Green Infrastructure Projects

Green infrastructure refers to projects that improve the local environment and address climate change, such as renewable energy, low-carbon public transportation, water management and sanitation, pollution control, and ecosystem services. According to OECD estimates, approximately US$6.9 trillion per year in green infrastructure will be required from now until 2030 to meet the Paris Agreement goals. Despite enormous green infrastructure investment opportunities, we know little about how the funding gap between estimated and actual green infrastructure investments should be met. In this project, we aim to study green infrastructure projects financed using the project financing technique, reveal their determinants, and quantify their real and environmental effects.

Project financing refers to “the creation of a legally independent project company financed with nonrecourse debt and equity from one or more sponsors for the purpose of investing in a capital asset”. Given the recent boom in the green finance market, it is timely and essential to study green project finance that predominately uses bank loans to raise capital specifically for environmental and climate-friendly infrastructure projects.

Using a comprehensive international infrastructure dataset, we define green infrastructure projects using the use-of-proceeds eligibility criteria under the Green Bond Principle. To explore the determinants of green infrastructure investment, we examine if cities with higher environmental risks are more likely to initiate green infrastructure projects. In terms of capital raising, we examine if banks adopting the Equator Principles and institutional investors with ESG preferences are more likely to fund green infrastructure projects. In the context of project financing, loans are repaid by future cash flows generated by the standalone single-purpose project. We will use this feature to examine the effect of green use-of-proceeds on contracting, as well as the default and recovery rates of project finance loans. Specifically, we investigate if green infrastructure projects have lower risks associated with transition and compliance, lower agency costs, more verifiable project cash flows, and stronger government support, thereby leading to more favorable contract terms, lower default probabilities, and higher recovery rates of green project finance loans. We will also examine how green projects influence the local environment and climate action.

Overall, this work aims to reveal the importance of green infrastructure project financing and broaden understanding of financing tools available to support the global transition to a green economy. Moreover, our project has significant policy implications for Hong Kong as an international hub to promote green infrastructure financing.