First, there’s just not enough of it – an estimated USD $4.5 - 5.4 trillion is needed to deliver cities’ science-based climate action plan, but barely 1 per cent of that is currently available for investment. Second, most public, multi-lateral climate finance is inaccessible to city governments because it requires sovereign guarantees or other support that is not forthcoming. Facilitating cities’ access to affordable climate finance, particularly cities in the Global South, should therefore be a priority for everyone concerned about climate change. Achieving this will require impactful partnerships between cities, governments, the development financial institutions and the general financial community to mobilise both public and private sector at scale.
As the world becomes even more urban, the question of enabling cities will become more important. Cities already generate more than 70 percent of GDP and hold over half of the world’s population, making them large consumers of natural resources, food, energy, and other goods. It is estimated that 70 to 75 percent of total natural resources are consumed in cities. As urbanization and population growth accelerate, an additional 2.5 billion people will be living in urban areas by 2050 and 90 percent of that increase will take place in cities in Africa and Asia. Cities also face tremendous inequalities – it is estimated over one quarter of city residents live in informal settlements facing not just inadequate infrastructure but also increased climate risk.
Cities also offer hope: they are hubs for innovation, enterprise and economic activity. Cities play an important role in delivering public services – providing vital infrastructure, and establishing an administrative context and conditions conducive to a business environment that favours economic growth. More generally, urban centres facilitate partnerships between economic institutions (such as chambers of industry and commerce), small and medium-sized enterprises, universities, research centres, trade unions and representatives of civic society.
Given their interconnected nature, investing in the transformation of cities can reap broad rewards. Adapting cities and regions for climate change and helping them reduce their emissions can produce wider benefits, such as the creation of green jobs, improvement in air quality and health outcomes, enhanced resilience, and improved quality of life. Investment in green and sustainable infrastructure for cities also ensures food and water security, helps reduce the risks of disasters as well as improving health conditions and reducing poverty and inequality of its inhabitants. Citizens are increasingly demanding innovative answers and more action and investment to combat the development, climate and biodiversity crisis.
CITIES CAN BE THE CATALYST FOR GREATER NATIONAL ACTION
While local and subnational governments have been developing climate action plans and engaging with themes of the Sustainable Development Goals, they cannot face the challenges of the 2030 Agenda without the support and enabling frameworks of national governments, international agencies and the private sector, particularly in the Global South where investments are lagging behind. City governments rarely have direct control over all the key sectors necessary to achieve net zero and require collaborative approaches with national governments and the private sector to advance sustainable development.
There is a broad spectrum of approaches to public-private collaboration in cities: from formal bodies and public-private partnerships such as Bogota’s cycle network or Kigali’s Imbuga City Walk, to alliances like Cape Town’s Energy, Water & Waste Forum or Pune’s EV Cell. Leveraging the expertise and resources of the private sector can help cities to reduce emissions whilst delivering on key infrastructure services, increase urban resilience, and build more integrated, inclusive, and prosperous communities.
Cities can make efficient use of the already constrained public purse by collaborating with the private sector on essential sustainable urban development projects. For example, between 2019-2023, Mexico City invested USD 57 million in infrastructure into the Vallejo-I industrial area to create higher densities, mixed land use, public spaces, and affordable housing. The city government actively promoted opportunities for businesses to invest or relocate to the area and have so far raised over USD 800 million in private investment from 300 small and large companies. Place-making or urban redevelopment can be a great opportunity to bring businesses together, build trust, and enable innovation.
THE URBAN FINANCE CHALLENGE
Delivering on Sustainable Development Goals, while getting on track to achieve the 2015 Paris Agreement goals, requires massive investments. Before the pandemic, it was estimated that developing countries would need to spend about 4.5 percent of annual GDP on average by 2030 to meet their combined targets, through public and private investment. The need for sustainable infrastructure investments varies from region to region and across sectors. For example, more rapid urban population growth is observed in Africa where there is also an urgent need for populations to respond to extreme flooding affecting the numerous coastal cities on the continent - something island economies are also particularly vulnerable to. In many other cities there is a particular need for finance to support energy-related and water resource management projects that will require additional, transition-focused, investments.
The mountain of resources required to meet city’s funding needs cannot simply be gathered through traditional sources of funding channelled through official development assistance (ODA) or development financial institutions (DFIs). To implement the 2030 Agenda, the role of DFIs (including multilateral development banks - MDBs) must shift from transferring resources to mobilizing them. Private sector financing and investments will be vital. On average, local and regional governments account for 37 percent of total public investment worldwide. They, together with the private sector, are key players in charge of the maintenance and daily operation of municipal infrastructure. With sufficient autonomy (in particular fiscal) to act, they are potential game-changers in co-creating local innovative solutions and mobilizing resources for the benefit of their communities. They should be empowered to access responsible borrowing and diverse funds (e.g., climate or green funds). Better coordination will also contribute to raising and combining different investment sources, making public financing, alongside private sector resources, more productive, effective and inclusive.
Historically, these urban finance needs have not been emphasised in international finance dialogues. The recently concluded 28th edition of the Conference of the Parties (COP28) in Dubai stands as an exception to this. There, hundreds of mayors, governors, subnational leaders and urban development partners rallied around a call to action on this agenda, led by COP28 President-Designate Sultan Al Jaber and UN Special Climate Envoy Michael Bloomberg. These subnational leaders were invited to join a dedicated Local Climate Action Summit on the first and second day of COP28 with city and local leaders standing side by side with world leaders on stage. A major outcome of the Summit was a new Coalition for High Ambition Multilevel Partnerships (CHAMP) to enhance cooperation between national and subnational governments in the planning, financing, implementation, and monitoring of climate strategies. If nation states properly included city action in the climate commitments, and then increased legislative and funding support accordingly, we can get NDCs in 2025 that are compatible with the Paris Agreement. The CHAMP coalition is at 71 country signatories and growing, with all nations committed to collectively pursuing efforts to limit the temperature increase to 1.5°C above pre-industrial levels, and increase adaptation and resilience.
THE CASE FOR MOBILISING PRIVATE SECTOR INVESTMENT
Cities with the impetus to take action to tackle climate change and promote sustainability need support in order to attract private sector investment. They often lack the technical capacity and expertise to prepare and present well-structured projects, especially climate-smart and sustainable projects that have the potential to attract investment. This is often a particular problem in Global South cities. Overcoming financing barriers and putting critical enabling conditions in place requires a multi-pronged approach.
At the forefront, numerous city-focused project preparation funds and facilities have been established in recent years to provide pipelines of investable or bankable climate projects. These facilities include the City Climate Finance Gap Fund implemented by the European Investment Bank and the World Bank together with a range of partners, the C40 Cities Finance Facility (CFF), Cities and Climate in Africa (CICLIA) - sponsored by the French Development Agency and backed up by the EU, to name a few. Cities need a mix of direct and intermediated access to funds and guarantees. Facilitating and accompanying this access to finance may require incentives for development financial institutions and private investors to boost the urban climate and sustainability finance market. To make investments work for both parties often requires technical assistance, de-risking instruments e.g. concessional finance or guarantees to cover either public payment or foreign exchange risk. In the longer term we also need to see reviews and reforms of national fiscal and regulatory frameworks to allow for the development of innovative financing instruments such as green bonds or sustainability-linked loan.
In this respect, the revised methodology for accounting for private sector instruments in official development assistance endorsed by the OECD Development Assistance Committee in October 2023 will encourage DFIs in particular to increase the number of financing arrangements that include de-risking instruments and vehicles for blended finance: guarantee mechanisms, equity investments and mezzanine debts.
City networks have an important role to play in advocating for this reform agenda, alongside pension fund managers, investors, commercial lenders, DFIs, including multilateral and national development banks.
Collectively we should aim to:
- Help build consensus among cities’ national and regional policymakers, who need to prioritize the design and implementation of a systemic urban climate finance architecture and ecosystem
- Ensure DFIs mandates and climate and sustainability strategies are based on clear, integrated and dedicated urban finance programmes that accommodate smaller project sizes, support the need for local currency financing and formulate risk mitigation strategies to attract private finance
- Make the case more generally for the need to prioritise cities in the global agenda to expand public and private investment in climate resilience, mitigation and adaptation.
Cities can be at the heart of our battle to fight climate change - but only if they have the finance to do it. With significant momentum on multi-level action gained at COP28 and time running out to keep the 2015 Paris Agreement alive, now is the time to give cities the resources they need and unlock their full potential.
More information on the landmark Local Climate Action Summit held at COP 28.