Creating Transformative Investment for Thriving Communities
How we are aligning capital to the scale and speed of investment needed
The Transformation Challenge We Face
If we are all to thrive in the 21st century, then our communities are still not changing at the speed and in the direction needed. The Thriving Communities initiative aims to turn this trend around.
Europe is rightly pivoting towards a much more mission-led approach to the change we need - with the Mission Boards reporting their recommendations and a first round of investment being launched under the EU Green Deal.
This is exciting, as a mission-led approach forces us beyond incremental change. It makes us focus on what must be done in our communities - rather than limiting to presumptions about what can be done. A mission must capture a community’s collective ambition for the future along with what humanity-as-a-whole needs from us (eg. eliminating greenhouse gas emissions and other forms of pollution). The timeframe for a mission must demand urgency, a decade at the most.
With five cities in South-eastern Europe we have framed the mission as: to make these cities into some of the best possible places in Europe to live, work and visit by 2025, while achieving carbon neutrality by 2030.
A mission-led approach demands of us much better ways of working together and enabling transformational change to flourish. One critical enabler is that communities will need to invest financial capital at a much greater speed and scale than they have managed before, and in ways that much better distribute the returns.
In this article we describe how we are working with communities to achieve this new investment paradigm, through development of a robust economic case and financing mechanisms for transformative investment.
Economic Case for Transformation
A critical first step in our approach is to help communities to understand the potential economic value to be harnessed by achieving their mission.
With each community we develop a ‘top down’ economic case for the change they want to achieve. This helps to reframe what might often be seen as costs into understanding them as essential investments.So far, we have focussed this analysis on the 2030 climate-neutrality mission.
Many communities are working hard to decarbonise while facing significant challenges due to inertia in existing organisational systems, policy environments, and limited municipal budgets. A key obstacle is the seemingly high cost of reshaping key greenhouse gas emitting sectors: transport, buildings, heating, waste and power supply. Understanding who needs to pay and who stands to benefit is another key challenge, particularly when investments and returns occur over a long period.
Many recent global reports show clear economic opportunities from actions that will advance decarbonisation, for multiple reasons including improved public health and wellbeing. The problem for community leaders is how to translate generic global analysis into an estimate of the economics of change for their specific community. This is what we help with.
The local economic case analysis allows us to better see and communicate the scale of total investment needed and economic value of these investments.
In the example shown in the figure below, the return on an investment of EUR 2.3 billion in climate-neutrality is 4:1 - who could argue with that?
Crucially, the analysis takes a broad view of benefits to the community created through climate neutrality investments, including areas such as citizen health, job creation and city liveability. These ‘indirect’ benefits are more difficult to monetise in today’s economy than direct savings in areas like fuel and maintenance costs, but they are no less real or valuable to the community. For example, the value created through improved air quality and thus better community health when polluting diesel-fuelled buses are replaced with electric buses can often be of the same size, or more, than direct fuel savings. These monetised indirect benefits are the light green part of the graphs above and below (simplified in this case to health benefits).
While investments might only ‘break even’ when accounting for just direct monetary benefits, quantifying indirect benefits helps show their true potential in creating societal value. In fact, especially for communities in South-eastern Europe, indirect benefits show massive potential, as shown in the example above.
Then there are also further indirect benefits that remain almost impossible to monetise, which will be additional again to what is shown in our quantified analysis. We work to describe these in more narrative form as part of the overall economic case.
The graph above makes things look quite easy, however the graph below shows how these costs and benefits do not accrue evenly across different actors in the community. This is a key reason why much needed progress is getting stuck in our communities.
As things stand, many of those bearing the most investment responsibility do not see commensurate financial benefits, especially of direct returns. It is little wonder that project business cases are not considered viable by disaggregated actors, even when the return on investment to the community as a whole would be strongly positive. The graph above shows this to be a particular problem for property owners, utilities and municipalities in this case, and this is a common trend across our analysis in different cities.
This part of the analysis shows how designing for transformative investment needs to be more than a question of ‘project readiness’ and financing - we have to think carefully about new economic structures, policies and business models that will solve this value-cost disconnect in our communities.
Furthermore, different actions each also have very different return profiles. The graph below shows how some actions have a strongly positive financial business case (abatement cost per unit of CO2 below the line) while others do not. Yet with a mission-led approach all of these things must be done. Investment in only the ‘easy’ actions in isolation does nothing to support delivery of the ‘expensive’ actions. Remember that in aggregate the total returns to the community of all these investments together are positive. This shows how strategic aggregation of investments is essential to a successful mission-led approach. Continuing to work through a fragmented project approach focussed on ‘easy wins’ is doomed to be insufficient.
The economic case analysis gives valuable insights into the potential value to be harnessed, total investment required and potential prioritisation. This highlights key economic hurdles that will need to be overcome in order to turn collective value into the returns on investment needed to support individual project business cases. The economic case analysis is therefore an invaluable resource for improving communication within the community on the opportunities, and helping to guide development of a strategic investment portfolio to achieve a community’s mission.
While the analysis provides different specific pictures for each community, we find that the general dynamics described here are common. The model and analysis are developed by the team at Material Economics. Local teams are then supported to adopt and use this model to test, adapt and refine action and investment pathways over time.
Transformative Investment Mechanisms
Building on insights from the economic case analysis, we work with each community to develop suitable financing mechanisms to unlock and manage the investments needed to achieve their mission.
These mechanisms must be able to facilitate a suitable combination of public, community and private finance that matches the transformative investments needed in each community.
In the design of such mechanisms we look closely at opportunities to leverage the value of existing community assets, and to advance a first portfolio of ready-to-go projects as we build out a more mission-led and longer-term portfolio of action. This helps to build confidence and investment practice across the community, while encouraging interaction between cities to share best-practices. The Bankers without Boundaries team bring their proven project preparation tools to help communities to strengthen the robustness and ‘readiness’ of their specific actions and projects, so each is ready for suitable investment.
Ultimately the financing mechanisms need to help activate the full spread of investment needed in a community, not just municipal investments (though these can provide an important foundation). This will include operational investment in the collaboration and acceleration teams - the people on the ground designing and delivering the action portfolios. The financial mechanism then creates a virtuous cycle over time of more action and more investment, leading to more returns, more community value, more resources and again more action - as illustrated below.
Together with communities and our partners we work to broker the funding and investment needed to establish and grow these financing mechanisms. For example:
- Proven approaches such as crowdfunding and community share offerings early in the process can help to ensure that a collective community approach is taken from the beginning.
- Public investment will be critical ‘catalytic capital’ to be leveraged in order to get to the full scale needed, as communities build their track record and expand their ambition and scope.
- Tools like green bonds and on-bill financing of renewable energy can help to unlock forms of private capital that may have otherwise been out of reach.
In the context of the Covid-19 pandemic recovery, smart investment and leverage of public stimulus investment will be especially critical in achieving the scale needed longer-term. By combining investments and spreading risks, well-designed financing mechanisms support communities to work in more radical ways.
Given the importance of strong governance in attracting external investors, there is also an important role for an independent partner to help communities to ensure that funding is spent strategically and transparently through these mechanisms. This independent support helps to de-politicise decision-making and enable more expansive innovation, experimentation, action and learning. This is part of the assistance that Thriving Communities provides.
Mission-led financing and investment is a new skill and approach for us all, and all communities have a lot to learn and develop yet. Embracing this and developing effective models for each community will be critical if we are all to thrive in the 21st century.
We believe that two key ingredients for transformative community investment are a robust overarching economic case and well-designed financing mechanisms to deploy financial capital at the speed and scale needed.
We are already working with communities across South-eastern Europe to develop and deploy this approach, and we look forward to working with more.
This work is supported by EIT Climate-KIC.