US$2 trillion, funded the analysis, which was carried out by Mercer. The analysis looks at impacts by sector, region, and asset category (bonds, private equity, real estate, etc.) and builds on a set of climate change scenarios out to 2030 developed by the Grantham Research Institute at the London School of Economics and the consulting firm Vivid Economics.