Project

IF- Investment Funds for Low-carbon Infrastructure

Start of Project 12/2018
-
End of Project 09/2022

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.

Learn more

Project results

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.

Main Findings

Download Poster

  • 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.

Flagship-Paper

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.