Image: Josh Harris

All eyes on 2020 for sustainable city finance


Note:  Technical terms are marked with a * and explained briefly in the Glossary

For the second time in a month, one of London’s iconic buildings played host to a global gathering of governments, financiers and think-tanks.  The subject, once again:  the puzzle of how to go from virtually a standing start to mobilising the $$ trillions needed to fulfill the Paris agreement and its ambition for a 1.5°C world.

This time, for the April 4th C40 Financing Sustainable Cities Forumwe had moved from the gothic splendours of the Guildhall (hosting the annual Climate Bonds conference) to the spiraling complexities of City Hall.  Some 200 delegates filled the main Chamber, from as far afield as Bangladesh and New Zealand.

If the journey from the medieval seat of city power in London to the modern-day Mayor’s home was one kind of metaphor, the ambition of City Hall when it was built is another. It is still somewhat astonishing that a building completed in 2002 – one of whose aims, as architect Norman Foster put it, was to “demonstrate the potential for a sustainable, virtually non-polluting public building” – could use just 25% of the energy consumed by a typical London office building at the time.

Mayors need to be leaders and they need to move fast.”

That kind of 75% overnight leap forward in sustainability is what cities-network C40 is saying is needed in cities around the world.  As we reported when we covered C40’s work recently, and as C40 Executive Director Mark Watts reiterated at the start of the conference, the challenge is one that can be very simply expressed. “To meet a 1.5°C target, the total carbon budget for the C40 cities, for the rest of the century, is 22 gigatons.  If our cities continue with business as usual, that budget will be consumed in just 8 years time, by 2025.”

For this reason, C40 (now actually 91 cities) is concentrated on a ‘Deadline 2020’ agenda. “That’s when emissions need to peak,” Watts said, “so mayors need to be leaders and they need to move fast.”

And they need to raise a lot of money: Watts noted that C40 had identified some 3,000 low-carbon projects in at least a planning stage in its member cities, and though precise costs were available for only 15% of these, C40’s rough estimate was that $375bn is needed for green infrastructure in its cities by 2020, $110bn of this in its nineteen European cities.

Sustainable cities are more successful

To put more accurate numbers on these needs, Watts announced a new project with CDP to establish the pipeline in much more detail.  “One thing we do already know,” Watts said, “is that the cost of not doing anything and then having to pick up the pieces is 4 times the cost of addressing the needs upfront.”  What’s more, he noted, “there is now an accumulation of evidence from around the world that that cities which move onto sustainable pathways are more successful in all kinds of ways, from the health of residents to attracting the most skilled workforces.”  (Shirley Rodrigues, Deputy Mayor of London for Environment and Energy had earlier noted that London’s low carbon sector is now worth £30 billion in GDP, and employs 192,000.)

C40’s Financing Sustainable Cities initiative, organiser of the forum is, Watts said, “about finding new ways of seeing eye-to-eye between city governments and investors on the challenges of unlocking private capital.”

“Mayors are becoming bolder, and there is a domino effect being created in a race to top over sustainable infrastructure”

Debating reasons for the large financing gap in green infrastructure for cities, Val Smith of Citi and Ani Dasgupta of the WRI Ross Center for Sustainable Cities, agreed that the main cause was probably just the pace of urbanisation. Smith said that while cities can be more nimble than national governments, and people in cities are often very aligned towards common goals that address urgent and basic needs such as clean water, city budget mechanisms were still slow to recognise important elements of green spending.  “Take a green roof on a city building.  It may cost a bit more but it’s bringing a whole host of climate benefits  – cooling, water management, biodiversity and so on. But planning and budgeting processes don’t recognise these benefits.  So cities need to organise in different ways, and break down silos in thinking.”  Nonetheless, she said, “Mayors are becoming bolder, and there is a domino effect being created in a race to top over sustainable infrastructure.”

Dasgupta noted that once the more nuanced benefits were recognised, spending on green infrastructure is very efficient in budgetary terms. “For every dollar you spend you get nearly a dollar back in savings of one sort or another, compared to ‘business as usual’ developments.”  He also pointed out that though city powers are often constrained, the sectors under their control, such as transport and buildings, are major emitters and thus potentially major improvers as well.

Image: Josh Harris
Constraints on Cities

A flavour of the constraints faced by cities was provided by two chief financial officers, Sue Tindal of Auckland, New Zealand and Kevin Jacoby of Cape Town, South Africa. Tindal noted that her city’s devolved powers – and thus its range of revenue streams – was quite limited.  With an AA credit rating, however, in terms of capital raising the city was in a “real sweet spot” for investors, evidenced by a recent city bond issuance in London being three times oversubscribed.  “My problem,” she says, “is that to keep that rating, the rating agencies say I can’t have a debt level that’s more than 2.65 times my revenues.”  Climate change, she said, imposes huge operational costs on her budget, from asset losses to insurance premia to repair and maintenance costs after disasters. (Even as she spoke, Cyclone Debbie was causing flooding in New Zealand.)

Kevin Jacoby, admitting that the recent downgrade of South Africa’s country credit rating to ‘junk’ status was “embarrassing”, nevertheless noted that being a city in a developing country brought the benefit of cheaper capital from international development banks. “That has meant we’ve been a bit spoilt in the past,” as he put it, “and we need some catch up in terms of our capacity to understand the new financial instruments coming on tap, such as green bonds.”  Nevertheless, the city plans a green bond later this year, and is seeking access to GCF funding.  Jacoby identified project preparation as his biggest constraint in terms of infrastructure spending.  “I can’t put a project into the budget till it’s costed, so it’s critical political decisions are made in time to get projects to that stage.  The actual budgets are the easy bit.”

A panel of investors ranging from development and commercial banks to an asset manager and a construction company looked at the urban finance landscape and discussed the issue of whether ‘greening’ finance would bring down the cost of capital*.

Greg Chant-Hall of Swedish-based construction giant Skanska said that there was still an issue with definitions.  “My firm has been working on sustainability for 20 years.  In the beginning that term was defined by things like green materials. Now we include ethics and transparency as well.” Echoing earlier comments, he also noted that, since timeframes for sustainable projects were longer than for traditional ones, cost benefit analysis need to move on.  “It’s not just capex and opex, you need to also include long term benefits such as health from cleaner air.  And we all need to be sure we are measuring the same things, or you can’t make comparisons.”

The failure to factor in such considerations was one reason why he wasn’t yet seeing any reductions in cost of capital, Chant-Hall said.  But he and other panellists mentioned that mortgages on green homes were getting cheaper than those on standard ones, because of the realisation by lenders that lower energy costs made the mortgage payments easier for owners to meet, and thus reduced the risk of default*.  “That should also flow through into deals where those assets are aggregated, such as securitisations*” said Murray Birt of Deutsche Asset Management.

Thoughts on ways of generating new sources of revenue for building green assets during the day seemed to be focused on new taxes of one kind or another.  Road pricing (now to be accompanied, in London, by a Toxin or T-Charge) was sees as an important tool for cities to both raise funds and discourage dirty vehicle use.  A new cycling scheme in Medellin, Colombia, for example, is being by funded by ‘air tax’ on polluting companies, while that in Barcelona is being paid for by parking fees.

The Need for Aggregation
Photo: City of Mexico









There were also numerous calls during the day for cities to aggregate their projects in order to create demand that would drive more interest and better prices from suppliers.  And indeed the April 4th C40 forum was to be followed by a roundtable on clean buses, attended by 11 cities who will discuss the possibility of just such an aggregated order-book.  (Regular readers of will know that we have been calling since Paris for a common categorisation of climate actions, to help with exactly this kind of initiative.  Needless to say it’s too cheap and simple an idea for any funder yet to have picked up!)

There were some interesting questions from the floor. One concerned how some of the monies raised by cities might flow out to the hinterlands that provide them with ecosystem services and food; to which one response was that sustainable supply chain improvements should reach such providers.  Another in a similar vein concerned how second and third tier cities could get in on the fundraising act, given their smaller size.  Finally, a UK cities association asked why even with access to one of the world’s most sophisticated financial systems on their doorstep, they couldn’t get banks to accept templates for green finance applications, and needed to see the wheel re-invented each time.

It has to be said there was no real answer to this, but asked what the single best thing that governments could do, panellists answers were centred on policy:  joined-up thinking, longer term planning through electoral cycles, creating alignment between investor and government risks.


Speaking about the City of London’s Green Finance Initiative (GFI), GFI founder and former Lord Mayor of the City of London Sir Roger Gifford said that he believed the high-carbon divestment movement was now moving on from simply a divestment story to a growing interest in the low carbon projects institutions could invest in instead. “Investors are increasingly seeing that green is not a replacement for good credit quality.  Rather, they get the same quality but better transparency on the use of proceeds and better reporting of impacts.”   He said that the GFI had six aims:

  • To set clear vision that environmental targets will only be met if policy makers and industry work together
  • To address the need for better market data, including better reporting of climate risk, through initiatives such as the Task Force on Climate-Related Financial Disclosures (TCFD) 
  • The need for green standards, for example, more accurate tagging of green loans (as opposed to bonds)
  • To embed change so that the next generation of money managers is better equipped to deal with both climate risks and opportunities
  • To improve stewardship and governance guidelines – he also made a call for savers to get more engaged with the funds that manage those savings, such as pensions
  • That Paris was the first step on the road, not the last one

There is huge pressures on our systems of innovation.  But I believe the financial community is up for this – Nick Hurd MP

In his keynote speech, Nick Hurd MP, the UK’s Minister of State for Climate Change and Industry said that Paris had reversed the inertia of the past, and that a genuine political momentum had been established.  Speaking of the opportunities from new technologies, especially in the energy and transport sectors, he said he also believed that “money is thinking in new ways, and looking for more useful homes,” and that cities and national governments were working together better.  The short timeframe for making real inroads “puts huge pressures on our systems of innovation.  But I believe the financial community is up for this if we can create the right alignment between demand and supply.”  To applause from what one must assume was a north American cohort in the audience, he noted that “the low carbon economy doesn’t have to come at the expense of growth.” Restating the commitment made at Marrakesh for the UK to play a leading role in securing the $100 billion public finance promise, he also stressed a concomitant to this:  “We need to get a lot smarter, though, about how we use that public money to release private money, to turn the $100 billion into $ trillions.”

In a succeeding panel on creating bankable projects, themes were diversification* and credit enhancement*.  On the former, the panel noted that securitisation of rooftop solar finance in the USA was gaining investment grade* ratings, as was a warehousing* facility for energy efficiency loans, WHEEL. Michael Wilkins of Standard and Poors rating agency* said that “investor interest in infrastructure has increased dramatically recently. What they are seeing is that it has good yields* over sovereigns*, lower defaults, and higher recoveries* when defaults do happen. What’s missing is the pipeline* of projects for them to invest in.”

On the pipeline issue, Gustavo Jimenez, head of German development agency GIZ’s Mexico office, said that cities often have capacity gaps in knowledge about finance.  “They are getting smarter now, but capital markets still need to roll up their sleeves and get their hands dirty helping cities create these bankable deals.”

So what wasn’t said?

With the exception of a question on insurance institution, adaptation wasn’t discussed at all.  Nor were the panellists able to answer the question, except to agree that insurance had an important part to play in financing adaptation.  One indeed noted that “no one has really yet been able to figure out how to monetise adaptation projects.”

Possibly linked to this, there was very little discussion either the kind of hybrid structures that will be needed to finance the more difficult actions to ‘monetise’.  Almost all the discussion focussed on bonds and similar (fairly straightforward) types of instrument.  Perhaps again as a result, there were very few mentions of the role of DFIs, who will need to step forward big-time to provide the credit enhancement and similar de-risking mechanisms for the more complex hybrid structures.  With international flows growing, and given the long-term nature of many projects, a massive issue here is going to be currency risk – mentioned just once.

Finally, though there were many references to the Paris linkages, there was not a single specific mention of the NDCs that I noticed.  That may or may not matter – most of the (informal) city pledges made at Paris were actually more ambitious than the relevant national pledges.  But at some point, city actions and climate investment plans are going to have to be baked into national climate investment plans, or it’s hard to see how effective monitoring of the Paris agreement can occur.  It is presently hard to see how or when that is going to happen.

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2 thoughts on “All eyes on 2020 for sustainable city finance

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