Financing the Resilient City - A demand driven approach to development, disaster risk reduction and climate adaptation

This report presents a strategy for scaling adaptation to climate change impacts within urban areas. It approaches the adaptation challenge within the overall context of other pressing risks and development challenges confronting the world's urban regions.

The strategy specifically focuses on the requirements for mobilizing large amounts of capital for urban risk reduction, above and beyond the amounts that will likely be mobilized through new international adaptation funds. It argues that adequate and effective mobilization of resources will only occur in response to localized demand for broad-based urban investment.

In presenting this 'demand-driven' strategy, the report proposes a reframing of the adaptation challenge from its primary focus on risk reduction to a broader focus on increasing the performance of the area or system in which the investment is to take place. This re-emphasis on the issue of performance is captured in the concept of 'resilience'.

Urban Resilience is defined here in economic terms as the ability of an urban area or system to provide predictable performance, i.e. benefits, utility, to residents and users, and predictable returns to investors, under a wide range of often unpredictable circumstances. Resilience is proposed as a more attractive objective for city leaders and investors than adaptation, because it is aligned with the primary, underlying driver for global urban growth.

We build and invest in cities to secure their economic utility and advantages, and their quality of services and amenities. We don't build urban areas in the first instance to escape risks. Strictly speaking, 'adaptation' focuses development on mitigating specific risk factors without a clear connection to the overall performance of the relevant area as a functioning urban unit. Rather than just being a risk-reduction cost, resilience investments aim to create a performance and investment premium for an urban area.

From an urban property and infrastructure development perspective, 'resilience upgrading' is implementing a set of financially justified risk reduction measures that increase the reliability of investment returns and asset values under a wider range of circumstances. The challenge of climate adaptation, and of other risk reduction strategies, is to create the institutional, planning and policy frameworks, business practices, and financing instruments to establish a market basis for resilience upgrading of vulnerable urban areas and systems.

Towards this end, the report proposes a framework for integrating climate and other risk reduction measures into broader public sector and market-driven investments planned for urban areas and systems; and for efficiently matching the different measures to the most suitable types of finance. New types of market-based finance will likely need to be invented.With regard to international development assistance (IDA), the framework proposes three 'inversions' of the conventional development assistance approach. These are:

  1. bottom-up planning processes for identifying vulnerabilities and risks and for integrating related risk reduction measures into the other priority performance enhancements for the area or system;
  2. bottom-up technical and institutional capacity for designing such comprehensive 'resilience upgrading' projects; for managing and staging complex project execution; and for preparing the different investment propositions related to different components of these projects; and,
  3. bottom-up procurement of investment through managed, competitive sourcing mechanisms and processes.

On the basis of such a demand-driven approach to investment planning, design, and financial sourcing, the different kinds of measures required in comprehensive resilience upgrades can be identified. The different risk-reward profiles and the performance of these resilience measures in reducing risks (within the context of different types of conventional urban re-development or upgrading projects) can be established.

On this basis, financial services providers would be in a position to bundle similar measures, across large numbers of projects, into portfolios. Specific financing instruments could be designed to create diversified, scaled pools for investment. The instruments could each be tailored to a targeted class of measures that share a similar risk-reward profile. The instruments might take the form of portfolio-based loans, catastrophe bonds, re-insurance, securitization, or other structured finance instruments. In this way, much larger private capital flows could be sourced for adaptation and other kinds of disaster risk reduction.

To lead this kind of financial innovation and the development of such an investment market for resilience measures the report proposes that international adaptation funds, or similar national-level funds or programs, could be very effectively leveraged by focusing on three areas. These are:

  • Funding for local, national, and international initiatives to 'mainstream' new resiliencestandards into conventional urban development projects, much as recent 'green building' standards have been mainstreamed into urban development and construction over the last decade.
  • Funding for local planning and project preparation, including financial structuring for comprehensive resilience upgrading projects in known highly vulnerable urban areas and systems.
  • Funding for financial product innovation for the purpose of creating scalable private investment flows into global resilience upgrading.