Creating the enabling conditions for urban climate finance support
September 2021
Leveraging sufficient levels of finance is crucial to meet global targets to fight climate change and increase the resilience of urban areas. Cities are at the heart of the climate issue: they produce the majority of greenhouse gas emissions, and are also concentrated centers of climate risk, with acute socioeconomic impacts resulting from extreme weather events increasingly affecting a rapidly urbanizing population.[1] The continued growth cities in Asia and around the world is also an opportunity to build cleaner, more livable and resilient cities.
Trillions will be required annually by 2050 to address climate risks for urban infrastructure. Urban infrastructure investment needs have been estimated at $4.5 – 5.4 trillion per annum from 2015-2030.[2]
The recently released 2021 State of Cities Climate Finance Report examines the current state of urban climate investment, the barriers to reaching the needed investment levels, and the steps to overcoming these challenges. Produced by the Cities Climate Finance Leadership Alliance (the Alliance), the report contributes to the Alliance’s mission to mobilize city-level climate finance at scale by 2030.
The report delivers its findings in two parts:
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The Landscape of Urban Climate Finance (Part 1) presents the most comprehensive estimate of global urban climate finance.
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The Enabling Conditions for Urban Climate Finance (Part 2) analyses enabling frameworks and presents solutions for mobilizing climate finance for low-carbon, climate-resilient urban development pathways.
Part 1: The Landscape of Urban Climate Finance
One of the difficulties in financing resilience within cities is being able to track flows of climate finance. This report provides a framework for consolidated tracking estimates of urban climate financial flows, which can be used in the future to monitor and benchmark progress, and to provide a building block to improve funding performance. The authors then use the framework to estimate how much capital is being invested to address climate change mitigation and adaptation in cities and how much of an investment gap exists at a global scale.
The report finds that on average $384 billion was invested annually in urban climate finance globally in 2017-2018. Out of that figure, the report was able to track $75 billion of project-level data, corresponding to approximately 1,030 tracked projects. These projects represent approximately 13% of the total of $574 billion global climate finance tracked by CPI for the 2017-2018 period.[3] This relatively low number is in part due to challenges in identifying projects with urban benefits and barriers to mobilizing investment into climate at the city level. Even with these methodological challenges, it is clear from the analysis that commitments estimated for urban climate finance are many times lower than the scale of investment opportunities in the sector, which the IFC estimates to be at least $2.45 trillion annually for private investment alone.[4]
Another recent report, the Joint Report on Multilateral Development Banks’ Climate Finance, also discusses some of the challenges for tracking finance in development projects. The report, coordinated by the European Bank for Reconstruction and Development (EBRD) combines data from ADB and other MDBs. The report provides practical guidance for tracking climate finance and includes key principles such as the granularity and conservative principles.
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The granularity principle requires that project teams identify mitigation and/or adaptation activities at the lowest level of project disaggregation (e.g., project component, sub-component, activity, or output) that can be supported by budgetary and technical documentation. Mitigation and/or adaptation finance can be reported only for those relevant project elements that contribute to mitigation and/or adaptation.
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The conservative principle requires that if data to support a detailed, granular analysis of mitigation and/or adaptation content are not available and mitigation and/or adaptation finance must be estimated based on expert judgment, it is preferable to under-report rather than to over-report climate finance figures.
ADB’s Urban Climate Change Resilience Trust Fund (UCCRTF) is helping to embed such principles within the organisation through knowledge sharing and communications within the ADB’s Urban Sector Group.
Part 2: The Enabling Conditions for Urban Climate Finance
The second part of the 2021 State of Cities Climate Finance Report analyses enabling frameworks and presents solutions for mobilizing climate finance for low-carbon, climate-resilient urban development pathways.
It is the first attempt to provide a common level of understanding of the terminologies, knowledge, and themes used by climate policy and climate finance practitioners, city-level urban planners, and municipal finance officials.
The report argues that mobilizing urban climate finance at the scale and speed needed to address the climate crisis requires the enabling conditions that support:
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greening the existing urban finance sources (increase the green share)
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mobilizing new urban climate finance (increase the green pie) and
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increasing the climate-smart impact of urban development (increase the green impact).
Figure 1:The enabling conditions framework to mobilize urban climate finance: country, city, and climate-specific elements. Source: World Bank 2021, State of Cities Climate Finance Report, Part
Figure 1:The enabling conditions framework to mobilize urban climate finance: country, city, and climate-specific elements. Source: World Bank 2021, State of Cities Climate Finance Report, Part 2.
Figure 1 shows a framework for creating the enabling conditions for climate investment can in urban areas. The framework shows that this depends on three elements:
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Country-specific – national-level governance and fiscal systems under which cities fall and which determine what they can do in terms of planning, regulation, and finance;
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City-specific - the capacity and remit cities have for planning and financing expenditures and their potential for mobilizing or attracting other sources of finance; and
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Climate-specific - connecting city-level climate investments with the appropriate climate financing instruments.
The report argues that city governments can impact climate outcomes by leveraging their roles both as providers of infrastructure and services and as stewards with their ability to plan, regulate, convene, and champion. “To mobilize urban climate finance at scale the enabling environment framework needs to be vertically integrated (from local to national levels) and horizontally integrated (across urban systems, processes and planning).”
The report also notes that as cities operate in a wide spectrum of enabling environments across and within countries, each city’s context must determine the relevant policy levers and financial tools for mobilizing urban climate finance.
[1] CDP Cities. 2018. Cities at risk: dealing with the pressures of climate change. Available at: https://www.cdp.net/en/research/global-reports/cities-at-risk
[2] Cities Climate Finance Leadership Alliance (Alliance). 2015. State of City Climate
Finance 2015. New York. Available at: https://www.citiesclimatefinance.org/2015/12/
the-state-of-city-climate-finance-2015-2/
[3] Climate Policy Initiative (CPI). 2020. Updated View of the Global Landscape of Climate Finance 2019. Available at: https://www.climatepolicyinitiative.org/wpcontent/uploads/2020/12/Updated-View-on-the-2019-Global-Landscape-of-ClimateFinance-1.pdf
[4] International Finance Corporation (IFC). 2018. Climate investment opportunities in emerging markets: an IFC analysis (No. 121277, pp. 1-140). Kerr, T., Maheshwari, A., & Sottong, J. D. The World Bank. Available at: un https://www.ifc.org/wps/wcm/connect/topics_ext_content/ifc_external_corporate_site/climate+business/
resources/cioc-ifc-analysis