Home Finance Avoiding the Tragedy of the Horizon: Financing Sustainable Infrastructure in Emerging Economies

Avoiding the Tragedy of the Horizon: Financing Sustainable Infrastructure in Emerging Economies

by internationalbanker

By Martin Chrisney, Senior Director, IDAS Institute, KPMG, and Fernando Faria, Global Deputy Head of KPMG IMPACT and Latin America Head of Infrastructure, KPMG




Net-zero emission goals and global targets for better environmental, social and economic outcomes are found in the Paris Accord and the Sustainable Development Goals (SDGs). The 2015 agreements set clear guidance on the direction of change. What remains less certain is the pace of change in the policies, regulations and markets needed to reach these targets. For infrastructure investments, which are long-lived assets, this uncertainty exacerbates the inherent tension between today’s investment decisions and the impacts of long-term trends and risks.

In emerging markets, where demand for greenfield assets is greatest, the risk calculus is even more complicated. The infrastructure investment required in emerging economies is estimated between US$1.0 and US$1.5 trillion a year.1 Yet, these markets often lack political, economic and regulatory stability; they have limited access to long-term finance—particularly in local currency—and less efficient financial markets to allocate capital.

Three key elements are needed to help address the infrastructure needs of emerging economies successfully. These start with innovations in the financing and valuation of infrastructure assets, better targeting of investments to meet social and environmental goals, and, finally, incorporating new incentive structures that better align investments with sustainability goals.

Finance is not enough

Discussions among policymakers and market participants have focused attention on raising additional finance for infrastructure and social programs—broadly, ESG (environmental, social and governance) investing. The case was made most recently in the United Nations 2015 Addis Ababa Action Agenda with the call to move from billions to trillions in international development assistance. There is both a scale and sense of urgency for new financing and, once again, renewed efforts to combine public and private capital with domestic resources to reach global targets.

In the ensuing years since 2015, trends in sustainable finance have led to the greening of capital markets. For infrastructure assets, green bonds—followed by social bonds and sustainability bonds—have set standards for allocating capital to ESG-linked investments and added transparency to the “use of proceeds”. The market for Green, Social and Sustainability (GSS) bonds topped $1.2 trillion in 2021,2 and green bonds alone will likely reach $1 trillion in 2023.3 In parallel, corporates are greening their balance sheets with net-zero commitments and providing greater non-financial reporting as part of their commitments to the broader stakeholder community. (Data from KPMG’s “2021 KPMG CEO Outlook Pulse Survey” indicates that corporate-sector adoption of ESG strategies is viewed as linked to improved profitability.)4 Both these efforts respond to “pull factors”, as firms and investors consider climate risks in their operations and supply chains, and “push factors” from increased shareholder and stakeholder activism, seen most vividly in the energy sector.

For the infrastructure sector, adopting Green Bond Principles (GBP) and voluntary metrics such as the International Finance Corporation’s (IFC’s) Equator Principles and related performance standards is valuable to help establish good practices. However, additional steps are needed if self-regulation is to meet ambitious societal targets such as the SDGs and net-zero emissions. In the competitive setting of infrastructure awards, investments need to be guided by clear, open standards of what constitutes sustainable infrastructure.

Infrastructure’s new role

The infrastructure sector is responsible for more than three-quarters of global carbon emissions, and any meaningful decarbonization strategy requires addressing the emissions generated by energy use in transport, industries and buildings.5 In terms of social impact, infrastructure is key in emerging economies. For the foreseeable future, rising middle-class demands, the need for more equitable access for underserved communities and rapid urbanization will likely drive infrastructure demand. Housing, basic infrastructure for roads and energy, and social infrastructure—for example, schools and hospitals essential for equity and social wellbeing—will all be strained.

For these reasons, it is important to apply a social and environmental lens to decisions about how and where to invest. Infrastructure assets have direct and indirect impacts on ESG outcomes via multiple channels throughout the assets’ lifecycles. Most notable are their contributions to renewable energy and adaptation to the impacts of climate change through resilient design. Expected social benefits come from expanding access to needed services for the most vulnerable and preserving natural assets, such as environmental barriers to coastal flooding and carbon sinks.

The key element is to link the financing instruments to ESG outcomes from the start of the program design and not as an afterthought (see Figure 2). The challenge is twofold. On the one hand, it should be confirmed that infrastructure can play this role in the emerging markets in which the needs are greatest. Second, the definition of infrastructure assets should be updated to embed sustainability as a key metric in line with the UN’s 2030 Agenda for Sustainable Development.

How to create incentives for sustainable infrastructure

In the absence of widespread adoption of carbon taxes (or border adjustment mechanisms), investments in sustainable infrastructure will likely be driven by market forces as technological innovation pushes down costs and by efforts to incentivize investments and establish global standards. Whether these efforts will be sufficient to scale up sustainable infrastructure investments in emerging markets is an open question.

A first step is to redefine the asset class so that the focus is on sustainable infrastructure assets. Today, asset owners and asset managers deal with a myriad of regulations and reporting requirements that are not consistent and lack the transparency that the sector requires. The recently announced creation of the ISSB (International Sus­tain­abil­ity Standards Board) under the IFRS (International Financial Reporting Standards) Foundation is a good start towards that standardization and is expected to have a flow-down impact on infrastructure investments. The FAST-Infra initiative, promoted by the IFC (International Finance Corporation), Global Infrastructure Facility (GIF) and HSBC, which seeks to establish a sustainable infrastructure label and asset class, is another important step in the right direction.6

Next, clear, standardized procurement rules that favor sustainable investments across the project lifecycle and the supply chain should be embedded in all tenders. ESG considerations should cover all procurement phases from pre-qualification to approval of project variations to changes in the shareholder structure to help ensure continuing commitment to the ESG metric. In emerging markets, a balance should be struck between quantifiable decarbonization and net-zero indicators and metrics of social and economic gains—such as access by underserved communities, employment creation and economic growth. An approach that captures total ESG-value creation can help determine the “art of the possible”.

Underlying this approach are global standards agreed to by government contracting agencies that establish common ESG indicators for their procurement programs. A global network of project-delivery units can share knowledge, set common standards and develop practices that leverage private-sector capital. The recommendations of the Sustainable Markets Initiative for scaling private-sector investment into sustainable projects is a model of action.7

Finally, the gap in the availability of risk capital, particularly relevant in emerging markets, should be addressed by various stakeholders. At the forefront, development-finance institutions can revisit their catalytic roles using equity and guarantees for certified sustainable projects and consider the sales of post-construction assets on their balance sheets. Governments in the Global North should meet their commitments made under the Paris Accord and COP26 (2021 United Nations Climate Change Conference) and increase the availability of risk capital to developing economies. Innovative financial instruments can pool risk capital, such as the net-zero equity promoted by our KPMG colleagues, to help raise financing to target environmental impact over risk-adjusted returns.8


Today’s new infrastructure assets are here for the remainder of the 21st century and into the 22nd century, so these investment decisions will impact future generations. Taking the long view is essential. Failing to do so would be further evidence of the “tragedy of the horizon”, coined by Mark Carney—former governor of the Bank of England (BoE)—to describe the shortsighted search for profit in financial markets without consideration for long-term risks and impact. Ideally, the future is one in which addressing the climate emergency and building equitable societies are not conflicting but mutually reinforcing goals.



1 United Nations Sustainable Development Goals: “Addis Ababa Action Agenda,” 2015.
2 BloombergNEF: “Press Release: Sustainable Debt Issuance Breezed Past $1.6 Trillion in 2021,” January 12, 2022.
3 Climate Bonds Initiative: “Sustainable Debt Market Summary H1 2021,” September 2021.
4 KPMG: “KPMG 2021 CEO Outlook Pulse Survey: Preparing for a New Reality.”
5 World Resources Institute (WRI): “Climate Watch,” 2020.
6 Climate Policy Initiative: “FAST-Infra – ‘Finance to Accelerate the Sustainable Transition-Infrastructure’ Initiative.”
7 Sustainable Markets Initiative: “Mechanisms to Scale Private Sector Investment in Sustainable Projects,” October 2021.
8 KPMG Global: “Net zero equity – a fairer future for all,” Mike Hayes, October 29, 2021.



Martin Chrisney is the Senior Director at KPMG’s International Development Assistance Services (IDAS) Institute based in Washington, D.C., where he coordinates the delivery of strategic and technical support on development topics to support governments, multilateral banks, bilateral donors, civil society and philanthropic organisations.

Fernando Faria is the Global Deputy Head of KPMG IMPACT, a platform that supports and empowers KPMG professionals as they assist clients in fulfilling their purposes, achieving their ESG goals and supporting the world’s attainment of the UN Sustainable Development Goals (SDGs). He is also the Latin America Head of Infrastructure for KPMG.



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