By Mohammad Raafi Hossain, Founder and Chief Executive Officer of Fasset
2020 has witnessed wildfires run rampant in Australia, tremendous storms and flooding in the southern United States, and the largest ice shelf left in the world shattering earlier this month—climate change and the threat it poses to society are startlingly obvious. The impact of climate change will go well beyond the physical world, however, and is set to have significant knock-on effects to the global economy. By 2050, experts estimate, climate change will cost the world economy $7.9 trillion.
While haunted by the threat of climate change, both developed and developing nations are facing deepening challenges around infrastructure development. In emerging economies, rampant population growth and rapid urbanization are placing increased pressure on existing infrastructural systems. Meanwhile, developed markets are engaged in maintaining relevance in an increasingly technology-driven, global economy and are in need of modernizing rapidly-dating infrastructure. Around the world, the need for infrastructural development and economic stimulus has never been so great.
These challenges are even more substantial when reviewed in the context of the economic downturn catalyzed by the COVID-19 pandemic. Earlier this year, markets witnessed the fastest selloff in American stock market history since the 1929 Wall Street Crash and Great Depression Era. Meanwhile, 15.5 million Americans are currently unemployed, compared to less than 4 million at the start of 2020, while some 15 million are facing unemployment in the European Union. National leaders now have global recession and a public health pandemic to consider, along with climate change and the need to maintain the viability of their cities and national economies through infrastructure development.
With such a myriad array of problems, however, comes the opportunity to re-examine the way governments approach economic stimulus to gain the desirable effects across all of these areas. Sustainable infrastructure projects can provide an immediate answer to current government requirements and the challenge of infrastructure development—while having long-term climatic and economic benefits.
Studies have shown that for every $1 billion of construction work, 6,000 man-years of employment are created—meaning the potential of the sustainable development industry to offer substantial opportunities for economic growth is clear. As millions around the world face job losses, the impact which this could have in kick starting the global economy is difficult to overestimate. Governments would do well to take seriously the immediate and short-term benefits of supporting development projects of this nature—particularly when combined with the pressing requirements surrounding the provision of sound infrastructure to meet the economic and social needs of their citizens.
International organizations have been quick to set the pace for regional and national actors’ approach to supporting sustainable development within their borders. The United Nations’, Sustainable Development Goals (SDGs), adopted by all of its member states, include an increased focus on the development of resilient infrastructure (Goal 9), as well as the construction of sustainable cities and communities (Goal 11). On paper, therefore, governments and international organizations are in clear alignment on the necessity of supporting sustainable infrastructure development, while the benefits of doing so are clear.
Why then, does the sustainable development sector remain substantially under-provisioned?
Barriers to Entry
In short, government funding has proven insufficient in driving development of sustainable infrastructure—tax revenues simply cannot keep up with the demand. As a result, many worthwhile and important projects struggle to attract sufficient capital funding. The depth of the funding problem for sustainable infrastructure projects is made clear by the World Economic Forum’s estimates that there will be a $15 trillion deficit in sustainable infrastructure funding by 2040 as governments struggle to keep up with sector demand.
With promising results for investors, it would be easy to assume that private actors would be eager to enter the market and to reap the benefits of supporting much-needed development projects, plugging a rapidly growing funding gap. Indeed, interest in sustainable investing has been on the rise. More than ever before, investors of all types are looking to increase their investment into ESG—from retail investors to family offices and private equity funds to large financial institutions.
The barriers to entry to this appealing market, however, remain high—not only for retail investors but also for family offices, funds, and high net worth individuals. As investors seek to expand the proportion of ESG investments and “green assets” in their portfolios, these barriers to entry—which include low liquidity, large ticket sizes, lack of optionality, and high costs and fees—limit the accessibility and appeal of sustainable infrastructure assets, in particular.
Tokenizing Assets to Lower Barriers to Entry
In order to drive capital into the sustainable infrastructure sector then, it is necessary to reduce these barriers to entry. Emerging technologies, such as blockchain and tokenization technology, can play a substantial role in bridging this gap. Previously unseen in the infrastructure asset market, tokenization services allow asset owners to digitize and fractionalize equity of their holdings, creating digital “tokens” which represent a share in the underlying asset. Applied to infrastructure assets, such as solar farms or wind farms, it is possible to break down the barriers to entry for investors of projects which support green development.
As a result of undergoing tokenization, previously exclusive and inaccessible assets become highly liquid, accessible, and tradable, allowing retail and institutional investors seeking to access these low-risk, yielding assets for the first time. For asset owners, this means enhanced liquidity and substantially lower costs in securing capital. This combination of short term and long term benefits are only possible by leveraging blockchain technology—and can profoundly impact not only the wider market but also investor expectations and behavior.
With tremendous market potential for investors, a widening capital gap for the funding of these infrastructure assets, and a wide range of positive externalities which the funding of such projects can have for national and global economies—from employment opportunities, improved living conditions, quality of life, and environmental sustainability, the sustainable infrastructure sectors is deserving of our attention and our best efforts to lower the barriers to entry for traditional and retail finance. As climate change, urbanization, and economic recovery become central to the conversation as we look ahead from 2020—emerging technologies stand out as a turnkey solution to unlocking the profound potential of this asset class. Bringing together the physical, financial, and digital worlds is to everyone’s benefit.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.