Read our report on project finance here.

Upstream of project developers are their financiers. The investment banks, pension funds, and asset managers looking to earn a return on their investments may legitimately be interested in the social and environmental benefits that infrastructure provides—but they are for certain more interested in the returns on their loans and equity. Of course, it’s not news that the return-seeking and risk-averse behaviors of private investors constrain project developers; no investor wants to go bust. But when a renewable project developer asks investors for a long-term loan for a large fixed capital investment, how exactly do those investors assess that developer’s bankability? 

Understanding how actors in the market judge the “investability” of specific classes of assets isn’t just an academic question: it is of extreme importance to the energy transition. Renewable energy projects in particular find themselves in a difficult position. They are more exposed to financing risk than other energy projects are and, worse, have characteristics that make them an awkward fit in many portfolios: they neither have the same extremely predictable cash flows as other assets that are classified as “infrastructure,” nor do they have the same upside value appreciation potential as newer or hard-to-obtain technologies that an investor could justify taking risk on.

This issue brief tackles this question from two angles, focusing particularly on energy projects. Section I examines credit rating agency methodologies as a window into how private creditors judge the safety of investments in project developers. Section II describes how the investment strategies of institutional investors constrain their financing decisions. Finally, this brief concludes with a short discussion of how public-sector financial institutions can overcome the constraints imposed by both the criteria of credit rating agencies and the biases in investors’ strategies to develop difficult-to-finance yet decarbonization-critical projects.