Local climate bonds: democratizing finance for a just transition to net zero

Financing the transition to a decarbonised future is one of the key goals of COP26. Here Dr Mark Davis, School of Sociology and Social Policy, shows how a new model of alternative finance is providing a direct route for cash-strapped councils to raise funds for local net zero projects, whilst also giving citizens the opportunity to vote with their money for a fairer, greener future.

Climate finance is one of the key goals animating COP26, the UN climate change talks, starting this weekend in Glasgow. When discussing climate finance, COP26 is likely to involve a dizzying set of ‘big numbers’ required to meet global commitments under the Paris agreement and the recommendations of the 2021 IPCC report. But financing climate action doesn’t have to be something only the big players do, everyone can get involved.

On 19th October 2021, for example, the UK Government published its Net Zero Strategy: Build Back Greener, setting out policy proposals to decarbonise all sectors of the UK economy by 2050. What is clear from this document is that delivering the green public infrastructure projects necessary to meet those targets will require local government to play a leading role.

Two-thirds of UK councils have already declared a Climate Emergency, yet they continue to face a significant funding crisis limiting their ability to act. Since 2010, councils have lost on average 60p in the £1 of central funding under successive administrations and have been further hit by the economic impact of Covid-19. Councils also have reduced borrowing options for their capital programmes. Rates for the Public Works Loan Board (PWLB) have fluctuated, grant income has fallen, and the government finance provider, Salix, has scrapped its 0% loan offer for energy efficiency measures.

Clearly, councils will struggle to finance local net zero projects while maintaining front-line services without new sources of stable, low-risk borrowing. So, where might they turn to secure the funding they urgently need to decarbonise local economies in line with national proposals? And, as citizens, how might we help?

Enter Community Municipal Investments

In partnership with the crowdfunding platform Abundance Investment and the public sector organisation Local Partnerships, my research at Leeds co-created Community Municipal Investments (CMIs) to help meet these challenges. A new model of alternative finance, CMIs use investment-based crowdfunding to create an opportunity for people to invest directly in local green and social projects. Crucially, this is not a donation-based model, which is often what people associate with crowdfunding. CMIs are backed by a business model that uses debt or equity structures to provide a meaningful financial return to anyone who invests.

With council budgets squeezed, and precious central resources rightly protected for front line services such as health and social care, CMIs enable councils to finance “hard to fund” net zero projects. This includes installing solar panels on schools and council buildings; building wind farms and electric vehicle charging points; retrofitting social housing to help combat fuel poverty; and installing LED lighting on transport highways for buses and cycles.

CMIs are structured as long-term investments (+5 years) with a fixed repayment. They are issued by a council’s corporate body via a crowdfunding platform. They are delivered to market as ‘Local Climate Bonds’ and tied to specific green infrastructure projects local to the council. The cost of borrowing this way is cheaper for councils than the PWLB, though CMIs and PWLB can be blended to support larger capital projects. CMIs also offer councils an alternative to complex, shareholder-facing and often controversial private finance structures that are infrequently aligned to climate objectives.

“The Local Climate Bonds’ way of funding decarbonisation projects all over the UK will also support thousands of good green jobs, including in retrofitting our homes, moving away from fossil fuel transport and improving natural biodiversity. The newly-formed Greater Manchester Retrofitting Taskforce will be considering innovative financing options such as these.” Andy Burnham, Mayor of Greater Manchester¹.

Local Climate Bonds provide a low risk option for retail investors

One of the major innovations of CMIs is to de-risk net zero investment by disconnecting retail investor risk from project risk. The risk investors take is that a local council somehow ceases to exist and loses its tax raising powers during the term of the investment, not that a particular infrastructure project fails. Despite real threats to their financial well-being, councils are extremely robust organisations, enjoying an institutional longevity beyond high-street banks, which people typically see as the safest place for their money.

With a 1%-1.5% return reflecting that low risk (equivalent to UK Gilt markets), CMIs provide a better rate of return than most current high-street products. And, at the same time, they also deliver more positive social and environmental outcomes by transparently funding real net zero projects in local communities. Investors may walk, cycle or catch a bus passed new solar panels installed at a local school knowing their money helped to put them there while also receiving an equivalent or better return than their existing savings accounts.

Local Climate Bonds benefit both councils and citizens

Aligned with the principles of the European Just Transition Mechanism (JTM), which asserts that a healthy economy and a clean environment can and should co-exist, CMI have a minimum investment threshold of just £5. This means that as many people as possible can participate in helping their community to achieve net zero, playing their part in responding to the Climate Emergency. Whilst the financial return on an investment at that level is negligible, research shows there are tangible social co-benefits to participating in civic projects. CMIs therefore provide a short and simple answer to a question I hear a lot in my research, which is “… but what can I do to support the Climate Emergency?”

The UK’s first two CMIs were launched as Local Climate Bonds in the summer of 2020 in two different socio-economic and political contexts. The first by Conservative-led West Berkshire Council in the relatively wealthy and rural South East of England, and the second by Labour-led Warrington Borough Council in the relatively poorer and urban North West of England. Offered at 1.2% over 5 years, each CMI was sufficiently attractive to raise £1 million for local net zero projects, even within the uncertain context of Covid-19.

As my recent report shows, CMIs can also offer councils new ways to communicate with residents about a shared public mission to combat climate breakdown, building relationships of trust through supporting local initiatives. This matters since only around 10% of residents know their council has declared a Climate Emergency. This benefit was seen in action when one-in-six investors in the West Berkshire CMI decided to donate their first interest repayment back to the council for a local rewilding project. The council has since won Silver in the Green Public Service Awards and took the Sustainability and Social Value Award at the CIPFA/Public Finance Awards for their CMI initiative.

“I’m absolutely delighted that our first ever Community Municipal Investment has been such a success, generating a huge amount of interest and attracting hundreds of investors from Warrington and across the country. Reaching our £1m investment target is a fantastic achievement, particularly in such challenging times. It shows that tackling the Climate Emergency is something that people really care about.” Russ Bowden, Leader of Warrington Borough Council².

Given this success, my team secured the support of the UK’s Green Finance Institute to launch a national campaign targeting all 404 local authorities in the UK to pledge to offer a Local Climate Bond in the 18 months following COP26. As I write in October, six more councils have now committed publicly: Blaenau Gwent, Camden, Cotswold, Eastbourne, Islington and Lewes. And with your help, your local council could be next.

Financing the climate revolution together

CMIs aim to empower the many to make their money matter by investing directly in net zero projects in their communities. So what can you do to help?

• Ask yourself if you really know where your money is and what your money is doing. What, if any, positive green outcomes are being delivered by your current savings and investments?
• Find and speak to an ethical financial adviser who can check your investments, and your pension, for its impact on the environment and advise on options to ‘green’ your portfolio;
• Move your money! Chances are you have never considered changing bank, and yet depositing your money with an ethical bank can drive investment in green projects;
• And finally, lobby your local council to offer a Local Climate Bond in your area. You can start this process by pointing them at the Green Finance Institute’s Local Climate Bond page. Many of us want to play our part and, for as little as just £5, we can all do more to drive our local communities towards decarbonisation.

After all, only by democratising finance in this way — by empowering the many to make better, more sustainable financial decisions — may we truly hope to build back greener.

Further information

Mark is an economic sociologist at the University of Leeds. Mark’s research evaluates the potential of alternative finance to build a fairer, greener economy and he is the academic architect of Community Municipal Investments (CMIs), the model behind Local Climate Bonds.

For more on CMIs, visit: The Bauman Institute, Community Municipal Investments webpage

Mark’s new book, Crowdfunding and the Democratization of Finance (co-authored with Bruce Davis), is published by Bristol University Press on 1 November 2021.

Footnotes

1. Quoted in the Green Finance Institute’s press release for their Local Climate Bond campaign, 13 July 2021.
2. Quoted in Warrington Borough Council’s public statement in response to meeting their £1M target via a CMI.