Indspark: Bridging the Gap Between Bankability and Responsible Investment

af Susanne Pedersen

Managing Director

As much as many of us would like to think that achieving social and environmental benefits are enough to accelerate climate action, the role of finance cannot be ignored. Particularly in cities, where housing stock or infrastructure need to be made energy efficient, obtaining project capital is the first step to kick starting the low-carbon environment.

Between €0.36 and €1 trillion per annum of incremental investment is needed over the next 15 years to set cities on a low-carbon and resilient development path to meet climate targets, build resilience and cope with booming urban populations.

Capital for this low-carbon transition exists but accessing it is the challenge. One major barrier is that those involved speak very different languages and operate on different timescales. Climate projects are, by nature, long-term, place greater emphasis on co-benefits such as social and environmental gains, rather than simply on profit. Often they are experimental without a proven return on investment. There is a need to demonstrate the value for investors.

At the same time, legislation and global policy such as the Paris Agreement is driving greater disclosure and transparency. There is a growing movement working to make visible the levels of climate risk in companies and their assets, particularly those still heavily invested in fossil fuels, or without any real strategy to deal with the impacts of climate change on everything from value chains and sourcing to potential litigation.

Together with our partners, Climate-KIC is helping to bridge this gap between a need for bankable projects with a good return on investment and the need for responsible investment. From the angle of responsible investment, we are developing risk management and adaptation services that help determine the cost and impact of climate change which is currently not visible across sectors and supply chains. Yet, from another angle, we are developing the novel approaches needed to help mobilise investment for climate innovation and cleantech. A big part of this is identifying and accessing bankable, green projects by articulating new models of value, benefits and returns.

One of our major successes in bridging the gap between bankability and responsible investment is the Low Carbon City Lab (LoCaL) flagship under our focus area of Decision Metrics and Finance Theme – a global innovation hub, and flagship programme that aims to unlock climate finance for cities, identifies options to raise capital, and facilitates investment in fundamental mitigation and adaptation projects.

A project within the LoCaL flagship, Green Bonds for Cities, has developed a set of tools to help cities navigate such obstacles to kick start new low-carbon developments and renovations to existing infrastructure. The project is currently working with Mexico City, which aims to issue its first green bond – the first issued by any city in South America – in 2017. The city intends to direct the proceeds towards existing plans to expand its bus network, improve its water infrastructure and invest in low-emission buildings.

Issuing green bonds allows cities to access low-cost capital earmarked for investment in climate-friendly municipal projects. This funding stream can be hard to access for many cities especially in developing countries for a variety of reasons. These can include a lack of knowledge around developing green bonds, low creditworthiness and weak or absent green project portfolios.

Perhaps the first crucial step for cities in unlocking finance is really understanding the data around the issues that are important to them. Another of our projects, Carbon Track and Trace which the Climate-KIC partner cities Vejle and Trondheim, has shown this in relation to municipal greenhouse gas emission inventories. These are time-consuming and expensive to build and maintain, and the data on which they are based is often inaccurate and out of date. Having immediately available and accurate data can support cities in better understanding the costs, benefits, and impacts of their climate mitigation strategies.

But, most importantly, bridging this gap cannot be done without building awareness, sharing knowledge and developing skills. Climate-KIC works closely with the renowned Cities Climate Finance Training initiative to build awareness of the opportunities for both investors and city officials, helping them to gain a better understanding of our investors and each other’s requirements, and showcase existing projects.

Last year, we held a major workshop with the Local Governments for Sustainability (ICLEI) that are prompting a standardisation in the way cities report and present their projects – a critical step towards speaking the same language and understanding each other’s timescales.

Reaching a mutual understanding between city officials and the investment community on what it takes to create bankable projects and to secure green financing is crucial. It’s this finance that is the key to our low-carbon future.

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Climate-KIC co-hosted a Green Finance workshop on 21 March in Gothenburg, a city that is a pioneer in green bonds, to bring together investors, city officials and policymakers to explore how green public-private partnerships can be strengthened and unlock finance for climate action. Read more about the workshop outcomes and the city of Copenhagen's approach to it all here!

Climate-KIC is the EU’s largest public private partnership addressing climate change through innovation to build a zero carbon economy.  We address climate change across four priority themes: urban areas, land use, production systems, climate metrics and finance. Education is at the heart of these themes to inspire and empower the next generation of climate leaders. Our Nordic office has been located at DTU's campus in Lyngby north of Copenhagen since 2014.