Finance: Bottleneck in the Fight Against Climate Change

TEXT: Sibel BÜLAY

COP 27 is the Implementation COP, and finance is one of the keys to implementing the actions necessary to get to carbon neutral status.  An important discussion on the topic was held at the Multilevel Action Pavilion on Finance Day:   ”Investing in the Net Zero Potential of Cities – the next steps: a C40 and Cities Commission for Climate Investment (3Ci) event.”  The session was moderated by Steve Turner, Director of 3Ci.

Marvin Rees who is Mayor of Britol, expressed impatience with the COP process.  “All the plans in the world count for nothing unless someone is going to pay for them to happen… If we leave COP with a bunch of declarations that aren’t attached to dates, money and places, they are just declarations.  And unfortunately that too often appears to be the business of national governments.”

He also explained cities’ need for private funding. Cities provide services and the climate challenge is that they need to deliver those services while targeting net zero GHG emissions. This requires investment in new infrastructure in amounts far exceeding available public funds. “The scale and pace of change we need to deliver cannot be delivered with public money alone.  We must have private sector money.”

Whereas cities are often linked to environmental destruction,  Rees believes that cities offer efficiencies that can be of value in the fight against climate change. “Most people live in cities.  Cities can move faster than nations.  We offer density, a gateway to more efficient living.  Resource use per human life is lower than across national averages… We need a coherent global plan to understand what cities are… what we need them to be:  to maximize the contribution they can make to minimize the price the planet pays  for hosting us.”

The other Mayor on the panel was Yvonne Aki-Sawyerr. “In 5 years we haven’t been able to draw down on 5 million USD,” said Aki-Sawyerr.  She was drawing attention to the difficulty developing cities in the Global South face in procuring funding. “There are billions of dollars in adaptation money, but only 2% has come to the Global South.  And that’s where the disproportionate impacts are.”   Cities are vastly different and the most vulnerable cities are also the ones with the greatest need for investment.  They also present the greatest risk for investors. “The way we get comfortable deploying capital requires for that situation to be de-risked.”

“We need to grapple more with this question of public good… to discuss how we attach value from the perspective of the global good.  And can we look at it as an offset to some of the risk?  Freetown doesn’t have a Moody’s rating, a credit rating.  We don’t have liquidity, central bank policy… But the problems are there.  And they are problems which will impact us all.  How do we unpack this?  If you look at this from a purely finance lens, you will walk away.  How do we look at this and say ‘our returns are not just the money. Risks are not just the risks to my balance sheet, but a risk for the world, the planet.’  How do we actually reframe how we are building financial models?”

Vito Dellerba, as Director of Investments, brought a different perspective to the discussion.  Private investment is expanding its scope beyond stocks and bonds.  “We hold trillions and we need to find a way to mobilize the capital.  Institutions like ours, because our portfolios keep growing, we need to keep investing…  We are moving into areas we have never been in, because climate change is a massive opportunity.  We need to stop talking about it as if it is only a threat.   As an investor, when I hear trillions of USD are necessary, it tells me it is a very deep market opportunity across very different types of asset classes:  from early stage tech to private equity to fixed income in sovereign corporates, all over the spectrum.  And so we just need to change the narrative and think about things differently;  to look at a problem we’ve never looked at before and actually talk to one another.  Climate change is a global issue, which means that the only solution can be a collaborative one.   These questions are relevant to us because if we don’t solve climate change, who cares about all those assets.  They are all going to become obsolete. So we need to be agents of change.”

Cities can’t rely on public finance alone. They absolutely need private finance.  Investing in sustainable urban development is becoming more attractive for private funds, which is why they are attending COP meetings. “However, the challenge of converting that strategic interest, increase in good will, to actual financial flows is a work in progress” says Tanaka.

Chris Hayward and Josué Tanaka both had recommendations for cities seeking private funds and investors looking to invest in cities.

•   Project ideas must be developed into investment-ready status but cities lack the technical capacity and the funds to prepare them. Early collaboration with the private sector can help overcome this.

•   There are different projects, a variety of funding, different players.  For each type of project you will have a different combination.

•   The private funding sector has had very little experience investing in urban projects. They lack an understanding of the complex local environment, including the fiscal landscape. To investors:  don’t underestimate local knowledge. Community leaders have huge community knowledge. They understand what works in their cities and what is needed in their cities.

Susan Aikin was encouraged by what she heard in the previous panel. “All investments, infrastructure and interventions we are seeking to deliver in our cities  are for the benefit of our citizens and residents.  Vito is looking for projects for what he needs to deliver from his investors’ point of view. Cities are looking for projects that deliver for our citizens… So there we go… The common space is already there.”

”When talking of commercial ROI (return on investment), the public good is not irrelevant to that discussion.  Investors also need to please their customer base, people whose  pensions they are holding.    Their expectations have changed and they are looking for their savings to deliver the public good, as well. And cities can provide that for investors.”

Alan Banfield drew attention to the issue of scale. “Within the next 20 years the amount of infrastructure we need to build is equal to that which already exists.  Most of the need is in the Global South.  The need is vast, urgent and offers scale:  all of which presents an opportunity for private investment.  But there are questions of risk and return.  An answer to these questions lies in Yvonne’s question:  How do we value public good? Because it MUST be valued.”

We can expect many more sessions on the topic of finance. Best to end this writing with Marvin Rees’ recommendation for COP 28:  “Next year’s COP should have a focus on cities, finance and dates.  We should have a solid plan ready for endorsement which can then be kicked off at COP28.”