Jerome Haegeli, group chief economist at the Swiss Re Institute, reflects on a year of lockdowns, its impact on our thinking around environmental issues, and the key role institutional investors will play in a green recovery.
Our lives transformed when the UK first plunged into lockdown last year. As the world came to a standstill, breaking from the everyday got an increasing number of people thinking about the impact of their daily routines on the environment. Many companies – not least insurers – had similar realisations, considering how they might refocus their efforts on building a more resilient and sustainable future.
The role of green infrastructure investment in this transition has become even clearer since – along with a realisation that investment in infrastructure makes good economic sense too.
Aside from helping insurers meet their ESG goals, infrastructure has always been attractive owing to its credit quality and inherent liquidity premium. But as with many asset classes, the impact of COVID-19 took its toll.
Global infrastructure transaction value fell by 57 per cent in the first quarter of 2021, as economies around the world grabbled with surges of new infections. Meanwhile, deal values declined sharply during the second and third quarters of 2020, as both new and ongoing projects were placed on hold.
But a sudden recovery at the end of last year saw infrastructure making a surprise comeback. As a result, the asset class experienced just a 2 per cent fall for the full year, revealing its true strength and potential for future growth. As the vaccination roll-out enables economies to reopen and as governments begin investing once again, this makes infrastructure worth monitoring as we move through the recovery phase.
Take the US as an example – President Biden has proposed a two-phase, USD 3.2 trillion public infrastructure package over 10 years. On this basis, our current forecasts predict that infrastructure projects will offer private investors an estimated USD 1.4 trillion annual global opportunity to fill the funding gap, particularly when it comes to green and sustainable infrastructure.
Of course, certain sectors will continue to lag, particularly among those who by the very nature of their business have been unable to stay in operation amidst ongoing government restrictions. The shutdown of international travel means airport investment will no doubt be behind in the recovery, while supply chain disruptions triggered by the pandemic have hurt certain areas of sectors like automotive and industrial products, causing ongoing shortages of labour and materials.
But others are set to make significant gains. Renewable energy investment in particular is likely to experience strong growth as providers prioritise green infrastructure, supporting the recovery from COVID-19.
COVID-19 will change the design and use of infrastructure and this will open up whole new areas of opportunity. For example, mobility restrictions are leading to new street designs that prioritise walking and cycling, while the rise of remote working has affected usage of transport systems, office buildings and urban areas.
Elsewhere, continued social distancing is likely to change designs of buildings, public places and urban spaces. In turn, this will drive new investment, especially in digital infrastructure such as data centres.
But much of the future infrastructure opportunity and need is in emerging markets. Emerging economies are set to drive two-thirds of global GDP growth and are home to more than 80% of the world's population. Global resilience therefore strongly relies on the strength of emerging markets. A key question that remains here though is how we can bring the tremendous amount of assets insurers have under management in the advanced economies to where these projects are located. Achieving this calls for far more transparency and harmony across the asset class.
So while there is significant opportunity for insurers looking to take advantage of the rebound and support the development of a more sustainable future, in order to unleash this to its full extent, policymakers will need to establish a market-friendly framework that moves infrastructure finance closer to being a standardised asset class.
But teething issues are no reason to rule out infrastructure in the here and now. As an industry, we have a duty to back assets that match the long duration of our liabilities, making infrastructure an ideal long-term investment asset class. Even against the current backdrop, investing in sustainable projects and green infrastructure could be extremely worthwhile – while importantly creating incentives to build for resilience right now.
While it's clear collaboration across the public and private sectors will be vital if we are to make green infrastructure projects as prosperous and transparent as possible over the long-term, in the face of accelerating climate change and its impacts on economies around the globe, we need to be engaging with sustainable infrastructure projects now. This will be essential to creating a more sustainable future and supporting our long-term economic recovery.
