Investing in Low Carbon Urban Infrastructure: Tell Me More

Published: Thursday, April 27th, 2017 by Lenora

Although this site focuses on housing investments, one of the big themes on DevelopingSmartCities.org is private investment in cities’ low carbon transformation. Many of these infrastructure investments in sectors like transportation, water and energy overlap with the built environment and housing. Earlier this month, CDP and C40 Cities released The Low Carbon Investment Landscape in C40 Cities to highlight:

“the tremendous opportunity for collaboration between cities and the private sector to invest in sustainable projects, and also the need to accelerate investment and development in sustainable infrastructure in order to deliver a climate safe future.”

CPD Urban Infrastructure: Cost by Project Area Graph

CPD Urban Infrastructure: Cost by Project Area
Source: CDP Open Data Portal

CDP’s databases of “3,000 low carbon infrastructure projects in planning stages across C40 cities worldwide, with over 700 in the buildings sector alone” apparently requires private sector investment urgently, adding up to US$15.5 billion in required investment. And that’s a partial reporting. You can find these databases here at the CDP site. One specifically outlines projects seeking private sector involvement in 2016. (I hope we’ll see a follow-up of how many of those projects obtained the funding they sought)

Not surprisingly, C40 city governments can’t finance necessary low carbon infrastructure on their own. CDP and C40 Cities suggest that cities could play a more productive enabling role for private investors. To help that along, CDP has developed a platform for cities to communicate with investors of all kinds about urban resilience projects.

Bringing cities and investors together. Lack of good information is certainly one logjam that needs to be cleared. Investors need better information about sustainable urban infrastructure projects – about cities’ priorities, project sectors, total project costs, investable deal sizes, project risks, stakeholders, potential returns, environmental impacts, etc.

Even if cities were perfect at explaining these projects, bankers and other investors have a steep learning curve. It’s more profitable to focus on areas where risk parameters are well understood and replicable, scalable deals can be underwritten (e.g. for telecoms networks or office buildings). Bankers and investors with specialized training in areas like building energy efficiency are few and far between.

CDP summarizes these blocks:

“Accessing and attracting finance are some of the most significant barriers that mayors face when delivering on their climate change plans, while the finance industry reports a lack of understanding of the low carbon technology being deployed and experience in the financing models cities use to fund infrastructure projects.”

How far can information go? It’s a common source of confusion that information and conferences will bridge the investment gap. Data can help relieve market inefficiencies, and large scale data initiatives are very helpful and necessary to rally resources and raise the visibility of these issues. Still, project information needs to be enhanced to be actionable.

Investors need to be able to benchmark projects to select among potential opportunities. For instance, why invest in a BRT system in one city in Latin America vs. another? A practiced tech investor may recognize a good team and an idea that merely needs execution after having made dozens of investments, none of which required massive upfront capital investments. Urban investing is still in its infancy and generally requires large-scale capital commitments, so governments, development finance institutions and other grant-makers will have to advance financial innovation, bridge information gaps and participate to derisk urban resilience projects.

Investors also need to know key absolute targets and parameters in markets where information is still scarce. A good credit analyst knows what constitutes high indebtedness in a given industry and what kinds of credit improvements a company should target over time. Do investors in energy efficiency retrofits in developing markets have the same clarity? Probably not. They need to know what level of efficiency improvement in a specific building type in a given geography constitutes good performance. Technology tools and frameworks are emerging to help provide this perspective.

Information alone also cannot bridge governance gaps, lack of municipal project management capacity and the intergovernmental complexity that investors often face in cities. These are just a few examples.

Connecting the dots. The Financing Sustainable Cities initiative is one exciting initiative aiming to connect some of these dots. Some excellent blogs that highlight the complexity of investing in sustainable urban infrastructure can be found here. As new kinds of partnerships, contracting and financing structures emerge, the job of platforms like these will hopefully shift toward enabling cities to build on past successes and failures of other cities rather than reinventing the wheel with each successive foray.

Certain dots remain unconnected, namely that of scaling up investment in sustainable, inclusive housing. Watch for more on investment platforms, their role in mobilizing sustainable infrastructure investment and the linkages with housing investments.