Sustainable Cities: A Business Opportunity for the Financial Sector

Cities generate more than 80 percent of global Gross Domestic Product (GDP). Cities also account for 70 percent of global carbon dioxide (CO2) emissions. The World Bank Group estimates that another 2.5 billion inhabitants will be added to cities by 2050. Urban growth of this scale, combined with the immediate action needed to mitigate and adapt to climate change, requires urgent action. The need for sustainable growth in cities brings opportunities for the financial sector.

 

IFC helps municipal authorities build climate-resilient, sustainable cities. Many cities have already developed climate action plans, but some have not. These cities will need to take inventory of their existing greenhouse gas (GHG) emissions and produce climate impact studies so they can prioritize green investments. In 2021, IFC estimated that there are opportunities for investments totaling $1.2 trillion in cities in Europe and Central Asia.

 

 

Building sustainable cities — and a sustainable future — will need open dialogue among all branches of national, regional and local government. And it will need the engagement of all stakeholders – including the private sector and civil society, and especially the poor and marginalized.

Ban Ki-Moon
Former United Nations Secretary General

 

 

Defining Sustainable Cities

As part of its work to support sustainability and reduce poverty, the World Bank describes Sustainable Cities and Communities as:

  • environmentally sustainable in terms of cleanliness and efficiency;
  • resilient to social, economic and natural shock;
  • inclusive, bringing all groups of people into markets, services, and development; and
  • competitive and able to generate jobs for citizens.

With city populations growing at unprecedented rates, it has never been more important to ensure that urban growth is sustainable. The need for sustainable growth offers many investment opportunities.

 

“Cities must be part of the solution to the biodiversity crisis. We hope mayors’ call for increased, direct investment will not fall on deaf ears so that they can unleash the power of nature in cities.”

Sheila Aggarwal-Khan
Director of UN Environment Programme’s Economy Division
at the United Nations Biodiversity Conference, COP15, in Montreal, December 2022

 

 

Sustainable Cities: Investment Opportunities

 

IFC identified that cities in emerging markets around the globe have the potential to attract more than $29.4 trillion in cumulative climate-related investments in six key sectors by 2030.. Of these opportunities, $1.2 trillion was identified in the Europe and Central Asia region. Almost three-quarters of the financing opportunities in ECA cities were identified in the green building sector, with an investment potential of $881 billion. Other investment opportunities identified in the ECA region were in public transportation ($116 billion), renewable energy ($88 billion), climate-smart water ($64 billion), electric vehicles ($46 billion), and waste ($17 billion).

 

 

 

Rethinking City Finance

 

A report issued by the World Economic Forum (WEF) in August 2022, identified a need for cities to have sustainable and diverse sources of finance to meet future needs. This is especially important in the aftermath of COVID-19. During 2020 and 2021 many cities postponed and cancelled investments in city infrastructure.

 

The WEF report states that cities will need private investment through new partnerships and new, creative financing solutions. While some additional financing will come directly from residents through taxes and fees, there is also a need for private sector investment. This could come in the form of green infrastructure bonds, blended finance, climate bonds, or public-private partnerships. Some urban projects will require financing from multiple parties.

 

This need for increased financing comes at a time when corporations and financial institutions are becoming interested in investing in cities. Pictet Asset Management was one of the first financial institutions to launch a city-themed investment fund, SmartCity, with seed money of €652 million.

This fund is designed to invest in equities and related securities issued by companies that help to build, run, and manage cities sustainably.

 

“Cities can protect themselves from pollution, floods, extreme heat, water and food insecurity, by increasing investment in nature-based solutions and shoring up natural ecosystems.” 

Akanksha Khatri
Head of Nature and Biodiversity, World Economic Forum
at the United Nations Biodiversity Conference, COP15, in Montreal, December 2022

 

 

IFC’s Cities Initiatives

 

IFC’s $10 billion Cities Initiative combines investment and advice to help municipal authorities build sustainable cities. With the worldwide urban population expected to grow by 2.5 billion by 2050, cities are one of IFC’s five core areas of work, as part of the World Bank Group’s Climate Change Action Plan for 20121-2025. IFC’s work in cities includes connecting municipal leaders with financial institutions so cities will have the support they need to implement plans to reduce GHG emissions.

 

IFC has developed two key tools to help cities become more sustainable.

  • APEX can help cities develop Green City Action Plans that include investment opportunities.
  • EDGE certification ensures that buildings in cities are sustainable and cost-efficient.

Both of these tools combine data with concrete recommendations to decrease GHG emissions.

 

“World Bank’s latest Climate Change Action Plan (2021 – 2025) recognizes city systems as one of the five key systems that generate the most GHG emissions and face significant adaptation challenges.”

Susmita Dasgupta
Lead Environmental Economist, Development Research Group, World Bank

 

 

IFC’s APEX Investment Planning Tool

 

IFC’s Advanced Practices for Environmental Excellence in Cities (APEX) tool provides information to help cities meet sustainability goals. The APEX tool is provided in the form of an app. The app is being piloted now, and used by city leadership in client cities. Ultimately, the app will be free for anyone to access.

 

There are two primary uses for the APEX app. First, it can be used to develop a Green City Action Plan — a plan of activities to reduce a city’s GHG emissions. These action plans include investments, policies, and planning measures. For municipal leaders considering several possible investment opportunities, APEX can provide Green Investment Opportunities Diagnostics, investment plans that analyze and prioritize investments across different urban sectors. For each potential investment, the diagnostic plan will estimate costs and forecast future GHG reductions. This tool allows cities to direct funds to optimize outcomes.

 

Once a city has set targets and implemented changes, the APEX tool can provide useful data. With a plan in place, APEX can track the city’s progress toward its targets. APEX will compare actual progress to what would have happened if the new green plan had not been in place. When cities use sustainability-linked loans or bonds to finance plans, APEX can generate data to meet investors’ demands.

 

APEX is an important part of a three-way planning tool for cities, IFC, and financial institutions. Using APEX, IFC can advise cities to help identify potential climate-related investments. Banks or other financial institutions can provide optimal sustainable financing to cities. IFC can assist banks to make sure the best financing tools are in place. Financing tools might include sustainability-linked loans or green bonds or new financial products. In some cases, IFC may be able to enter into a Risk Sharing Facility with a financial institution — a bilateral agreement to share risk in the case of a loss.

 

“We believe that evidence-based data and powerful information can make cities better and more sustainable places to live.”

Prashant Kapoor
Chief Industry Specialist, Green Buildings and Cities,
IFC Climate Business Group, Climate Change

 

IFC’s EDGE Certification

 

Excellence in Design for Greater Efficiencies, EDGE, is a standard focused on energy and water efficiency in buildings. The EDGE software makes it easy to certify resource efficient and zero-carbon buildings and helps business managers decide which measures to incorporate in a building. Buildings consume 35 percent of global energy and 5 percent of water. They produce 15 percent of all GHG emissions. Renovating inefficient buildings and making sure new buildings meet efficiency standards is key for cities working to reduce GHG emissions.

 

To become EDGE-certified, buildings must achieve energy savings of 20 percent across the three categories of energy, water, and materials. Buildings that achieve greater energy savings can reach higher certifications of “EDGE Advanced (zero carbon ready),” and “Zero Carbon.” Buildings certified as Zero Carbon must use 100 percent renewable energy on- and off-site, or purchase carbon offsets to reach 100 percent.

 

 

 

Cities in the ECA Region

 

While most cities struggle to cope with growing populations, some cities in the ECA region are struggling with population decline. In a 2019 report, the WBG found that 61 percent of cities in Eastern Europe and Central Asia saw population decreases from 2000 to 2011, losing an average of 11 percent of their population during that period. Population decline varies by country, and by region within each country. While some cities see populations decline, others see more concentrated population growth. Bigger cities, capital cities, cities with diverse industries, and cities near a coast are more likely to grow, or at least to see lower declines in population.

 

Not all areas with declining populations experience economic decline. However, a typical scenario with a declining population is a decreasing source of tax revenue combined with an increase in average costs to deliver services. This situation requires creative solutions and innovative financing.

 

Even with population declines, 67 percent of the population in the ECA region live in cities. IFC’s analysis “Climate Investment Opportunities in Cities” reminds readers that cities in the region with populations greater than 100,000 are vulnerable to climate change effects such as heatwaves, infection outbreaks, air pollution and water pollution.

 

After working with Belgrade, Serbia, to develop a vision for urban development, IFC estimated climate-smart investment opportunities in the city of almost $5.5 billion until 2030. The work included developing rivers, waterfronts and public spaces, making public buildings more efficient, and modernizing the public transport sector, among other projects.

 

“Belgrade is keen to improve environmental sustainability and become a smart city. We are working with IFC to attract private sector investors through public-private partnerships and we plan to implement several projects under this model…”

Zorhan Radojicic
Mayor of Belgrade

 

 

Start Your Green Journey

IFC’s Green Banking Academy (GBAC) is an online banking knowledge initiative designed to help financial institutions and the private sector in Europe and Central Asia (ECA) learn about sustainable cities and work with cities to enhance their green portfolios. GBAC advisory services are available to help financial institutions gain this knowledge. IFC offers the tools that financial institutions will need to measure, report on, and decrease GHG emissions in their portfolios. IFC can also assist financial institutions in developing new financial instruments to meet the needs of investors in the green economy.

 

For more information about GBAC or to schedule an assessment of your climate capabilities, please email ecagbac@ifc.org to contact a member of our ECA GBAC team. IFC experts are available to provide you with more information about working with cities to improve city sustainability and enhance your green portfolio. We are looking forward to working with you. Stay green!