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January 4, 2023

How to make markets a main player in the urban energy transition

Frameworks are already in place to drive the urban energy transition, but money is not moving quickly enough. ClimateView’s Irena Badelska discusses why and how the mobilisation of finance towards green projects must be accelerated – and the cities already taking a lead in demonstrating working solutions.

urban energy
Urban energy transition: city-level ambitious could be higher than national level in some countries. (Image by Hurca/Shutterstock)

At the time of writing, more than 2,300 local and national governments have declared a climate emergency affecting the lives of more than one billion people around the world. As city leaders scrutinise their paths towards a greener future, however, the sheer scale of the challenge ahead is becoming clearer. London Mayor Sadiq Khan recently announced that the city’s urban energy transition will cost £75bn.

Some hope can be gleaned from a handful of cities, from Copenhagen to Mumbai, which have already made significant inroads towards their net-zero targets, and are on track to beat their national governments in the race to carbon neutrality.

However, cities that aspire to outpace their national government’s climate targets soon run up against a common obstacle. 

“The ambition at the city level may be higher than the national target, and their capacity to deploy resources on the ground is probably better too,” explains Irena Badelska, chief revenue officer at ClimateView. “But that doesn’t necessarily translate into an ability to unlock funding, because cities don’t have the same access to the capital markets or private finance as corporates and national governments do. 

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“There are existing climate finance frameworks that allow for capital to be deployed right now, but money is not yet moving to the right places fast enough.”

There is a parallel problem in the markets: a distance from the realities on the ground that cushions the urgency of the climate crisis. “Capital markets find it hard to grasp the systemic nature of decarbonisation, the fact that we’re interconnected because we’re all living on one planet,” Badelska says. “It’s not enough to simply set a net-zero target and account for carbon emissions in a static report, which often lacks a tangible pipeline of impact-focused projects to back it up. 

“We are looking at a physical transition that needs to happen in the real economy. It requires the continuous evaluation and prioritisation of decarbonisation projects and initiatives, which need to be financed and executed with an unprecedented sense of urgency.”

Enter the financier

But success will only be achieved if markets are an integral part of the solution. It is becoming increasingly common for local governments to issue green and sustainability-linked bonds to fill the gaps in their urban energy transition budgets after modest tax revenues or national government grants have been used.

The Swedish city of Helsingborg, which works with ClimateView, became the first city in the world to list a sustainability-linked bond in March 2022, supporting its ambition of reaching net-zero greenhouse gas emissions by 2035.

“One of the key challenges that even advanced cities face is that this climate work is still done in a silo. There is very little ability for that work to translate into a financial product unless the climate team and the finance team actually collaborate,” says Badelska. “And that’s exactly what Helsingborg did ahead of launching their sustainability-linked bond earlier this year. The climate and finance teams worked together to establish a sustainability framework, including which KPIs and metrics will ultimately be presented to investors.”

Badelska believes that finance experts and local governments can solve each other’s problems. Markets have ready access to capital but struggle to grasp the nature of the problem on the ground, while city administrations can assess and respond to situations quickly, but lack funds. 

Standardising across the urban energy transition

Politicians also have an important role to play in creating the conditions for markets to support the green transition.

“One of the most important things that policymakers can do to send the right signals to the investment community is to help them internalise externalities. By putting a price on carbon, for example, a company or an investor can factor in the capital needed to pay for their carbon footprint. This will help them plan for the impact on their bottom line, with knock-on effects on the cost of borrowing, and will create a natural capital outflow away from polluting, long-term infrastructure assets at risk of becoming stranded in the future. That’s why we in the climate community have been arguing for carbon pricing for so long,” says Badelska.

Globally, a large chunk of carbon emissions is now covered by carbon pricing mechanisms. China launched its emissions trading scheme in 2021, which helped to bring some laggards into the fold. But the prospects of unifying the disparate carbon pricing schemes around the world seem slim.

In the reporting landscape too, there is no overarching scheme obliging companies, cities and investors to disclose their emissions. Rather, a patchwork of standards based on voluntary membership, such as the Carbon Disclosure Project, mandates participants to publish their greenhouse gas outputs. The recently established International Sustainability Standards Board (ISSB) under the IFRS Foundation could be transformational in this regard, potentially leading to the rapid adoption of sustainability-related financial reporting standards to meet investors’ needs for sustainability reporting.

A complicating fact is that existing mechanisms for the mobilisation of finance towards green projects are not leading to carbon reductions at anywhere near the pace needed to curb the worst effects of climate change. Badelska remains hopeful, however, that the growing popularity of green and sustainability-linked bonds could move the needle when it comes to deploying private capital to urban infrastructure projects delivering real impact on the ground. 

“Ultimately, investors are looking for standardisation, transparency and verifiable climate impact. In order to meet the minimum criteria to issue bonds, the projects they finance have to produce certain KPIs, which they need to track, monitor and evaluate over time. Radical transparency creates trust and will ultimately attract capital at scale to finance the urban climate transition”, she says.

ClimateView’s impact intelligence platform, ClimateOS, leverages localised data and systemic analysis to help cities understand the mechanisms behind their emissions and distil precisely the kind of data insights that many carbon disclosure standards require.

Real-world benefits

City climate transitions are not for the benefit of either regulators or markets. Real people must be at the heart of new investments.

Research by C40 cities – a group of almost 100 municipalities around the world that are leading the way on urban energy transitions – shows that investing in urban climate action will halve emissions and create a third more jobs than continuing with business as usual. It could also reduce air pollution by up to a third and deliver $280bn worth of health-related economic benefits in C40 cities alone.

“Cities often feel that they’re mapping out a roadmap for others to build upon and be guided by; the private sector, for example, investors, or citizens,” Badelska concludes. “This is true in many ways, of course, but what we are also seeing is how learnings across pioneering cities can help share and export their local knowledge and experience about successful climate projects and initiatives on the ground to many other cities around the world. 

“Our role at ClimateView is to enable and accelerate this process by connecting cities on our platform and their impactful projects to capital.”

In a 2000 address to fellow city leaders, then Denver mayor Wellington Webb observed that, while the 19th century was a century of empires, and the 20th century defined by nation states, the 21st century would be a century of cities. Their success in serving as a catalyst for change, enabling real climate impact through redirecting the flow of private capital to the most potent net-zero infrastructure investment, will go a long way towards defining whether this prediction will come to pass.

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