ldevellis climate change, green cities, green finance, Sustainability

Green cities: the private finance opportunity to combat climate change

Cities occupy less than 3 percent of the earth’s land but are responsible for 75 percent of global greenhouse gas emissions. As disproportionate contributors to climate change, cities also hold the opportunities to disrupt this global trend.

Investing in climate-smart infrastructure is slated to be booming business as cities will require between USD 5.2 and 5.4 trillion of global investments just to decarbonize existing buildings in the quest towards net zero by 2050.

Commercial banks are already starting to invest in green and climate-smart urban infrastructure by falling back on conventional models as well as by exploring new and innovative financing mechanisms.

But, while municipal financing is well established in the US and some European markets, there is currently a market gap in the provision of large-scale climate finance for cities in emerging markets where there is scope for banks do significantly more.

Green cities can unite the economy and the environment

Green cities open pathways to funnel resources into decarbonzing key sectors such as energy and built infrastructure.

Implementing green city measures either in the form of physical infrastructure improvements or policy change, however, requires investment. Green investments rewire the way a city functions, decoupling economic growth from negative environmental consequences such as increased pollution.

For instance, electric buses reduce operational costs of public transit, and improve access to public mobility, increasing people’s economic productivity. E-buses also lower greenhouse gas emissions and improve air quality.

Further, an International Finance Corporation (IFC) report estimates that if cities in 21 emerging markets under analysis were to prioritize climate-smart growth in their recovery plans, they would stand to attract as much as USD 7 trillion in investments and could create 144 million new jobs by 2030. Initiatives such as zero-carbon buildings support both sustainable and economically productive cities.

Banking on green cities

Private banks have their own environmental, social, and governance (ESG) pressures and face climate-change risks in their investment portfolios. Innovation in finance and tapping into new markets makes good business sense.

Green Bonds were introduced around 2008 and their growth in capital markets has been exponential, reaching USD 1 trillion in cumulative issuance by the end of 2020. A practical way for banks to finance green cities, Green Bonds are of mutual benefit to cities and banks, offering tax incentives for the borrower and business diversification for the lender.

Green Bonds offer a way for banks to address their commercial issues head on, while benefitting governments, green infrastructure and climate-change mitigation, but they are not the only option toward these essential ends. Nor are green finance opportunities most effectively leveraged on a project-by-project basis.

Through the innovative use of existing and new finance mechanisms, and through thematically aggregating city (or regional) investments by type, and owner of infrastructure, banks can leverage the green city investment opportunity at scale through the following finance mechanisms, among others:

Through the above financing mechanisms – which already exist – banks can help cities fund climate-smart initiatives without raising taxes or upending their balance sheets, thereby accelerating green city development.

But, to effectively redirect urbanisation resources, including private finance, into zero-carbon buildings and other climate-smart municipal infrastructure requires city governments and private banks to partner in non-traditional ways.

Championing the case for green cities

To evolve into green, cities need to establish symbiotic relationships facilitated by innovative programs like APEX that bring the public and private sectors together towards a common goal: to enable green finance pathways to decarbonize infrastructure and combat climate change. Connecting cities in emerging markets with banks to accelerate at-scale financing of urban infrastructure projects does just this, simultaneously enabling commercial banks to grow and green their investments.

This article was first published in The Fifth Estate (Australia’s leading business newspaper for the sustainable built environment and the people and issues that surround it) on behalf of APEX Green Cities, an innovation of The World Bank Group’s International Finance Corporation (IFC). APEX partner with cities in emerging economies to help identify and prioritize high-impact carbon-reduction policy actions and infrastructure investments, as well as to identify and provide support in green financing pathways.