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Net-Zero Navigator: Infrastructure
The speed of net-zero transition will be determined by the wider enabling environment to control emissions. With the power and transport sectors contributing over two-thirds of CO2 from demand for energy1, the infrastructure ecosystem to support increased demands from a growing population and industrial activity can either bring forward country decarbonisation pathways, or delay them. The speed of change is in turn determined by access to capital, and policies. We think infrastructure modernisation is a critical enabler of faster renewable electricity scale-up, economy-wide electrification, and adoption of low-carbon fuels.
From bottleneck to catalyst
Driven by population and economic activity, global energy demand and mobility needs are experiencing unprecedented growth. Meanwhile, variable renewable energy (VRE), such as solar and wind energy, is increasing its share in the global electricity mix. The evolving energy landscape has led to higher demand for power infrastructure, including electricity transmission and distribution systems, and utility-scale energy storage systems. At the same time, transport network demand has increased to support increasing passenger and commercial travel as international trade reconfigures amidst US-imposed tariffs.
As efficiency and cost of renewables has significantly improved in recent years, development and investment of renewables has outpaced that of electricity grid systems. Since existing electricity grids were not designed for high integration of renewables, intermittency of renewables could introduce instability to the grid system, forming a bottleneck towards achieving a zero-emission grid. Upgrading the transmission and distribution systems, as well as energy storage systems, could improve the balance of on-grid electricity demand and supply, and thus catalyse the adoption of renewables and decarbonisation.
For transport infrastructure, we think its role in driving net-zero transition is more diverse than power infrastructure. Airports and shipping ports could act as an enabler of low-carbon fuel adoption – sustainable aviation fuel and biofuels, which contribute to decarbonising aviation and shipping, as electrification is still far from largescale viability and commercialisation in those sectors. Rail and road transport could contribute to catalysing electrification of most of the transport sector by displacing fossil fuel-powered vehicles directly and increase the adoption of electric road vehicles.
Despite the decarbonisation potential of infrastructure modernisation, infrastructure has been underfunded due to significant capital expenditure, high cost of capital, and a longer asset lifecycle than other investment in the ecosystem. Based on the current investment trajectory, the global infrastructure investment gap would be more than USD15trn between 2016 and 2040, according to Global Infrastructure Hub. In a previous edition of the Net-zero Navigator, we highlighted that carbon-intensive industry-backed sovereign wealth funds (SWF) could provide additional sources of funding for net-zero transition. Considering the characteristics of infrastructure and the SWF mandate to provide long-term returns for the population, we think infrastructure would be a good match for portfolio diversification for SWFs. In 2023, the share of infrastructure in SWF direct investments was 20%, albeit from a low base, and long-term momentum is increasing, as shown by a five-fold increase in value since 2018, according to the International Forum of Sovereign Wealth Funds.
Infrastructure disruption driven by climate change and extreme events threaten essential services like education and health, costing between USD391bn to USD647bn annually2. This highlights the vulnerability of existing systems and the urgent need for action. Infrastructure is also key to achieving net-zero outcomes by building resilience. Resilient natural infrastructure such as wetlands, forests, and urban green spaces strengthen community resilience by integrating ecological processes into urban planning, creating spaces that are both adaptive and regenerative.
Multilateral development banks (MDBs) are important for mobilising climate infrastructure finance and derisking infrastructure projects. However, the time frame from project inception to completion can be long, and from a corporate governance perspective, the effectiveness of MDBs’ boards of directors can be a contributing factor to speed of delivery. However, there is lack of board functional diversity, including climate-related knowledge in MDBs given that most directors have a background in banking and finance (an average of 94% of non-resident BoDs and 73% for resident boards3). In addition, we think a greater focus on board socioeconomic diversity is needed to ensure inclusive culture and improve performance. In our view, greater focus on governance practices will help optimise decision-making and increase investor and other stakeholder trust.
In the full report, we identify the role that infrastructure plays in the net-zero transition, focusing on power and transport infrastructure, which have the largest investment needs at USD3.2trn annually by 20404 . On balance, we expect that the economics and pressing demand for infrastructure upgrades and rollout will be the key driver of the pace of execution. We also expect diversification of the sources of capital that fund infrastructure towards SWFs.
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What is the Net-Zero Navigator?
The Net-Zero Navigator is a monthly flagship report from HSBC Sustainability Research that tracks the latest developments in the net-zero space. The aim of this report is to help investors take a view on the three most material issues in terms of delivering a Net-Zero future.
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- World Resource Institute CAIT Database
- World Bank, Underutilized Potential: The Business Costs of Unreliable Infrastructure, June 2019
- A Prizzon et al., Governance of multilateral development banks: options for reform. ODI Report, 2022
- Global Infrastructure Outlook, by Global Infrastructure Hub
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People power: Enabling the net-zero shift
People are at the heart of the net-zero transition.
