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Attracting Climate Finance to Build Urban Resilience

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More than half of the world’s population now lives in cities – and without significant investments in resilient infrastructure, they will likely suffer an estimated $415 billion a year in damages by 2030 from weather-related and other disasters, according to World Bank.

Cities can play a significant role in shaping a low-carbon and climate-resilient future by prioritizing sustainable development projects. At present, however, there is an estimated $1.8 – 2.4 trillion annual financing gap for low emission and climate-resilient infrastructure globally, the majority of this is needed in cities (UNFCCC, 2019).

Cities will need to mobilize additional funding from both public and private sources to help fill this gap and implement resilient urban infrastructure projects that can contribute to a sustainable future.

The Current Snapshot of Climate Finance

Urban climate finance entails any financing that is directed to climate change mitigation and adaptation projects and programs. When discussing climate finance, it is important to note that at present, climate finance flows are mainly tracked at the global and national levels, while tracking at subnational level is still challenging due to the lack of detailed project-level investment data.

A recent report from Cities Climate Finance Leadership Alliance (CCFLA) shows that urban climate finance averaged $384 billion in 2017/2018, of which 91% went toward urban mitigation projects and dual uses, with urban transport projects representing 53% of investments, followed by building infrastructure and energy efficiency projects at 47%.

Adaptation projects, including water and wastewater management, agriculture and land use and disaster risk management initiatives remain underfunded; they received only 9% of tracked climate finance (with the majority coming from the public sector) in the same period. Adaptation finance, as a result, currently falls short of international needs and targets specified in the Paris Agreement.

Public climate finance mainly comes from national governments and their agencies, followed by development finance institutions (DFIs) and climate funds, and as of 2017/2018 it represented 38% of total tracked urban climate finance at $84 billion.

Meanwhile, private climate finance mainly flows from households, non-financial corporations, commercial banks, institutional investors, private equity, venture capital, and infrastructure funds, and it amounted to $136 billion in 2017/2018 – which equates to 62% of urban climate finance, globally.

As many developing cities struggle to identify the risk and return profiles of climate projects, they need climate finance providers, particularly DFIs, multilateral development banks and national development banks (NDBs), to extend project preparation support to cities and help them to develop bankable project pipelines.

These organizations also play a critical role in de-risking urban climate projects and providing structural support to enable cities to utilize innovative financing instruments, including blended finance in order to further unlock the potential of private investments for urban infrastructure.

The growing need for climate finance post COVID-19

The COVID-19 pandemic has further complicated cities’ efforts to take action toward a sustainable future.

One reason for this is that 90% of COVID-19 cases are located in cities, who in response have re-allocated budgetary resources toward healthcare, social services and other immediate operational needs.

The CCFLA report states that an estimated $20.5 trillion has been pledged for COVID-19 recovery globally through October 2020 – of which only $1.1 trillion is earmarked for activities that directly or indirectly support urban climate finance. The majority of this funding, according to Kristiina Yang, one of the report’s lead authors, is intended to address the immediate short-term impacts of the pandemic on humanitarian and health assistance.

However, as cities plan to build back better, the report recommends that cities also need to prioritize medium- and long-term infrastructure investments including building retrofits, sustainable transportation, increasing green, nature-based public spaces for recreation and improving water and sanitation infrastructure.

These investments all create employment opportunities, and in the long run improve cities’ economies and strengthen public health – giving these cities the resilience to “bounce back” from future pandemics and other crises.

Challenges cities face in accessing climate finance

Local governments often face budget and capacity constraints that limit the funding for climate-resilient infrastructure, and they may also lack the knowledge, skills and resources to strategically integrate climate change issues into local budgeting and planning. Consequently, “cities need dedicated support on building institutional and technical capacities to mobilize and deploy climate finance, including using innovative financial instruments” – Laura Jungman, senior consultant at CCFLA, shares. And they also need to develop the communicative prowess to “sell” the benefits of local climate investments to potential investors.

More often than not, smaller and developing cities cannot access international climate finance directly, as international climate funds and DFIs still rely heavily on accredited implementing entities at the national and international level to direct funds. Meanwhile, these cities may struggle to develop infrastructure projects that align with the priorities of these accredited implementing entities and the eligibility criteria of international climate funds while  simultaneously fitting their own unique needs and circumstances.

“NDBs can help address this issue by facilitating cities’ access to a large number of finance providers, including public international financiers and institutional investors”, Kristiina suggests. They also have local knowledge of the national investment environment and are thus well-positioned to support urban climate finance.

However, many NDBs do not have a clear mandate for climate investment, which can lead to a lack of capacity to identify, access and fund urban climate projects. This, in turn, exacerbates the cities’ ability to build on the expertise of NDBs to increase access to different funding sources.

With these considerations in mind, Idan Sasson, Project Coordinator at the CCFLA, offers one solution for cities with development ambitions: leverage the power of partnerships.

“As investors often require larger investments to justify the due diligence and transaction costs, one approach to reduce the barriers of investing in small- and medium-sized climate projects is to optimize aggregation interventions and project bundling,” Idan says.

Aggregation interventions focus on the standardization process of guidelines and building ecosystems to create enabling environments for investments in smaller climate projects, while project bundling can diversify risks, enhance creditworthiness and create separate tranches of capital that appeal to institutional investors. Recently, the Public-Private Partnership (PPP) Center of the Philippines took this approach by bundling together a group of smaller waste-to-energy projects from across the country to attract investments.

Beyond national partnerships, city governments will also benefit from working with development organizations on project preparation. Experience with these organizations helps cities transcend obstacles to obtaining development finance, and will help them form strategies to efficiently pursue low emission, climate-resilient urban infrastructure initiatives (and defray the due diligence costs associated with project preparation).

Examples of innovative financing sources that can minimize cities’ barriers to climate finance include:

●      Bundling urban climate investment opportunities to expand subnational finance and crowd in institutional investors through the International Municipal Investment Fund(IMIF), a unique fund designed to focus exclusively on supporting cities and local governments in developing countries and managed by the United Nations Capital Development Fund (UNCDF), the Global Fund for Cities Development and Meridiam.

●      CRAFT: a fund that combines a standard growth equity investment structure with technical assistance to enable the deployment of climate resilience services and technologies in developing countries.

●      Climate Investor One: combining three innovative investment facilities into one to finance projects in the wind, solar and hydro sectors.

Immediate steps for cities

In order to improve access to investment opportunities, cities need to strengthen their institutional and technical capacities as well as enforce enabling conditions for climate-resilient investments.

Laura Jungman further shares that cities can begin to accomplish this by first developing “concrete Climate Action Plans to streamline their climate-resilient infrastructure projects and prioritize those that align with national and international goals and have great potential to support longer-term recovery and sustainability.”

Aside from aligning to national climate policies and regulations, cities will also need to design and enforce city-specific standards and incentives to encourage public and private investments in their climate projects.

Further, cities will also benefit from educating officials in relevant departments on climate change and strengthening their financial management and investment planning capacity to improve the use of fiscal budgets, revenue streams, blended finance sources and other potential finance mechanisms to enable climate-resilient outcomes.

Most crucially, cities should seek technical and capacity development support from Project Preparation Facilities (PPFs) to prepare investment-ready projects supported by compelling project proposals. PPFs factor in climate, environmental, economic and community considerations into the planning process, resulting in projects that are generally well-received by local residents as well as prospective public and private sector investors.

CDIA, as a project preparation facility with 14 years of experience working with cities in Asia and the Pacific, can help cities prioritize and prepare climate-resilient infrastructure projects that match the requirements of downstream financiers and mobilize resources to attract the most potential funders and investors.

While securing climate finance may not be a simple task, the dividends of climate investments are invaluable. Cities that prepare their infrastructure to withstand climate events and other inevitable crises, including pandemics, will become more livable – and they will make crucial contributions toward a sustainable future.

 

The CDIA team would like to thank their partners and colleagues from the Cities Climate Finance Leadership Alliance who lent their insights to this article, including Idan Sasson, Kristiina Yang, and Laura Jungman.

 For a more comprehensive list of facilities or initiatives active in city-level project preparation, refer to the Green City Finance Directory, prepared by the Cities Climate Finance Leadership Alliance.

 Sign up for CDIA’s newsletter for urban development news from cities across Asia Pacific. Cities can apply for CDIA’s project preparation support via application or register for CDIA Virtual Clinics for intensive, one-on-one consultation on preparing bankable infrastructure projects.

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