Something Feels Off: Are We Solving the Right Problems in Urban Climate Finance?

By Dominic Hofstetter, TransCap Initiative
September 2022

Electric vehicle charging in Birmingham, UK (via Unsplash). Should cities figure out how to bring EV charging to city centres or rather how to keep cars out of city centres altogether?

This is the first article in a series that presents insights from an investigation into the challenges and opportunities of the urban climate finance movement. This investigation sits at the heart of a collaboration between the Centre of Public Impact (CPI), the TransCap Initiative (TCI), and EIT Climate-KIC, which have joined forces to bring systemic investing to cities in order to catalyze urban sustainability transitions.

Whenever experts agree on the nature of a complex problem, two things tend to be true. First, certain aspects of the problem are objectively real and irrefutable. Second, certain aspects of the problem are assumed to be real and irrefutable but it’s been a while since someone checked, raising the question of whether those assumptions actually still hold.

It’s this second point that made us embark on an investigation to understand why, exactly, cities struggle to mobilize and deploy financial capital to fund their sustainability transitions. The literature on urban climate finance is vast, and there is no shortage of support initiatives. But our collective experience working at the nexus of finance, sustainability, and cities has still made us wonder: Is the urban climate finance community solving the right problems?

Here’s what we have learned so far.

The Conundrum

Cities have been the focus of global climate action for decades. For instance, ICLEI and C40 — two of the most prominent city action platforms — were founded in 1990 and 2005, respectively. And finance has been a priority topic ever since, as the funding challenges are vast and the support needs of cities obvious.

Yet there seems to be a conundrum:

Despite the plethora of city alliances, support offerings, and climate action handbooks, there is relatively little action at the pace and scale required. Yes, there are several interesting projects that serve as case studies for academics and practitioners, but there seems to be no collective movement with any meaningful thrust. It feels as if cities have signed up for a marathon but are still at the starting line waiting for the race to start.

Why is that?

The state of urban climate finance in 2022 (credit: Marco Verch, via CC license)

What the Literature Tells Us

If you consult the mainstream literature — particularly publications by city action platforms, NGOs, and multilateral financial institutions — you’ll learn about a long list of issues that are standing in the way of greater and more effective climate action in cities. We have listed the top 15 of these in the appendix at the bottom of this article, along with a selection of the sources we have consulted.

From among those issues — or, rather, those issue narratives — three stand out as critical:

1. Civil servants lack skills and expertise, so they need to be trained.
2. Cities lack access to capital, so they need help in mobilizing international climate finance and private sector funding.
3. There is a lack of bankable projects, so cities need support in pipeline building and project structuring.

What’s striking is just how much consensus amongst experts there seems to be around these issue narratives — which leads us to question whether these problems are, in fact, the most important ones to solve.

Why We Remain Skeptical

Our inkling that something might be off isn’t rooted so much in the notion that cities need help with capacity building, capital mobilization, and pipeline development. In most cases, all of the above will be helpful.

But it’s obvious that there is a discrepancy between the degree of consensus on the problem and the lack of action on the ground. If we all agree on what the issues are, and if there’s such a rich support structure that cities can tap, why aren’t all cities on the racecourse yet?

So we’re eager to find out what emerges when you scratch beneath the surface. Are the issues that dominate the mainstream literature on urban climate finance the whole story? Are they root causes or merely symptoms of more structural, intangible problems? What are the unstated assumptions that underlie problem framings and support offerings? And to what extent is the strength of the consensus influenced by an echo chamber effect, in which narratives are repeated mainly because they feel intuitively compelling and less because they are empirically validated?

What prompts us to ask these questions are a number of meta-level observations we have made over the years working at the intersection of urban climate action, innovation, finance, and systems change. For instance:

• The “project” as a unit of analysis and intervention plays a dominant role in framing urban climate challenges and structuring support offerings.
• There is a notable absence of cogent theories of change that articulate how laundry lists of actions will combine coherently to generate transformative effects.
• Fundamental changes to city government are rarely discussed, and most recommendations advocate for incremental improvements to the status quo.
• There is a strong colonial vibe emanating from the urban climate finance universe, mostly along a Global North/Global South axis.

All of these reasons give us pause and make us ask:

What’s really going on?

What We Are Curious About

In search of clues, we started to look for what the mainstream literature omits or underplays, both in terms of how the problem is framed and what cities should do about it. We listed our Top 15 observations in the appendix below.

The pattern that emerges suggests that there are three under-appreciated areas that deserve closer inspection:

1. City Governance: The way cities are institutionally structured and organized, including the norms, values, and knowledge systems that underpin planning and budgeting, the degree and quality of citizen participation, and the power dynamics within city governments and between civil servants and investors
2. Mindsets and Practices: The way cities go about developing visions, setting objectives, designing interventions, raising capital, allocating resources, and fostering collaboration
3. Demand on Capital: The specific requirements for the quality of the capital employed to drive urban transformation (e.g., its tenure, risk appetite, return expectations, etc) and the many novel ways in which investors must re-define their role in order to become systemic actors

What’s Next?

With these learnings in hand, we will now set out to conduct a set of interviews with civil servants, finance professionals, researchers, community leaders, and orchestrators of multi-stakeholder alliances to validate our observations and test the hypotheses that have started to emerge. We will also expand our literature review into the fringes of the published universe, where radical ideas are not subject to institutional dilution.

We will share an update on what we’ve learned in a few weeks’ time. Stay tuned!

APPENDIX

Top 15 Issues Faced by Cities When It Comes to Urban Climate Finance, as per the Mainstream Literature

1. There isn’t enough money, as cities struggle to mobilize capital, incl. Because they can’t raise taxes or issue bonds or because they struggle to engage the private sector
2. There are not enough bankable projects, as cities lack the skills to develop and capitalize pipelines of projects
3. The external environment isn’t conducive to mobilizing climate finance at the city scale, incl. because the macroeconomic environment remains a challenge (sovereign risk, exchange rate risk, etc) or because national-level policies constrain climate finance in cities
4. There is a lack of integration, coordination, and collaboration across municipal departments
5. International climate action frameworks (e.g., UNFCCC) are set at national levels, and there is insufficient integration between national-level frameworks and city-level policy agendas
6. Some of the most promising solutions (e.g., carbon tax) are regressive and thus run into social justice problems that are difficult to navigate and mitigate
7. Urban climate finance solutions favour rich cities, which tend to be in the Global North, while urban development is predominantly a Global South issue (at least from a size-of-problem perspective)
8. Business cases for climate projects remain weak, especially in adaptation and resilience
9. The private sector doesn’t understand the peculiarities of public finance and how to effectively engage with city governments
10. Many climate finance solutions are complex and therefore place excessive demands on the capabilities required of civil servants and public-sector investors
11. The cost of inaction remains poorly understood
12. Cities lack the skills needed to do long-term integrated planning
13. Many cities, particularly in the Global South, prioritize the provision of basic services over projects that mitigate climate change or strengthen resilience
14. Data quality and availability in cities remain poor
15. There is a lack of coordination and collaboration of climate action across national, regional, and municipal layers of government

Top 15 Omitted or Underplayed Angles to the Urban Climate Finance Challenge

1. Values and principles on which urban planning and spending are based
2. The capability to do proper visioning and futuring within city governments
3. A city government’s innovation capacity (culture, risk tolerance, collaboration)
4. A coherent vision for city government fit for the challenges of the 21st century
5. The role of structured learning and sensemaking in managing complexity
6. Decentralizing power and fostering greater citizen participation in defining spending priorities
7. Democratizing capital raising by tapping citizen-investors
8. The opportunities of multi-stakeholder alliances operating in partnership with (but outside of) city governments as entry points for urban climate finance
9. The opportunities from bundling value flows across different urban systems (energy, air, biodiversity, economy, human health)
10. The need to overcome political path dependencies and infrastructural lock-ins
11. The need to innovate around the decision-making frameworks guiding urban planning and capital allocation decisions within cities, and the objective functions and mental models that underpin these frameworks
12. Power dynamics between civil servants and multilateral and private-sector investors, particularly between Global South cities and Global North investors
13. Frame shifts away from “the city” as a unit of analysis and intervention to “higher” (region) or “lower” (neighbourhood) levels within urban systems
14. The qualitative demand on the capital intending to generate transformative impact
15. The need to move beyond single-project investing toward strategic portfolios of assets that have the potential to generate combinatorial effects

A Selection of Mainstream Sources We Have Consulted

• CCFLA et al. (2021), The State of Cities Climate Finance
• IFC (2018), Climate Investment Opportunities in Cities
• UNFCCC Standing Committee on Finance (2019), Climate Finance and Sustainable Cities
• UK CITIES Climate Investment Commission (2021), City Investment Analysis Report
• C40 (2022), Green Finance in C40 Cities — Benchmarking Assessment
• The British Academy (2021), Climate Finance for Cities and Urban Governments, a COP26 Briefing
• UNEP (2014), Climate Finance for Cities and Buildings — A Handbook for Local Governments
• C40 & Arup (undated), Deadline 2020
• Global Covenant of Mayors for Climate and Energy (2021), The Multilevel Climate Action Playbook for Local and Regional Governments
• GIZ (2017), Challenges and Opportunities for Urban Climate Finance — Lessons Learned from eThekwini, Santiago de Chile and Chennai
• ODI (2018), Clean Energy Project Preparation Facilities — Mapping the Global Landscape
• Science Based Target Network (2020), A Guide for Cities
• WWF (2019), One Planet City Challenge — Updated Assessment Framework
• UNDP & World Bank (2020), Catalyzing Private Sector Investment in Climate Smart Cities
• GPRBA & World Bank (2019), Innovative Finance Solutions for Climate-Smart Infrastructure — New Perspectives on Results-Based Blended Finance for Cities