Financing Climate Action: Lessons from international experience

Climate change is accelerating. Cities are a cause, but they also face the highest risks. Indian cities are particularly vulnerable due to their high population density and evolving infrastructure. The green economy transition enabled by climate finance represents a large opportunity to improve quality of life, develop resilient infrastructure, and generate green jobs. International experience suggests that net-zero plans are necessary but not sufficient. They need to develop financing strategies, strengthen accounting systems, engage investors, and involve communities and citizens to successfully raise the capital required. Supportive policies such as sustainable procurement and integrating energy and climate action into the broader rubric of urban planning can accelerate climate finance

Finance is a catalyst for action. Across the world, cities are the centres of economic activity and account for more than 60 per cent of carbon emissions. Globally, more than 70 per cent cities are witnessing climate change impacts (Knuth & Krishnan, 2021). Therefore, financing cities’ climate action will be key to managing global climate challenge.

Many cities are gearing up to take decisive action, as demonstrated by 122 cities making it to the CDP’s list of leaders in environmental action and transparency. However, only one Indian city (Mumbai) has made it to CDP, 2022. Finance for climate action is often a constraint, especially for cities in emerging markets. IFC estimates that emerging market cities will need to invest $ 29.4 trillion across six key sectors towards mitigation and adaptation (IFC, 2018). In good news for India, IFC is planning to double its investments to about $2.5–3 billion annually (Gera & Sikarwar, 2023).

The Indian government has proactively shaped policy and programmes to enable and accelerate climate action in cities. Nevertheless, most ULBs lack the necessary technical and financial capability required for sustained action. Further, most states have not delegated the managerial and financial autonomy necessary to enable and empower them. City master plans and development plans lack a coherent strategy to finance infrastructure and development projects (Bhatiani et al., 2022). There is a clear need for Indian cities to place greater emphasis on raising finance for sustainable infrastructure development and enhancing resilience to mitigate climate risks. In this context, newer and more innovative financing sources can accelerate climate action, infrastructure development and green livelihoods.

Climate-positive investments in the last decade were about $4.8 trillion, with a CAGR of 7 per cent per annum from 2011-21 (Naran et al., 2022).

One of the structured finance mechanisms is a dedicated Green or Climate Fund. London, for example, established a revolving Green Fund with an initial investment of £125 million (presently grown to £575 million) with the objective of creating a greener London, including reducing GHG emissions by 60 per cent from the 2010 level (45 million tonnes). It was established in 2010 under the JESSICA (Joint European Support for Sustainable Investment in City Areas) initiative to provide loans and equity financing to projects with higher risks and to encourage commercial investments in climate-friendly projects.

Over the years, additional investments have been made by investors at both the fund and project levels, with total investments exceeding £375 million (FMDV, 2014). The fund is operated professionally by a set of investment managers depending on the sectors, such as energy, recycling, housing, waste to energy, etc. (FMDV, 2014). A key lesson from London is that professional fund management ensures transparency, consistency and adherence to the stated objectives while utilising funds from climate investments.

Amsterdam has a similar initiative titled the City Climate Fund to reduce 55 per cent of carbon emissions by 2030 and 95 per cent by 2050, relative to 1990 levels. It was established by the city council with a budget of €150 million and focuses on four sectors: built environment, mobility, electricity, harbour, and industry (City Council of Amsterdam, 2020). Green Bonds as debt instruments are becoming increasingly popular. The Government of India recently issued two green bonds, raising about $2 billion with a successful greenium of 5–6 basis points (Jain & Deb, 2023). The coupon rates and tenures for the two bonds are (i) 7.10 per cent for a 5-year tenure and (ii) 7.29 per cent for a 10-year tenure (Ministry of Finance, India, 2023).

Our cities can also take a leaf from Johannesburg, which issued its first green bond of ZAR 1.46 billion ($81 million). Funds are deployed on a variety of projects, including renewables, energy efficiency, and biodiversity, etc. A comprehensive approach that included aligning the purpose of bonds with the city’s climate initiatives, a definite process for evaluating projects and their impacts and a transparent annual reporting mechanism was a key factor in Johannesburg’s success (ERM, 2015).

Auckland’s plans to be Net Zero by 2050 have followed a more ambitious trajectory by adopting a mix of green budgeting, green bonds, PPP, blended finance, and voluntary crowdfunding (City Council of Auckland, 2020). The City Capital Plan Budget for the current decade (2021–31) proposed a NZ$31.8 billion expenditure focusing on climate change and development sectors including transportation, road safety, and housing. An additional NZ$ 152 million shall be invested towards electrification of public buses, planting 200 ha of native forest in regional parks, planting 11,000 trees in urban forests, and improving zero-waste recovery network.

Auckland Council has also issued five green bonds to date, with a total asset value of NZ$1,958 million and bond tenure ranging from 5 to 30 years. These funds fund the public bicycle network, electric trains, terminals, depots, street lighting, solar systems, efficient buildings, water and waste management. Cities can unlock climate finance in a strategic and accelerated manner based on a well-articulated Net Zero target and capital plan, as demonstrated by Auckland’s experience.

Quito implemented an innovative land value capture scheme through an “Eco-Efficiency Ordinance”. Since transportation was the major contributor to GHG emissions, the mechanism was designed to provide additional development rights to existing buildings along public transportation corridors to incentivize the development of energy-efficient buildings. Further, additional incentives are being provided for new developments that integrate affordable housing units. The incremental value of land along transportation corridors is retained by the city (Urban Sustainability Exchange, 2022).

The success of land value capture mechanism was due to effective collaboration between the government, utilities, community and other key city stakeholders. Quito’s example demonstrates that contextualising finance within a specific challenge faced by the city can not only unlock additional funding but also enable action to directly address the problem.
In Belgium, the City of Ghent developed a platform to raise small funds (minimum €5) from many individuals and communities (Climate Adapt, 2018). This platform has successfully funded projects to create mini-green spaces on residential balconies and vertical walls to mitigate the impact of extreme temperatures.

For rebuilding after an extreme event, Catastrophe Bonds (CAT) can be utilised, as they provide an immediate payout in case of losses emanating from specified events such as cyclones, floods, etc. The immediate payout ensures that critical projects such as communications, electricity, water, etc., can be rapidly redeveloped, thereby minimising the economic and social loss. CAT bonds have been used in countries such as Jamaica and the Pacific Islands, which are at high risk of extreme events (World Bank, 2019).

These and other innovative funding options will need to be exercised by cities as they focus on net-zero policies and strategies. Each financing option will have its own unique advantages and challenges. Cities, therefore, need to enhance their capacity in the finance and accounting areas to raise funding at the lowest cost and maximise their revenues from projects. Cities can also take assistance from various facilities operated by multilateral agencies, such as the Cities Finance Facility, which enables access to finance for climate change mitigation and resilience projects. It also provides technical assistance to develop bankable investment proposals (UNFCC, 2020).

A strategic financing roadmap with an economic cost-benefit analysis should be undertaken as a starting point to ensure the prioritisation of projects with the highest benefit-cost ratio. As part of the exercise, sustainable procurement policies may be adopted so that plans, projects, and products are evaluated based on the life cycle cost rather than the least cost approach traditionally adopted. Further, convergence of technologies across electricity, telecom, gas, and transport presents newer opportunities for enhancing integration to improve quality of life, reduce cost, and enhance sustainability. Cities can take advantage of this to develop integrated projects such as underground utility networks. Our research in project SUNDAR, i.e., Sustainable Urban Networks for Dynamic and Resilient India, highlighted that integrated development will enhance resilience, reduce land requirements, and minimise economic and social interruptions from the perpetual and ongoing construction cycle. Green economy transition and climate finance are opportunities of the century. According to the World Bank, transitioning to a green economy through sustainable infrastructure development will require $90 trillion by 2030. It will unlock new economic opportunities and jobs with every dollar invested, yielding four dollars in returns (United Nations, 2019).