Make no mistake, momentum is growing to ‘localize’ climate finance

New innovations in green bonds, climate insurance, sustainable and resilience standards and certifications, and more.
Igor Sorokin/Shutterstock

The evidence is overwhelming. Besides being the warmest year on record, 2016 saw an overwhelming number of “pollution peak” days in cities across the globe.

Paris, for instance, is regularly exposing more than 1.5 million inhabitants to pollution levels that do not respect European regulation. In Africa, imported fuel — low-cost but toxic — is poisoning those who live in Lagos, Dakar and elsewhere.

Multiple concerns are tied up in these situations, of course, including around public health and the environment. Yet the broadest policy changes will be brought about in the fight against climate change — and as is becoming increasingly recognized, cities lay at the forefront of those solutions.

Even as cities continue to commit to reducing their greenhouse-gas emissions, however, local officials face a major challenge in piloting a shift to a low-carbon future: financing. And this is only exacerbated by national-level funding constraints that have limited public investment in recent years.

Over the past 12 months, then, mayors and other local authorities have increasingly mobilized on this issue. In November, local governments agreed on a Roadmap for Action aimed at “localizing” climate finance in response to the urgent need to fund sustainable urban services and infrastructure, particularly in areas that are seen as fragile or especially vulnerable to climate change.

[See: Cities unveil time frame for ‘localizing’ climate finance]

Today’s international climate-financing architecture is highly complex and suffers from division and chronic under-financing, in particular for adaptation. There is not nearly enough patient, long-term and innovative climate finance models and approaches that could pay for the massive infrastructure projects needed in coming years in developing countries.

That’s a particular problem in that these countries are where the needs for renewable energy and other sustainable infrastructure are greatest. Over the next 15 years, the world will have to invest around USD 90 trillion in sustainable infrastructure assets if it hopes for a breathable future, and much of that will be required in cities.

Much of the obstacle to greater financing is that risks abound, both real and perceived. Political, technological and other risks often are too high to attract investors and developers to finance low-carbon projects, especially in emerging markets.

[See: Initiative aims to make more green infrastructure projects ‘bankable’]

Furthermore, the global “smart” revolution has prompted a shift away from traditional business models around public services in cities. But new financial models still need to be experimented with and assessed according to their local value on a spectrum of issues — social, environmental, political and economic.

But we are seeing new trends — and new innovations. A host of solutions today are being put into action in cities across the globe as investors, practitioners and policymakers at the national and local levels recognize the urgency and opportunity of this gap. Many of these remain in an experimental phase, but several are gaining on-the-ground experience by the day.

Matchmaking and readiness

The most concerted effort to bolster mechanisms to localize climate finance is taking place through an initiative called the Cities Climate Finance Leadership Alliance (CCFLA). Launched under former U. N. secretary-general Ban Ki-moon in 2014, the alliance is made up of 48 NGOs, research centres, foundations, public and private banks, central governments, U. N. agencies, and networks of local and regional governments.

“A host of solutions today are being put into action in cities across the globe as investors, practitioners and policymakers at the national and local levels recognize the urgency and opportunity of this gap.”

Core to its mandate is “matchmaking” — connecting demand and supply. But the group also supports overall readiness in order to empower local and regional governments to deliver low-carbon and resilient development plans and infrastructure. CCFLA plays a key role in identifying and helping to address gaps in knowledge, capacity, resources and working practices in cities and other subnational levels.

[See: Pension funds are key to Africa’s transformation — and city officials can help]

In 2015, the CCFLA released “The State of City Climate Finance” report, which highlighted this investment gap and emphasized the need for increasing capacities necessary to facilitate capital flows toward local low-emission, climate resilient infrastructure. Following that release, CCFLA members committed to support several key steps aimed at strengthening the international and domestic environments to allow for robust flows of climate finance to cities.

Among the solutions, alliance members and partners are experimenting with innovative financial instruments for city investments such as green bonds, climate insurance, sustainable and resilience standards and certifications, and project preparation facilities. Here are a few notable such initiatives:

  • The Global Innovation Lab for Climate Finance was developed by the Climate Policy Initiative as an international partnership to identify and pilot cutting-edge climate finance instruments. An example is the Energy Efficiency Enabling Initiative, which aims to increase the supply of risk capital (equity) by attracting private-sector capital for a new energy-efficiency equity fund.
  • Global Infrastructure Basel’s Standard for Sustainable and Resilient Infrastructure (SuRe) is a voluntary global standard that integrates key criteria of sustainability and resilience into infrastructure development. SuRe states that it seeks to “leverage both public and private investments in infrastructure in a cost-effective way while strengthening resilience, maximizing social benefits and limiting the environmental footprint”.

[See: Lessons from Mexico City’s green bond, the first municipal issuance in Latin America]

Each of these initiatives aims to catalyze and improve capital flows to cities in developing and emerging economies for mitigation and adaptation measures. The Global Innovation Lab for Climate Finance alone already has attracted USD 600 million in seed funding and will drive billions more in investment.

[See: Explainer: What are ‘green bonds’ and why are cities so excited about them?]

These initiatives are presented in the latest CCFLA report, “Localizing Climate Finance: Mapping Gaps and Opportunities, Designing Solutions”, released in November. The report details more than 80 projects, covering the entire financing chain of local climate actions, with a particular focus on early-stage project development.

In mapping members’ initiatives on climate finance for cities, the report confirms a key point: Global momentum is growing to address the financing gap for local investments.

Carbon pricing and more

Despite this growing momentum, major advances still need to be made in order to create incentives for investment in local resilience. First and foremost, national governments could dramatically help this cause by acting decisively around carbon pricing.

“The Global Innovation Lab for Climate Finance alone already has attracted USD 600 million in seed funding and will drive billions more in investment.”

[See: As the Green Climate Fund meets, will it ensure climate finance reaches the local level?]

But others must play a role, too. Multilateral and regional development banks, for instance, need to dedicate funds to climate action and ensure that every policy and project funded is “climate-proof”.

Local financial institutions are key actors, as well. In the long run, they will need to be empowered to develop domestic, tailored-made financial solutions for cities, while channelling international climate funding to the local level.

Taking such steps can support local and other subnational governments in building fiscal autonomy, integrating and further adopting standards, operational and regulatory frameworks, and measurement tools for cross-cutting “climate smart” investments and urban services.

[See: Explainer: What is the Paris Agreement on climate change and what does it mean for cities?]

In all of this, it’s impossible to overlook the fact that progress in this area ultimately will require fundamental changes in social relations and institutions to make them more inclusive and equitable. It will require leaving aside individual and organizational ego to collectively create a common culture of climate finance that can move toward transformative change. Indeed, this long-term strategic vision may well be the fundamental mission of an alliance such as CCFLA.

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Charlotte Boulanger

Charlotte Boulanger is Climate Finance Project Officer at FMDV, based in Paris. She is also co-coordinating the Cities Climate Finance Leadership Alliance (CCFLA) Secretariat.