Unlocking and financing climate-resilient, low-carbon emerging cities

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By Tom Williams*

Rapid urbanisation is one of the greatest demographic shifts humanity has ever experienced, with the biggest impacts being felt by cities in developing and emerging economies. The unprecedented speed of change is creating enormous challenges for cities, not just to respond to this, but to do so in a way that is low-carbon and builds resilience to climate change.

Through Nationally Determined Contributions (NDCs), the actions countries intend to make under the Paris Agreement to reduce greenhouse gas (GHG) emissions, countries have identified water as important for adaptation. In 93 percent of NDCs water is prioritised, with many mitigation efforts depending on reliable access to water resources. There is clear demand for action on water, yet climate finance is not flowing to the water sector.

Underlining the seriousness of the challenge ahead, a recent McKinsey report estimates that the total investment needed in our cities, in transport, energy, water and telecommunications infrastructure, between now and 2030 is US$57 trillion. Water accounts for US$10 trillion of this figure.

A significant barrier to financing sustainable infrastructure for cities and water utilities is the lack of a credit rating. Research from the World Bank indicates that only 4 percent of cities in the world’s largest developing countries have an international credit rating–yet, every dollar spent on improving city creditworthiness has the potential to unlock US$100 in private sector infrastructure financing. The situation for water and sanitation infrastructure is even starker: only 2 to 7 percent of total private investment in infrastructure flows to these vital services.

The issue is often not insufficient finance, but rather the lack of well-prepared and commercially attractive investment opportunities (demand side) in combination with inadequate commercial banking markets, limited capital markets (supply side) and regulatory regimes. Improved creditworthiness will help city authorities and water utilities to build a pipeline of low carbon infrastructure projects.

Developing a project pipeline for climate-related investments in infrastructure can be challenging, with cities and water utilities alike often not having the capacity or tools to develop bankable projects. Common challenges include project definition (e.g. clear outputs), structure, transaction costs and procedures and monitoring amongst others. Critical to any project preparation is data, to be used to set a baseline and support ongoing monitoring.

The Energy and Carbon Emissions Assessment and Monitoring (ECAM) tool allows water utilities to use their own data and transform it into a source of valuable information to evaluate their operations in terms of GHG emissions and energy performance. ECAM can play a significant role in the development of bankable projects: providing critical baseline information and clear prioritisation in regards to the investment needs for energy efficient, low-carbon infrastructure.

There are a number of financing options open to cities and water utilities for climate-related infrastructure projects, including emissions trading schemes, green bonds, development finance, climate finance and equity capital. But guidance to help cities and water utilities identify the most appropriate financing and make sound investment decisions is often lacking. This guidance needs to consider different infrastructure needs, regulatory and market conditions and triple bottom-line outcomes.

Practical information to help cities and water utilities understand the conditions and requirements of financing options for climate-related projects is vitally important. The C40 Call for Action in Municipal Finance recently highlighted several of these issues.

Enabling integration with other services across a city, including solid waste and energy, to leverage co-financing and share the economic benefits of resilience and low-carbon investments should also be explored. Such integration points can be identified through looking at opportunities to transition to a Circular Economy.

To meet the expressed needs of NDCs and take action, cities and water utilities need to think and act with greater ambition. To do so, they will need support to develop bankable projects that can increase the flow of climate finance for important adaptation and mitigation investments in water. This is a once in a generation opportunity. A failure to seize it will expose billions of people to even greater climate change risks.

*Tom Williams has been with the International Water Association (IWA) since 2003 and as their Programmes Director since January 2013. At the IWA Tom is coordinating their thematic programmes, which aim to address and respond to some of the significant challenges we face in managing the water cycle.