Cities and climate change - the funding gap

Channels: Green Bonds, Investors

Companies: Zurich, Global Platform for Sustainable Cities, Global Environment Facility, Bank of China

People: Cecilia Reyes

Green bonds are among the tools available to cities as they look to raise the trillions needed to fund their sustainable growth, says Cecilia Reyes

The Cities Climate Finance Leadership Alliance estimates a finance gap of approximately $4-5 trillion per year for sustainable and resilient infrastructure in cities

Climate change has become established as a shared problem, one which transcends borders and is fuelling significant international collaboration to inform how we address its causes and impacts. Many nations also have in common the demographic trends that will be impacted by global issues like climate change, one of which is the inexorable growth of urban centres. By 2050, up to 70% of the world's total population – an additional 3 billion people – will live in cities.

A vast proportion of this urban growth will take place in developing countries, predominantly in Asia and Africa. In these regions, almost half a billion urban residents already live in coastal areas, which are increasingly vulnerable to rising sea levels and the unprecedented frequency and intensity of storms which may render many of these cities uninhabitable in our lifetime.

Collaboration and planning

There has been some promising progress in the coordination and planning which can help to mitigate and address both the contributions to, and consequences of, climate change for cities.

It is vital, therefore, that investments into our urban infrastructure are made with an eye towards their resilience and sustainability. In fact, a failure to do so by planners, developers, operators or investors represents a real risk to the investment

In June, the New Cities Summit was held in Canada, bringing together an important cross-section of academics, politicians and business leaders with specialisations in engineering, policy and data science (and more, of course) to explore how to overcome the challenges of having cities that grow more crowded than ever at a faster rate than ever – addressing issues such as how to create more flexible working and living spaces and smarter water and energy usage.

The funding gap

Earlier this year, city mayors, governors and leaders from around the world met in Singapore for the launch of the Global Platform for Sustainable Cities, or GPSC. The GPSC is part of an initiative funded by the Global Environment Facility (GEF) that is expected to mobilise up to $1.5 billion over the next five years for urban sustainability programs in 11 developing countries: Brazil, Cote D'Ivoire, China, India, Malaysia, Mexico, Paraguay, Peru, Senegal, South Africa, and Vietnam.

Cecilia Reyes, ZurichDespite this progress, recent research by the Cities Climate Finance Leadership Alliance estimates a finance gap of approximately $4-5 trillion per year for sustainable and resilient infrastructure in cities.

It is vital, therefore, that investments into our urban infrastructure are made with an eye towards their resilience and sustainability. In fact, a failure to do so by planners, developers, operators or investors represents a real risk to the investment.

Financial services industries, insurers included, should support climate change resilience programmes, globally and, where possible, invest in climate change resilience. The ways in which insurers and investors can do this are growing, with innovative new funding solutions emerging which help raise awareness and bring transparency to the issue of project resilience.

For example, several cities and municipal and transport authorities – including Johannesburg, Gothenburg, New York, Seattle and London – have already issued green bonds. It is expected that New York will spend over $27 billion on green infrastructure, with green bonds presenting a possible financing option.

After the $3 billion issuance of green bonds earlier this summer by Bank of China jump-started the Chinese green bond market, it is expected that the Chinese cities will play a crucial role going forward.

The ten-fold growth of the green bond market more broadly from $3 billion in 2012 to $42 billion in 2015 – a figure that has already been surpassed for the current year to date – demonstrates that investors are ready to invest when they are offered attractive options that fit their financial requirements for risk-adjusted returns.

Climate change policy solutions for cities

However, as well as mitigating the effects of climate change, cities need to consider their own contributions to the increased risks. In addition to housing a high proportion of the global population, cities consume over two-thirds of global energy supply, and are responsible for 70% of greenhouse gas emissions.

A number of cities are leading the way in this regard: New York energy regulators recently agreed a new Clean Energy Standard requiring 50% of the state's electricity to come from renewable sources by 2030. The state is also targeting a 23% reduction in energy consumption from buildings from 2012 levels, as part of plans to promote energy efficiency upgrades and to explore the creation of renewable heating and cooling technologies, such as geothermal heat pumps.

As this shows, data sharing and smart city technologies are already emerging as critically important. The ability to track consumption levels of utilities, distributing information in the case of emergency or even integrating new innovations will be crucial on the ground and at policy level. The successful implementation of these measures will have a significant impact in helping businesses to assess the risk of housing assets or building workforces in certain cities.

Businesses and governments need to keep exploring the risks and opportunities from these new and growing spaces, mitigating their vulnerabilities and innovating to make them more efficient.

Cecilia Reyes is chief risk officer at Zurich Insurance Group