22 March 2019
The South Korea-based fund should seek to derisk investments and explore innovative solutions such as resilience bonds, argues Alexandra Tracy
In the world's efforts to limit climate change, cities are front and centre.
More than half of the global population now lives in a city, with urbanisation continuing to rise rapidly in developing markets. Cities are responsible for 70% of energy-related greenhouse gas emissions.
In emerging economies it is likely that they will account for 70% of growth in energy use over the next two decades.
The extraordinary pace of urban development around the world means that, although it is expected that 70% of people will live in cities by 2050, a whopping 75% of the area expected to be urban by that time has not yet been built.
This means that there is a huge opportunity to leapfrog historical approaches to urbanisation and to prioritise the development of more resource-efficient, climate-friendly cities that will be resilient in the face of climate change and can tackle the challenges of pollution, congestion and energy access, as well as providing adequate green housing and public transportation.
Cities have a disproportionate impact
Successful action by cities to mitigate the extent of climate change and build their resilience can have a disproportionate effect because they are densely populated areas with potential for considerable economies of scale and significant climate co-benefits.
Research by New Climate Economy (NCE) has demonstrated that investments in low-carbon city projects have realised significant economic value from direct energy savings.
To accelerate action climate change most effectively, however, low-carbon measures must help to realise other development priorities, such as improvements in health, job creation and poverty reduction, which could add considerably to the outcome of low-carbon investments.
For example, NCE found that the monetised health benefits associated with improved building heating, insulation and ventilation can be more than ten times the value of the energy savings alone1.
Building resiliency for the long term
Cities are increasingly vulnerable to the potential impacts of climate change. 90% of the world's urban areas are built on coastlines, open to the risks of rising sea levels and increasing storm activity. And as increasing centres of wealth – contributing over 80% of global gross domestic product – cities have a great deal to lose.
Services such as energy, water, transport and communications are particularly connected in urban areas, which results in a codependent system that needs to be made resilient at every stage. City planning and infrastructure investments made today will have long-term outcomes and influence the direction of urban growth and development for decades.
Generating investment opportunities
By 2030, the world is projected to have 43 megacities, mostly in developing countries, each with more than 10 million inhabitants. At the same time, the fastest growing urban areas are cities with fewer than 1 million inhabitants, many of them in Asia and Africa. The scale of investment required to upgrade existing urban facilities, as well as to ensure that these new centres are developed in line with climate-friendly principles, will be considerable.
A recent report by the International Finance Corporation (IFC) estimated that cities in developing countries around the world have the potential to attract more than $29.4 trillion in climate related investments by 2030 in six key sectors.
The largest sector is expected to be green buildings, where the IFC forecasts $24.7 trillion of investment in both new construction and retrofits, as cities seek to house their growing populations. Low-carbon public transportation infrastructure is expected to account for $1 trillion, with electric vehicles making up $1.6 trillion.
The IFC also forecasts opportunities in climate-smart water and wastewater management and infrastructure totalling $1 trillion.
Requiring public and private sector resources
Investment in urban infrastructure for developing countries tends to be funded by the public sector, but the private sector can play an important role in supporting cities through financing, as well as expertise and innovation.
A city's ability to develop low-carbon projects is typically dependent on the reallocation of existing public budgets and its ability to raise revenue. For many municipalities, an inability to establish creditworthiness or to access capital markets greatly limit their ability to meet financing needs.
As cities grow, they need to move beyond traditional public funding to access much larger pools of capital. City governments can play a key role in creating enabling conditions to attract private investment, but are often constrained by regulatory frameworks, gaps in governance and lack of experience, and are unable adequately to address concerns about project bankability.
Green Climate Fund as investment catalyst
As the world's largest climate financing vehicle, the Green Climate Fund (GCF), channels investment at scale into mitigation and adaptation activities in developing markets, with an explicit mandate to use its own resources to catalyse private sector funding. With over 100 approved projects in its portfolio to date, nearly 20% of the committed amount is allocated to "buildings, cities, industries and appliances" and "transport" - which could be described as city-level mitigation actions - and 13% to increasing resilience in "infrastructure and the built environment".
There is a great deal of potential to increase the focus on these sectors, in particular in order to mobilise additional private sector funding, which currently makes up a very small percentage of these totals.
"The GCF could encourage the development of innovative financial mechanisms such as resilience bonds and climate insurance for cities"
For example, there are no private sector transportation projects in the portfolio. Given the disproportionate impact of urban development, as mentioned above, the GCF should aim to be aggressively increasing its focus on derisking investments and filling financing gaps in these areas.
This kind of targeted intervention could enable cities to access a broad range of potential sources of funding, including debt and equity financing. In addition to more traditional approaches, such as public private partnership structures or land value capture mechanisms to leverage private finance, the GCF could also encourage the development of innovative financial mechanisms such as resilience bonds and climate insurance for cities.
Building capacity of cities
The GCF also plays an important role in increasing the capacity of policy makers and institutions in developing countries to enable them to attract private capital. Through its "readiness support" programme, it can provide city governments with expertise to establish stable climate finance ecosystems and integrate climate considerations into development frameworks. In addition, it may assist them in designing and structuring infrastructure projects across sectors to build a pipeline of bankable investments.
GCF support could also enable city governments and local authorities to lay the foundations for meaningful engagement and partnership with the private sector and finance communities by completing comprehensive city adaptation plans and strategies that map climate related risks to assets and set priorities for action.
Keeping the focus on cities
"As GCF heads towards discussions later this year about new funding commitments, there is an opportunity to reconsider how to maximise its impact on the ground"
As GCF reaches the end of its first operational period (its "Initial Resource Mobilisation") and heads towards discussions later this year about new funding commitments, there is an opportunity to reconsider how to maximise its impact on the ground.
As the world continues to urbanise, sustainable development will depend increasingly on the successful management of city growth, especially in developing countries. Many cities will face challenges in meeting the needs of their growing urban populations, while seeking to reduce emissions and ensure that infrastructure is climate friendly. By
working closely with governments, promoting access to finance and crowding in private sector investments in cities most ready to move from climate change planning to climate change action, the GCF would indeed accelerate action in this vital area.
Alexandra Tracy is President of Hoi Ping Venture and represents the Climate Markets & Investment Association as active private sector observer at the Green Climate Fund
- Climate Economy, “The Economic and Social Benefits of Low Carbon Cities: A Systematic Review of the Evidence”, June 2018.