No alternative: Making sustainable infrastructure the only option

Only a fraction of global climate finance is reaching European cities despite their crucial role in decarbonising the economy. Developing a bankable project pipeline and new finance solutions replicable across cities is key to meet the enormous need for sustainable infrastructure.

Despite various moves in Europe to boost sustainable infrastructure investment it is so far proving difficult to catalyse the financing needed to address challenges such as retrofitting buildings and developing sustainable transport networks across the region.

Cities in particular need to be at the forefront of financing the move to a 1.5C-aligned world as they generate more than 70 per cent of global emissions and 80 per cent of global GDP. Around €3.7 trillion annually needs to be spent on urban infrastructure by 2030, according to the Cities Climate Finance Leadership Alliance (CCFLA). An additional €1 trillion annually is required to ensure city infrastructure is low-carbon and climate-resilient, according to the CCFLA, an alliance of around 40 financial institutions and other organisations including EIT Climate-KIC.

This massive investment need “clearly shows that working in cities is an effective way of addressing climate change”, says Hans-Peter Egler, Director of Public Affairs, South Pole. But only around 15 per cent of global climate finance is directed towards cities, according to the CCFLA.

A small portion of this climate-aligned city financing reaches Europe, despite high-profile policy efforts such as the European Fund for Strategic Infrastructure (EFSI) – the so-called Juncker Plan. The fund was launched in 2015 to mobilise at least €315 billion of private capital to innovative infrastructure projects. While the EFSI said earlier this year it has exceeded this goal, the capital it aims to mobilise falls short of the €688 billion per year of infrastructure investment it is estimated that Europe needs by 2020. “If we look at city financing, we’re at the lowest level in a decade – so currently available finance mechanisms and policy initiatives haven’t really got us to the scale we need,” says Victor Gancel, programme manager of EIT Climate KIC’s Low Carbon City Lab.

“We need to figure out new financing models and new technical solutions to respond to this high need for infrastructure investment,” says Egler. He explains a major barrier to investment is the often low credit-worthiness of cities and the fact that the investment required in city infrastructure is significantly higher than what can be raised by cities and central governments. “We need to mix all different financial sources – concessional financing, private financing, public financing – they all should be better co-ordinated in order to create a superior output,” he says.

And capital is, in theory, available to help finance the shift towards low-carbon infrastructure in Europe and beyond. But investors and lenders often say there aren’t enough bankable and investment-ready projects. Gancel says expanding the project pipeline and finding innovative ways to finance these assets need to go hand in hand. The Climate Innovation Summit hosted by EIT Climate-KIC in Dublin from 6-8 November brought together investors, policymakers, entrepreneurs and others to scale up financial solutions for climate action in cities and beyond.

EIT Climate-KIC is running a sustainable infrastructure training programme through which a group of bankers and other experts share their insights with city and local government officials on how to prepare an investment case and the steps involved in a financial transaction. ‘Project development capacity has emerged as a key bottleneck, particularly in the early stages of project development, and there’s a lot of untapped potential we can address by providing training to municipal staff,” says Skylar Bee, Project Manager- Capacity Building for Climate Finance, EIT Climate-KIC. “At Climate-KIC we are taking a strategic approach to training and capacity building centered around stages of the project preparation cycle.”

It has also, alongside partner South Pole, founded the City Finance Lab to act as a knowledge and capacity-building hub for innovative financing solutions for sustainable urban infrastructure in Europe. “We saw that a lot of infrastructure financing issues in cities are the same across different cities,” says Egler. “So it must be possible to find a way to design interesting and new investment opportunities that are scalable also replicable in other cities – that’s what we’re looking at in the lab.”

The City Finance Lab was launched last year and is this year working on initiatives in France, Poland, Norway, the UK and Portugal. Its pilot initiative completed in August involved developing a local voluntary carbon market for the city of Bologna. “The scaling up of the local carbon market will help the city transition further toward a low-carbon resilient state,” said Giovanni Fini, Expert in Energy Efficiency and Urban Sustainability Policies, City of Bologna, at the time of the launch. He added that the City Finance Lab was instrumental in the development and helped address “existing financial and legal barriers”.

Another challenge in catalysing investment for sustainable infrastructure is that a massive investment pool, namely institutional investors, remains largely untapped. This is because many institutional investor mandates include a cap on investment to so-called alternative assets, a category in which infrastructure tends to fall. City Finance Lab partner Global Infrastructure Basel’s is working to design a global voluntary standard for sustainable and resilient infrastructure (SuRE) to establish a common language and understanding of sustainable infrastructure projects among developers, local authorities and investors. Gancel says these efforts aim to make sustainable infrastructure into a clearly defined and well-understood asset class and “move infrastructure from being an alternative investment to being the baseline”.

This article is part of an eight-part series by Climate-KIC and Environmental Finance discussing Mission Finance, the theme of the 2018 Climate Innovation Summit in Dublin on 6 – 8^th November.  To see the series hub click here.