About 75 per cent of the infrastructure that needs to be in place by 2050 does not exist today. Getting such an immense scale of infrastructure development right will be critical to whether or not the world locks into a high- or low-carbon growth path. The newly established City Finance Lab tries to contribute innovative, replicable and scalable solutions to reach this ambitious goal.
Cities play a crucial role in tackling climate change as they account for two-thirds of global energy demand and 70 per cent of carbon emissions IEA (2016). Rising urbanisation, expected to reach 67 per cent globally by 2050 United Nations - World Urbanisation Prospects (2018), and the position of cities as centres of economic growth, condensing 80 per cent of global GDP World Bank (2018), sets them up to lead the transition to a low-carbon economy. In order for cities to do so, they must be prepared. Their investment activities should be embedded from the planning stage onwards to support the institutional capacity to implement evidence-based climate action planning and monitor the performance of climate actions. They also play a crucial role in tracking progress toward the achievement of the NDCs at both local and national levels.
Although they are part of the solution, cities still struggle to design bankable green infrastructure projects and attract sufficient investment. Only 15 per cent of climate finance reaches cities. Since municipal finance differs substantially from sovereign finance and pure commercial finance, it is crucial to develop innovative financing solutions tailored to the financing needs and governance systems of cities. Only then can they respond efficiently to the urban challenges at hand.
Key Role of the Financial Sector
Adapting urban infrastructure to climate change requires substantial capital investments. The public sector cannot carry the entire burden, which means that additional sources of funding have to be tapped into. Due to the high liquidity of the current capital market, capital is available. But in order to be directed towards climate-friendly investments, the business case has to be made clear that long-term stability and income generation are at least at the same level as traditional infrastructure projects, for developers and potential investors alike.
Climate-related risks have been acknowledged by the financial industry (e.g. traction of the Task Force on Climate-related Financial Disclosures, TCFD). It is to be expected that the integration of sustainability aspects in investments will lead to better risk management, higher performance and more efficient project investment. Additionally, the improved integration of resilience aspects will make climate-friendly and sustainable infrastructure projects more attractive. But the majority of stakeholders are still a little hesitant and prefer to follow the traditional and proven concepts.
However, there is a momentum to make use of by combining the urgency for climate mitigation and adaptation actions, the growing interest of stakeholders, and the liquidity of the capital market. Precisely this allows to collect, improve, showcase and disseminate new financing solutions, and thereby boost the financial sector as a whole. More and more financial institutions (banks, infrastructure financing companies, venture capital funds, insurances, etc.) are becoming aware of the fact that taking climate and environmental aspects into consideration early may contribute to risk mitigation and reduction. A proper understanding and incorporation of climate and other environmental elements might turn projects into greater financial opportunities than experienced so far.
City Finance Lab – a new Platform to Support Financial Innovation
The City Finance Lab was established in 2018. It is an initiative of the European Institute for Innovation and Technology (EIT), Climate-KIC, and South Pole – a private company for sustainability solutions – and was established in coordination with the Global Infrastructure Basel Foundation (GIB), the Global Fund of Cities Development (FMDV), and the Carbon Disclosure Project (CDP).
The objective of the City Finance Lab initiative is to support the current innovation boost and financial innovators by bringing together leading city finance experts from public, private and philanthropic organisations to improve and develop their innovative solutions. By doing so, it also aims to catalyse broader public and private sector efforts to scale up low-carbon and climate resilient investments.
The City Finance Lab complements the existing initiatives focusing on cities and climate finance, in particular existing financial innovation labs and project preparation facilities. The City Finance Lab has the unique approach to support European cities and their partners to develop innovative financing solutions tailored to their individual case. In this capacity, the City Finance Lab supports the development of innovative and well-designed financing solutions that scale opportunities for investment in sustainable cities and stimulate the replication of these innovative solutions through knowledge sharing and training. Based on periodic calls for submissions, the City Finance Lab supports selected finance initiatives with technical assistance to finalise them and get them ready for the market.
First Projects are Under Way
A first call for proposals in Europe was published in mid-2018. Project proponents submitted financing solutions contributing towards a low-carbon and/or climate resilient development. These financing solutions use either innovative finance instruments or mechanisms, or traditional instruments and mechanisms in an innovative way to scale financing. The proposals were pre-evaluated by the City Finance Lab administration unit managed by South Pole, and validated by the City Finance Lab Steering Committee, which selected the five most promising proposals for further development by a Technical Advisory (TA) team assigned by the City Finance Lab to support the project proponent on a grant basis. More information can be found in the table below.
Summary of the initiatives