Unlocking the economic opportunity of climate action

5th September 2016

By Maia Kutner, Head of Cities at CDP (formerly the Carbon Disclosure Project)

The appetite for investing in climate action is growing. At the UN climate talks in Paris last year, more than US$100 billion per year was pledged both from public and private sources to help developing countries mitigate and adapt to climate change by 2020. Financial institutions such as Bank of America Merill Lynch and CalPERS have made far-reaching commitments to redirect their investments in the coming ten years into renewable energy, sustainable transport and green bonds.

There is no better place to direct this finance to than cities.

Cities account for 75 percent of all global emissions. In our rapidly urbanising world, investments in smart, compact and low-carbon infrastructure could deliver serious environmental impacts while also offering financial advantages. Urban environments offer economies of scale, density and opportunities for innovation that can secure high rates of return and also create co-benefits in health, job creation and reduced congestion. For example, London’s low-carbon market is estimated to be worth at least US$33 billion to the city’s economy and this is only expected to grow.

Investments in sustainable infrastructure could yield extensive savings for cities and promote inclusive economic growth by capturing these savings.

The financing gap

The State of City Climate Finance report estimates that over the next 15 years, US$93 trillion is needed to finance an urban transition to a low-carbon economy.

This is a big gap to fill. CDP has published a white paper examining the barriers to private financing of urban mitigation projects, in order to shed light on how investors and cities can address this challenge. As one investor told us, the main problem is “not a lack of finance, but a lack of bankable projects”.

Our research suggests that city officials tend to view climate projects as costly rather than an opportunity to attract investors. Cities often lack the capacity or knowledge to prepare and market data on profitable, low-carbon projects to institutional investors and instead focus their search for funds to public sources.

These barriers are exacerbated by the difficulty in aligning the many different parties that are involved when designing projects and by low credit-worthiness of cities in the global south, where the largest financing gap exists and the highest rate of urbanisation occurs.

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What cities can do

Action by cities will be essential to achieving the ambitious goals of the Paris Agreement–but encouragingly more than 7,000 cities have made commitments through the Global Covenant of Mayors for Climate & Energy. Cities can also play a crucial role in creating an attractive investment environment that can absorb the trillions of investments needed in sustainable infrastructure.

One way to do this is to provide the market with more data. At CDP we know firsthand that there is growing investor demand for climate data, which they see as increasingly critical for guiding investment decisions. This year a sharp increase in the amount of data available on emissions and actions taken by cities suggests that city leaders are attuned to this opportunity. Over 500 cities globally reported the actions they’re taking on climate to CDP this year, a rise of 70 percent from 2015. Many first-time disclosers are from the least developed countries in Africa such as Ethiopia and Uganda.

There is still a bridge to build however between sharing this data, and establishing links with private investors in order to unlock finance. This is why CDP aims to share the knowledge of its wide investor network to improve the capacity of cities to present bankable, transformative projects and engage the private sector.

Please contact Florianne de Boer at florianne.deboer@cdp.net if you want to find out more about how you can get involved.

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