Crucial new developments in mitigation and adaptation including: renewable energy, public transport, and nature-based solutions, are needed to safeguard the lives of billions, yet many struggle to secure sufficient funding. In fact, studies estimate that, globally, there is a $6-$12 trillion gap in annual funding for climate and resilience investment (Buchner and others, 2023). Of the funding that does come in, only 10 per cent goes to adaptation projects (Negreiros and others, 2021), highlighting a real need to address human vulnerability in cities. So how can cities draw from greater sources of private and public investments for climate action?
Perhaps one solution is matchmaking – but not the kind you’re thinking of.
Urban-Act is an international project funded by the Government of Germany’s International Climate Initiative (IKI) with ESCAP as an implementing partner that seeks to accelerate access to urban climate finance. Urban-Act facilitates project preparation for cities, helping move their projects along the urban climate finance value chain so they can attract public or private finance. This is followed by city climate finance matchmaking, where cities are connected with potential investors through in-person events or online platforms. This process is explored in detail in ESCAP's 2023 working paper, Enabling Innovative Investments. The paper highlights how project preparation and matchmaking can unlock the potential of public-private partnerships (PPPs) to bridge the climate finance gap and accelerate climate action in cities. However, several challenges must be addressed.
These challenges include:
- Insufficient project preparation: cities often lack the capacity and resources to prepare ‘bankable’ climate projects that investors are willing to fund.
- Limited reporting on success: very few matchmaking programmes report on the success rates of the projects they fund, making it hard to evaluate and improve matchmaking support.
- Limited replicability and scalability of interventions: as cities all vary in their levels of development, political and economic systems, and local geographies, the support they require varies too, which can be hard to replicate elsewhere.
The same paper highlights some potential solutions for providing cities with more effective support. As investors often avoid climate projects due to large upfront costs and higher perceived risks, cities can seek blended finance between private and public investors, using public grant money to prepare well-developed projects, making them attractive to private investors due to smaller ticket sizes (the amount of capital for each share) who can then fund later stage implementation (see figure 1 to visualize project value chain)
Another solution involves financial aggregation. Here matchmaking programmes can consider working with multiple cities with similar projects to better replicate interventions, and/or they could compile many small projects from one city into one portfolio, increasing funding as they leverage of economies of scale and reduced transaction costs.
Enabling Innovative Investments (2023) lists a series of recommendations for successfully employing these solutions and ultimately enabling effective city matchmaking. They range from encouraging impact assessments for learning from mistakes to engaging in investor consultation early to align projects with investor criteria.
- To achieve blended financing:
- Engage in private investor consultation at early stages of project design
- Ensure projects are aligned with national strategies.
- Make use of online platforms such as CDP Matchmaker, SOURCE, or CI Portal.
- While financial institutions should support cities by:
- To valorize financial aggregation:
- Consider a ‘city cluster approach’ to increase replicability of interventions
- Improve scalability by compiling several city projects into one portfolio.
- To improve the effectiveness of matchmaking efforts in the long term:
- Promote capacity building to equip local governments with the expertise and leadership for implementing projects and securing private finance
- Adopt an impact assessment framework for monitoring and evaluation to tailor programmes for maximum effectiveness
Despite the uneven split of finances that goes towards mitigation projects, current trends show we are straying away from the 1.5°C warming target globally agreed upon at the Paris Agreement in 2015, emphasizing just how important it is that we accelerate climate finance in cities, particularly for adapting to the adverse effects of climate change that are expected to increase with time. Projects such as Urban-Act that make use of project preparation support and city matchmaking, along with the recommendations developed in the Enabling Innovative Investments (2023) paper, can help bridge the significant investment gap for climate action, making way for more sustainable and climate resilient cities.
