Out of every 10 dollars needed for the city climate transition, 9 dollars are missing. That’s a big gap, despite trillions of dollars having been earmarked for both climate investments and urban financing.
The billion dollar question asks not if there is money, but how cities unlock finance and where to invest it. This question is so essential that we will be dedicating an article series to the question – The Billion Dollar Series.
Climate investment planning and city financing are complex matters – even mature cities struggle to create investable projects at scale. But resources are not finding their way into municipalities. We sat down with three finance experts to talk about city investments in the climate space. We asked them:
What needs to happen to improve cities’ outlook to fund their transition?
Their answers boiled down to three key insights:
In other words: establishing a standardised process across cities and investors is what is missing. It’s time to iron out how to move capital into city climate action – let’s take a closer look at the experts’ ideas.
1. Projects: bundled and prepared
"Cities face a challenge in securing urban climate finance: the lack of investor-ready bankable projects with the right size and structure."
Priscilla Negreiros, Cities Climate Finance Alliance at Climate Policy Initiative
Sometimes cities have very good projects in their pipeline, but still do not receive investment. And that is why the project preparation phase is so essential – cities must connect early at this stage with potential investors to make sure their projects fulfill the investors' criterias. Public funding is extremely important to tackle the climate crisis, but without private funds we will not close the massive financing gap cities face. Both on the public and private side, there’s often a minimum ticket size requested by investors. By bundling projects, the deal size is large enough for investors to make a bet.
In our conversation with Priscilla Negreiros, Manager at the Cities Climate Finance Alliance, Climate Policy Initiative, she shares how there needs to be solutions to either aggregate the projects or aggregate finance mechanisms so that cities can access money. This is a necessary step to tackle the challenge at scale.
2. Reporting: Consistent and synced
"As many climate change projects may have longer term paybacks, investors are more akin to provide capital when the ecosystem transmits consistency, clear standards and trust."
Asen Charliyski, Bankers without Boundaries
Climate change creates a new investment landscape. One that might involve higher reporting requirements, as both investors and cities face new risks. These projects, such as green infrastructure investments, also need to mitigate the risk of locking in capital into assets that may become stranded in the future. That is why potential reporting inconsistencies and lack of data monitoring can – quite literally – be dealbreakers. No project benefits relying on out-dated local data or national emission figures, fogging the forecast. Therefore, consistent and standardized reporting is key. And the closer data gets to being updated in real-time, the bigger the appetite from investors and bankers.
Private financing needs to find its way into cities with more ease - and vice versa, cities need to find private financing and attract institutional investors. It’s all about how to get ahold of – and how to invest – the money that is ready to be used.
3. Emissions: priced and evaluated
"It's surprising to see that for all the talk about the connection between environment and economy, society-wide and standardised price tags on emissions are still such a rarity."
Vladislav Kaim, UN Young Climate Adviser to Antonio Guterres
If it were standard practice for emissions and the environment to be systematically integrated, the outlook for climate action would improve significantly. According to Vladislav Kaim, previously Youth Fellow at the International Monetary Fund and UN Young Climate Adviser to Antonio Guterres, climate action is stalling today. He traces this to a lack of agreement between climate knowledge (emissions), what to do to reduce them, and how much it will cost, save or benefit us (economy). And, he adds, climate finance should be pulled out of the idea that it must go through traditional banking systems.
There is a lot of work that is going into understand the benefits – economic and social – for everyone. Take clean air, or biodiversity for instance. For Asen Charliyski, Managing Director, Global Head Sustainable Cities Finance, Bankers without Boundaries, one of the main challenges in deploying private investment capital at scale towards the climate transition is to assign economic benefits to those that provide the initial investment. This is not easy math to make – but when it can be done it strengthens the case.
Establishing a standardized process
City efforts to get financing and funding will benefit from projects being bundled, aggregated and well-prepared. The reporting long-term should be consistent and synced across cities and sectors. And lastly, city climate investment plans with contextualized emission costs are attractive investments.
As we continue to ask the Billion Dollar Question, we’ll learn more from experts in tech, cities and finance. Watch this space. It’s time to lower the threshold for cities to receive climate financing, and to unlock the supply of projects by standardizing city climate planning.