Aligning funding to the urban system
Do we need to look at funding in a new way?
There are often challenges to succeeding with financing needs for projects and initiatives to deliver sustainable and resilience outcomes and the SDGs. Organising finance is not easy, yet the world’s economies, especially in developed ones, spent trillions of dollars during the COVID-19 pandemic to prop up their economies. Emergency funding was quickly unlocked around the world when the pandemic struck. Can a similar level of urgency be applied to unlock responsible financing to achieve the SDGs, climate adaptation and tackling vulnerabilities in the world’s urban environments?
Consider an example – the challenge of coastal flooding to urban environments (which is discussed in the Urban Disaster Threats section). The need for good flood defences has been recognised for many years, yet the financing for them and the time taken to build them continues to be an expensive and lengthy process, with wealthier states and cities sometimes (not always) progressing faster than poorer ones. Yet are we approaching flooding risk in the right way, by building walls and structures ever higher or deeper? Living with nature, not against it, means not just building ever larger barriers. It is about intelligent design and living. Responsible finance should be helping to shape how such solutions are being conceived of, designed and built, for example, mandating that in order to receive the finance (through whatever mechanism is decided upon – a loan, a bond, something else) the project owners integrate nature into the design. Can a better finance system linked to specific targets (e.g. SDG urban indicators) help to achieve good outcomes?
Maybe a different way of valuing the urban environment could improve the value-rating criteria and hence selection of improvement projects, which could change the way that Business Cases for them are put together, to drive outcomes that lead to thriving, greener and more resilient places.
National finance and accounting strategies
Responsible finance and accounting is key
As mentioned above, governments around the world “spent big” during the COVID-19 pandemic in a frantic effort to keep their economies alive, and to support people when they were forced into lockdowns. The amount of government spending, and the pumping of liquidity into financial markets, was unprecedented in modern times. Can governments pay these costs back at minimal impact to their citizens (i.e. through taxes), whilst allocating finance to improve urban environments which is tied to green and resilience-focused investments (and for that matter, for rural parts of their states also)?
There is an important link to government spending and the way that national accounts are managed, which relates to the definition of value. Countries have, for some 70 years, used a common international System of Accounts to guide their planning for economic and financial matters, and these accounts focus on financial assets (just as business and private sector accounts do).
There is no accepted system of environmental accounting to help us measure, value and preserve the environment we are all part of. They do not contain anything about natural capital. This thinking is starting to change, linked to the United Nations principles for the System of Environmental Economic Accounting (SEEA), which the UN adopted as a global framework in March 2021 and many countries have signed up to it. Governments are considering how to use it. This might include the creation of “natural capital banks”, which have a national environmental focus. The theory is that they would supervise existing governmental activities towards environmental protection and to value and preserve natural capital on behalf of society.
Perhaps there is scope for a central body to formulate plans for our urban systems, which could be turned into project and portfolio criteria used to rate sustainable investment options. The EU, which wants to become the first climate-neutral continent by 2050, has created a sustainable finance strategy which purports to take this approach. It is governed by a list of criteria that key activities / sectors, such as electricity generation or construction, must meet to be considered sustainable.
The EU and its member countries fund various initiatives, including in many countries outside of the EU. It may prove to be a way forward, and it may be a model that can be used to direct sustainable investment in our cities and towns.
Aligning funding to climate adaptation
How can funding truly be used to tackle our climate challenge?
A critical question in the drive to address climate change and adaptation is: will we agree and adopt a fair price for our carbon (CO2) emissions?
As we saw during the COVID-19 pandemic, the only way to get society to act and quickly change during a complex crisis is to “change the rules of the game.” Billions of people, and millions of businesses across the world, accepted quick changes to societal rules during the pandemic - it was an urgent matter that people experienced directly, and hence societal attitudes were, mostly, to accept changes to how we live, work and play. Can this same impetus and urgency be applied to climate change (given the continued evidence that we see all around us, which is discussed in subsequent sections), with a price on carbon (CO2) emissions being linked to how the world’s finances work?
Despite big commitments by governments, the world of finance and business, the race to Net zero has given rise to various methods of carbon accounting. As Greenpeace have stated, one of the biggest problems today is the use of the word “net” [1]. Why focus on “net” and not simply “reduction”? Can we grow the world's economies with good market principles whilst reducing and stopping carbon (CO2) emissions?
Governments need to decide how to price carbon emissions to get people, and businesses, to change their behaviours. Leaving matters to the market alone won’t be enough. Up until now, policies to tackle climate change have been too limited in scope because of the “free rider” problem. This problem is when the present gets a free ride for our activities while the future pays. To overcome it, can nations and the cities that power their economies work together, and with the finance sector, to change financial rules, including taxation and accounting standards? If this could be achieved, the finance sector could play a crucial role to shaping the way forward for urban environments.
Are there opportunities to work with the private sector for this? Consider the use of road vehicles (cars, vans etc) as an example. Rather than pay a lump sum road tax, why not tax people for how far they drive and also the classification of use of the vehicle? Cars are packed with computing power nowadays - surely it could be done if we had a mindset to make it happen?
The links between urban environments about carbon prices, and the financial markets that help to power investments, are clear. In urban societies, the behemoths of business in all sectors whose services and goods citizens purchase, through to our favourite neighbourhood cafés that claim to be caring about the environment, need to walk the talk. Many small businesses have been demonstrating this for decades - maybe there are things that large businesses can learn from their smaller brethren.
[1] Greenpeace
Green finance for urban environments
The importance of credit ratings
The funding that cities and towns raise is dependent on their access to capital at affordable interest rates. Long term credit ratings for cities and metropolises are important indicators of their ability to raise funds for the initiatives they need and require, and for the issuance of bonds. Bonds are important because they provide cities with an option to raise funds for capital improvement projects that are otherwise not funded by their regular revenue.
With the rise of green bonds and climate adaptation capital, are these types of finance easier to secure with a good city credit rating? Credit ratings are linked to climate change, and a city’s ability to be resilient against the threats that it faces.
Consider an example. One of the major credit ratings agencies, Moody’s, announced in January 2021 that the way the City of Venice responds to its flooding risks will be key to them maintaining their credit quality longer term. [2] Venice has been working on flood defences projects for a number of years, including the most recent major project, the Mose dams, which are operational.
The briefing note by Moody’s from January 2021 states that “the City of Venice (Ba1, Stable) faces more frequent and severe flooding as it becomes more exposed to climate change, particularly through both rising sea levels and subsidence.” [2] The increasing frequency of high tides and subsidence is impacting the severity of floods that can occur in Venice, which in turn is influencing its credit rating.
[2] Moodys
Private finance and urban environments
How can funding truly be used to tackle our climate challenge?
Private sector investment funds are investing in urban areas. For example, funds and private equity funds are buying into housing in cities, such as Blackstone buying a US$5.1bn portfolio of rent-controlled apartments across several cities, which are orientated towards low-income families. This type of investment is directly related to the socio-economic system of urban environments, including the affordability of housing. [3]
Other responsible finance initiatives, such as community development banking and new low-cost electronics payments systems, are being powered by the private sector and are actively improving urban economies from the ground up. This is the private finance sector focusing on what it does best with innovation, not trying to govern societal change - it is providing solutions that citizens and businesses can use to drive change themselves.