Promoting Innovative Financing Solutions for Cities

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 emissions1. Rising urbanisation, expected to reach 67 per cent globally by 20502, and the position of cities as centres of economic growth, condensing 80 per cent of global GDP3, 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

ProponentInitiativeTechnical assistance activities by the experts associated with the City Finance Lab
Kommunalbanken NorwayA self-assessment tool to measure climate-related risks for local governments
  • Analysing how transition risk could be applied at the municipal level.
  • Reviewing the draft of the tool to refine the structure and questions.
  • Analysing how the tool could include more quantitative evaluation of risk.
  • Providing information on other frameworks that can be relevant references for this tool.
  • Researching sources of climate-risk data that can be used to complement the tool.
  • Identifying the best strategy for the dissemination of the tool across Norway.
Community Forest TrustA natural capital-based investment fund to cover the core resources of Community Forests
  • Initial assessment of the fund proposed by CFT with particular focus on the structure of the fund and the economic model.
  • Review of funding strategy and the envisioned instrument, breaking down barriers and proposing solutions.
  • Review of marketing material and fundraising approach.
  • Development of a tailored fund structure and a road map towards securing anchor investors.
City of ParisAccelerating the replication of territorial development funds such as the ‘Paris Green Fund’
  • Interviews with entities involved in launching the Paris Green Fund to identify the conditions for success and the regulatory and technical details.
  • Partnership with France Urbaine Network to disseminate information and reach out to other interested cities.
  • Benchmarking and analysing similar funds from European countries.
Lisbon City CouncilIntegrating climate action projects into a city’s Participatory Budget (PB)
  • Analysing novel financing mechanisms that could be applied to the Lisbon PB.
  • Organising workshops within the municipal administration of Lisbon to ensure alignment between all stakeholders and a smooth handover to the new Municipal Directorate.
  • Examining all projects that have been launched in Lisbon in the last 10 years and categorising them according to their climate impact.
National Energy Conservation Agency (Poland)An Energy Performance Contracting scheme to stimulate deep retrofitting of buildings in cities
  • Identification of effective standards and procedures for the Polish context.
  • Revision of existing guidelines and documentation, and development of EPC models.
  • Development of technical specifications for a user-friendly software to support municipalities
Hans-Peter Egler

Hans-Peter Egler

Director of Public Affairs at South Pole
Hans-Peter Egler is Director of Public Affairs and Head of the Cities Practice at South Pole, a leading global sustainability financing solutions and services provider. Prior to that, he was the CEO of Global Infrastructure Basel (GIB), a leading non-profit foundation dedicated to promoting sustainable infrastructure financing practices. Hans-Peter Egler has long-standing expertise in international cooperation, management, and project innovation. Before joining GIB he led the Trade Promotion Division of the Swiss State Secretariat for Economic Affairs (SECO). From 1992 to 1994, Hans-Peter was Deputy Country Director of Swiss Development Cooperation in Bolivia. He holds a degree in public economy.
Hans-Peter Egler

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