Cities Should Bank on Climate Resilience

2017-07-28T12:09:32+00:00July 28th, 2017|Cities, Climate Risk|

By Andrew Eil & Stacy Swann

This week, the Rockefeller Foundation’s 100 Resilient Cities (100 RC) program is convening nearly 500 urban resilience leaders from cities around the world, including 80 Chief Resilience Officers, in New York to discuss, share, and develop new resilience solutions for cities.

In our last blog post, we discussed the concept of bankability: “Bankability” implies that lenders and investors believe the risk exposure of a project does not outweigh its return potential. Bankability as a concept is not only relevant to private developers in their quest to finance their projects, but also to cities trying to raise capital. Climate change is already impacting cities’ ability to maintain and develop infrastructure to meet their residents’ basic service needs: freshwater, energy, wastewater treatment, transportation, and waste management, among others, are under threat from storms, sea level rise, and other climate-related phenomena. Unlike national governments, many cities – especially those in emerging markets – may have limited access to debt markets (as of 2013, only 4% of the 500 largest cities in developing countries had access to international debt markets), and their risk exposure to natural threats can be both acute and chronic.

How then do cities invest in 21st century infrastructure when climate risks are rising? We would argue that any city-level investment program should be climate resilient, and that financing should incentivize such measures.

Many cities and other institutions are tackling the dual challenges of infrastructure financing and climate resilience by fusing them. Green bonds, green and resilience banks, disaster and natural capital insurance, public-private partnerships (PPPs), pooled financing, and other innovative financing arrangements have the potential to provide returns to investors and investment capital to cities by aligning their incentives. If cities invest in resilience to climate change and natural disasters today, they can reduce the likelihood of costly episodes that result in losses to investors. In a virtuous cycle, such investments could  increase cities’ bankability, reducing their risk premiums and interest rates when they access the bond and insurance markets in the future.

Examples of this kind of innovation – with novel elements of both urban design and municipal financing – are proliferating rapidly and are almost as diverse as cities themselves. Sanitation and sewage may sound unsexy, but it is an innovation hotbed. Many cities with combined storm water runoff and “sanitary” (household waste) sewer systems face serious environmental crises during storms when sewage can overwhelm waste treatment facilities and flow directly into rivers and lakes. The U.S. EPA has warned many cities that their water quality situations resulting from combined sewer overflows (CSOs) are critical and require immediate investment. The solution? A number of innovative approaches are being deployed. For example, better storm water management technologies are helping cities be more responsive to real-time issues and can prevent costly damage to infrastructure and homes.  Also, cities are proactively installing storm water gardens and resilience parks. One such park planned in Hoboken, New Jersey, has a dedicated storm water retention basin incorporated into a public park and parking garage to prevent runoff into the sewage system.

Such solutions can be taken to scale or, at a minimum, be integrated into overall infrastructure investment, and incorporated into a municipality’s financing strategies. In a city-wide initiative, the District of Columbia in 2014 issued a $350 million bond, the first green bond by a municipal water utility in the U.S. According to the District’s water authority, “The issuance achieved its green certification based upon the DC Clean Rivers Project’s environmental benefits, which include improving water quality by remediating CSOs, promoting climate resilience through flood mitigation, and improving quality of life through promotion of biodiversity and waterfront restoration.” Municipal green bonds are now taking flight in emerging markets as well: Mexico City issued a $1 billion green bond in 2016, the first for a Latin American city. The bond was oversubscribed, emboldening Mexico City to plan a second green bond issuance.

Green bonds have the virtue of using all of a city’s creditworthiness to raise earmarked resources for green projects. But that doesn’t mean that getting a certified green bond is easy. In order to issue the CDMX Green Bond, Mexico City had “to accomplish four basic things: 1) have defined sustainable programs and policies; 2) be able to prove transparency processes; 3) have healthy finances; 4) and develop an integrated work plan in coordination with the local Ministry of the Environment and Finance, along with national institutions.” Certification schemes, such as for climate bonds, are also arising to give investors certainty of the securities’ environmental benefits. These steps aren’t easy to complete, which is why donors, consultancies, non-profits, impact investors, and foundations are stepping into the breach to provide cities with planning expertise and to help them raise adequate capital. 100 RC has, to date, helped 32 global cities complete citywide resilience strategies, most recently Boston; Santa Fe, Argentina; and Toyama, Japan. The C40 Cities Finance Facility (CFF), launched in 2015 with funding from the German and American governments, is designed to help cities tap into the green bonds market.

But what about cities that are worried about whether their innovative resilience projects will work? If they can find intrepid investors willing to see the value in resilience, and possibly incentivize performance, amazing things can happen. In 2016, the District of Columbia further innovated in wastewater finance, issuing a $25 million variable-rate green bond to invest in green infrastructure to manage and absorb storm water. The 30-year bond, the nation’s first Environmental Impact Bond (EIB), pays out more to investors Goldman Sachs and the Calvert Foundation if DC exceeds its wastewater reduction targets, and investors forgo interest payments if the results fall short of targets.

The performance-based payments structure of the DC EIB helps to address a key bankability challenge: performance measurement and risk assessment. Unlike most traditional “gray” infrastructure, many new green infrastructure projects that are integrated into natural systems like tree cover, soil water retention, and river flow have performance characteristics that are difficult to measure. DC overcame this difficulty by “building a pilot green infrastructure installation that channels all water from its site into a single, gauged outflow pipe,” measuring outflow over 12 months, and then employing sophisticated water flow software.

These are just a few examples of innovative finance and project approaches to expand the city-level solutions that are both bankable and climate-resilience. Stay tuned for future blog posts that look at other aspects of “bankability” and climate-resilient investment.