Related News

Olam bags US$625mn shariah-compliant facility

ECA-backed lenders spark up Baltic wind farm funding

ETG closes first sustainability-linked credit facility

C2FO strengthens supply chain finance offering with managing director hire

Citi names head of commercial banking arm for China

The need for sustainable infrastructure in cities requires a new approach to financing, with US$57tn in investment required by 2030.

Today, more than half of the world’s 7 billion people live in cities, but by 2050 the global urban population will exceed 6.7 billion. 75% of economic output comes from urban environments, which are also responsible for 80% of greenhouse gas emissions.

By definition, sustainable infrastructure is that which supports the goal of economic development while minimising the environmental impact and by maintaining or improving the quality of life of the citizens that use it.

The challenge is clear: the infrastructure investment required to accommodate this level of urbanisation is massive. But it must be made with societies’ climate obligations in mind – indeed, the two must be viewed as inseparable.

A new report by Citibank and Siemens outlines the need for a new approach to financing – one that thinks not of the cost of moving to a climate-friendly environment, but one which is fully conscious of the financial and social dangers of not doing so.

“Much concern has been raised about the cost of transitioning to a low-carbon economy. The cost of inaction, however, is far higher,” the report reads.

The study finds that the need is pressing and that investors are awake to the opportunities.

“There is great need for cities to deal with climate change challenges and to deal with them soon. Building solutions takes time and decisions made now will impact on our city infrastructure for the next 50 years,” the authors write, adding that there is “growing interest among investors in climate-related projects as demonstrated by green bonds, the use of proceeds of which can be applied to sustainable infrastructure”.

The goal should be aligning the activity of all stakeholders in the infrastructure value chain: nations, cities, banks and corporations.

The goal should be aligning the activity of all stakeholders in the infrastructure value chain: nations, cities, banks and corporations, but the challenges are myriad.

As with traditional infrastructure, the main difficulty with sustainable infrastructure projects is attracting capital. Transaction costs are high, large injections of capital are required over a longer timeframe than many investors are comfortable with. Cashflows generally aren’t generated for a number of years, while the number of parties involved and complexity of the projects can make them arduous and protracted sagas.

Climate financing brings a new set of problems to the table, to further complicate things. Lack of historical data on similar projects usually doesn’t encourage investors, while the clear environmental benefit might be difficult to monetise – at least directly.

The solution? This is a hard sell, so a multi-faceted approach to sustainable infrastructure investments is needed.

The authors lay out six potential avenues of funding, old and new. In short, none of the options present a guaranteed road to success, but together could provide the lion’s share of the US$2.7tn that’s needed every year.

Emissions trading is among the most widespread methods of raising climate finance, with the combined value of emissions trading schemes sitting at US$24bn in 2015. Last year, China announced the world’s most significant “cap and trade” scheme, while the US and other major powers are following suit.

The report cites a growing appetite among investors for green bonds, which are suited to funding large and long-term projects.

The bond market as a whole is worth over US$100tn, while the green bond market (those bonds whose proceeds are used to invest in the likes of renewable energy, energy efficiency, water treatment, sustainable land use and biodiversity) has grown from US$0.8bn in 2007 to US$42bn in 2015. Exponential growth, certainly – but still a mere drop in the ocean required.

Among the most tried and tested methods of debt financing in this area comes from IFIs and ECAs, both of which have a significant role to play.

However, the fact that it took just one hour to fill the books on the IFC’s recent US$1bn green bond shows that interest is high. Almost one-third of the entire market is in China, but the report uses the example of Johannesburg to show how cities can leverage this type of financing to fund sustainable infrastructure.

In June 2014, Johannesburg became the first city to issue a green bond, with a value of US$143mn, 1.5 times oversubscribed. Among the sustainable infrastructure projects funded were the installation of 42,000 smart meters, the conversion of 30 buses from biogas to diesel and the upgrading of the water network.

Among the most tried and tested methods of debt financing in this area comes from international financing institutions (IFIs) and export credit agencies (ECAs), both of which have a significant role to play, the authors find.

In recent months, Sinosure has backed a US$1bn credit line from Bank of China to the Italian utility Enel for financing green and cleantech projects, while a number of European IFIs joined the Spanish ECA Cesce in the US$500mn financing of two solar thermal power plants in the south of Spain.

Furthermore, the likes of US Exim and Euler Hermes have a strong track record in large renewable energy project financing, but traditionally these investments have been in large, green or brownfield projects. The increased role of these types of financiers in sustainable infrastructure projects in cities is something to be encouraged, surely.

Away from these are state-backed city funds, climate funds and equity capital, but the message to be gleaned from the report is clear: the need is urgent, the options are there. Joined-up thinking, foresight and collaboration are required if the massive challenges of urbanisation and climate change are to be tackled in tandem.