IF- Investment Funds for Low-carbon Infrastructure
The aim of the Paris agreement to mobilize private investors for climate finance will trigger large investment needs in low-carbon infrastructure, exacerbating the general infrastructure financing gap arising from the specific challenges of infrastructure being illiquid, long-term assets and related regulatory uncertainty and unequal risk allocation. This project investigates financing instruments for low-emission infrastructures and evaluates their attractiveness and fit for different investor groups and aims to identify opportunities that make low-emission infrastructures attractive specifically for households and institutional investors. For both investor types, investment barriers as well as investor preferences will be examined in their potential for emission avoidance.
An analysis of financial market data demonstrated better financial performance for companies with low-emission portfolios, especially after the conclusion of the Paris Climate Agreement in 2015. For European retail investors, a broad-based survey found a substantial willingness to pay for low-emission infrastructure - but investors without prior knowledge pay little attention to the level of fees. As a reason for the lack of funding for infrastructure projects, a portfolio decision model of investors analyzed their low liquidity. Further modeling shows that instruments that reduce firm profits discourage further investment by firms when they are highly leveraged. Several papers discuss the design of sovereign wealth funds to finance long-term investments as a core issue of the project, analyzing in particular loan rate discounts for climate-friendly projects and the impact of subsidization on investment risk.
Illustration of project results
A special research highlight is the broad-based online survey. For the first time, individual investment behavior with regard to sustainability and climate change was investigated by means of surveys and behavioral economic (investment) experiments in a country comparison. In addition to investment decisions in real existing sustainable and conventional equity and bond funds, preferences regarding the consideration of sustainability aspects in retirement planning were also considered. Preliminary results show strong preferences for sustainable investment products across surveys, methods and countries. However, significant country differences in financial literacy emerge. Here, individuals with low financial literacy respond little to nothing to higher fees. When introducing possible policy measures to mobilize retail investors, this insight should be taken into account with a view to protecting these investors.
- A public database with mandatory reporting for all low-carbon infrastructure investment products could help to reduce the high search and information costs for individual investors.
- Establishing refinancing instruments that allow investors to use their long-term investments as loan collateral would make such investments more attractive.
- The high capital intensity of renewable energy requires support for the energy sector through subsidies or other measures that reduce risk for investors or improve profitability in the energy sector.
- Private investors in Europe can be expected to support the transformation process if appropriate opportunities are created and advertised.
Edenhofer, O., Klein, C., Lessmann, K., Wilkens, M. (2022):
Financing the transformation: a proposal for a credit scheme to finance the Paris Agreement. Climate Policy 22 (6): 788-797.
Edenhofer, O., Lessmann, K., Tahri, I. (2021):
Asset Pricing and the Carbon Beta of Externalities. CESifo Working Paper No. 9269.
Engler, D., Groh, E.D., Gutsche, G., Ziegler, A. (2021):
Acceptance of climate-oriented policy measures under the COVID-19 crisis: An empirical analysis for Germany. Climate Policy 21 (10):1281-1297.
Engler, D., Gutsche, G., Smeets, P. (2021):
Individual preferences for sustainable investments across Europe – A framed field experiment in five countries. OSF Registries.
Yanovski, B., Lessmann, K., Tahri, I. (2020):
The Link between Short-Termism and Risk: Barriers to Investment in Long-Term Projects. SSRN.
Yanovski, B., Lessmann, K. (2021):
Financing the Fossil Fuel Phase-Out. SSRN.