Scholars from the University of Pennsylvania are on the ground at COP27 in Sharm El-Sheikh, Egypt. Follow their updates from the climate conference and tune into a special podcast series from Energy Policy Now.
As COP27 unfolds, there is at least one thing all attendees agree on: climate mitigation and adaptation will require unprecedented investment. But where this money will come from—and who will ultimately pay—remain hotly contested issues. Nowhere is this problem more urgent and complex than in the cities of developing countries facing rapid urbanization, severe climate-related hazards, and a lack of financing to adapt.
During a Finance Day panel hosted by the Local Governments and Municipal Authorities Constituency (LGMA), Mayor Yvonne Aki-Sawyerr of Freetown, Sierra Leone, stated: “We’ve seen the commitments, but we haven’t seen the disbursement.” This summarizes the developing world’s clarion call at this year’s COP for rich countries, the private sector, and development banks to dramatically increase finance to avert climate catastrophe.
The scale of necessary investment is staggering. A new report declared that developing countries need to secure $1 trillion annually in climate finance by 2030, yet developed countries already fell woefully short of mobilizing the promised $100 billion per year by 2020.
While countries are focused on developing a “new collective quantified goal” for post-2025 and loss and damage finance at the formal negotiations, there is also recognition that private sector finance is crucial to achieving the scale of investments needed. The question of how developing countries and municipalities can access low-cost private sector finance remains a formidable challenge.
The private sector is developing and testing several innovative solutions to solve the investment gap. At the LGMA event, panelist Vito Dellerba, director of investments at global investment group CDPQ, described their growing investments in emerging market infrastructure projects and their plan to aggregate transactions across multiple smaller projects in order to meet bankability criteria. (Currently, projects worth less than $200M are infeasible for CDPQ). Other initiatives, such as the Subnational Climate Finance initiative, are leveraging public money to de-risk and attract private investment while focusing on smaller value projects.
These private finance initiatives all have one key feature in common: they require bankable projects that will provide secure returns on investment. And while this model can work for some projects and cities, they won’t work for all.
As Mayor Aki-Sawyerr explained, “When we are talking about cities we are talking about vastly different entities.Unfortunately, the needs of the most vulnerable cities are the greatest. So you have the worst financial ecosystem where you need the most capital.” Cities like Freetown in developing countries face two primary financing challenges for adaptation projects: (1) the difficulty of monetizing the benefits of urban adaptation projects and (2) profound investment barriers due to the perception that risks are higher than in developed countries.
On bankability, large-scale infrastructure projects that benefit an entire municipality, such as a dike or seawall, do not intrinsically have attached revenue streams. This poses a profound challenge for poor urban municipalities that urgently need to build this type of infrastructure but cannot attract private sector finance, for which investment-readiness is quintessential. Perceived risks are higher for cities in developing countries, due to lack of investment-grade credit ratings, high debt distress, lack of technical capacity, and other fiscal, regulatory, and political constraints.
Despite the benefits of adaptation far outweighing the costs, cities in developing countries cannot adapt to climate change without a significant scale-up in finance. Thus, while the role of private finance is crucial—and recent innovations in private finance greatly welcome—the public sector must play a larger role in mobilizing private adaptation finance for these low-income urban settings.
As panelist Marvin Rees, mayor of Bristol, declared: “All the plans in the world don’t mean anything if you don’t get anyone to pay for it.” As new commitments are announced daily at COP27, true success should be measured by whether the most vulnerable among us have access to much needed climate finance.