Commentary: America's shot at a sustainable future

The Infrastructure Investment and Jobs Act recently passed by Congress and signed into law by President Joe Biden on Nov. 15 will help to fuel America's economy for the next decade, driving sustainable and innovative growth across multiple regions and sectors.

It is less ambitious and more focused than first envisioned but, under the bipartisan deal, the IIJA will invest approximately $1 trillion in revitalizing America's transportation, energy infrastructure, clean water infrastructure and broadband, among other priorities. Many of these initiatives will benefit from having positive environmental, social and governance attributes, which could expand the depth and breadth of sustainable investment opportunities.

There is a lot at stake here. In many cases, the infrastructure America needs must address both climate change and be socially responsible. Priorities include continued development of renewable energy (including offshore wind), enhancements to electrical transmission infrastructure and building retrofits, all to reduce carbon emissions, along with improvements to transportation and water infrastructure to respond to social needs.

When it comes to addressing climate change, the IIJA is a step in the right direction. The legislation includes more than $65 billion for improvements to the power grid that will support the expansion of cleaner, more reliable energy, as well as the development of new technologies that will lower carbon emissions. Further proposals in the Build Back Better Act, which is currently under consideration, would also provide tax credits for regionally significant electrical transmission lines, aimed at stimulating more private-sector investments and broader sources of capital. This is important for the integrity of the grids as more renewable power is moved regionally to support the electrification initiatives.

The IIJA is also far-reaching in its approach to addressing social inequality through investments in critical infrastructure that will have a profound impact on smaller, more isolated communities in North America. It allocates some $110 billion on the repair of roads and bridges, as well as other major infrastructure projects — the largest investment in bridges since the construction of the interstate highway system. While that is expected to include some of the most economically important bridges in the country, it does not overlook thousands of smaller bridges as well — many of which provide critical connections to rural communities and tribal nations.

Likewise, the IIJA allocates $55 billion to drinking water, wastewater and stormwater infrastructure, including funding to replace lead pipes and service lines that will address lead exposure in schools and child care facilities. The infrastructure deal also allocates $1 billion for infrastructure that will help reconnect communities that have been divided by highways, typically in majority-Black neighborhoods. These initiatives will help to tackle underlying inequalities across America that stymie economic growth.

More broadly, investment in infrastructure will likely facilitate long-term economic growth. It will increase efficiencies and generate job and wage growth across the gamut of skills in manufacturing, construction, transportation and distribution. That will likely lead to new winners in the public markets too — particularly in clean energy, electric vehicles, telecommunications providers and construction. For example, the infrastructure deal includes $7.5 billion for expanding electric vehicle charging stations nationwide, which will ultimately accelerate electric vehicle adoption.

Historically, America has relied on public financing for infrastructure projects through municipal bond issuance, adding to the country's deficit, or raising taxes. But realizing the fourth option — getting private investors to finance America's infrastructure — could broaden the reach of initiatives in response to climate change and socioeconomic inequality.

There are broader benefits to public finances if private investment replaces state and local government funding for infrastructure. It will help to remove bureaucratic roadblocks and free up funds in the general municipal market currently earmarked for capital spending. That will allow state and local municipalities to either expand capital spending to unfunded projects or curtail spending on capital projects as they seek to repair their balance sheets from lost tax revenues during the pandemic.

The private investors who could write the check, such as insurers and pension plans, have the long-term investment horizons, scale and liquidity to finance the upfront costs of infrastructure assets, which can be capital intensive. That capital output is then repaid to investors over time by the government authority supported by cash flows from the infrastructure, such as toll payments or train fares, with the payments agreed to in advance. That cash flow provides a greater level of certainty on the investors' risk-adjusted returns over a 20- to 30-year horizon at a fixed interest rate level.

Institutional investors have a vested interest in making sure the project is sustainable and built for the long term to ensure that they receive the repayments from cash flows and are not vulnerable to climatic risks. The sustainability of these projects also make them more appealing to investors looking to increase their ESG investments. Total assets incorporating ESG principles managed by U.S. institutional investors have ballooned over the past 15 years to $6.2 trillion as of 2020, according to a report by the US SIF Foundation. This growth is expected to continue, driven by public and corporate pension plans, along with insurance companies.

Today, however, there is a sore lack of infrastructure projects in the U.S. for institutional investors to allocate to. Direct infrastructure investments that aren't explicitly labeled ESG by many of the popular investing data providers, but do have a positive impact on the environment or society, could greatly expand sustainable options on corporate and public pension plan menus. This is a bipartisan deal to fix America's infrastructure problem and a shot at a more sustainable future. And for investors it could be an opportunity to increase their allocations to ESG investments and drive an even more ambitious response to climate change.

John D. Vincent is a senior managing director and head of project finance at SLC Management, a fixed- income and alternatives asset manager. He is based in Toronto. This content represents the views of the author. It was submitted and edited under P&I guidelines but is not a product of P&I's editorial team.