How Cities are Using Innovative Finance for Sustainability

From issuing green bonds in Gothenburg, to implementing city adaptation strategies worth 11 billion DKK in Copenhagen (€1.1 billion), Nordic cities have demonstrated that providing finance for scaling up climate action is a top priority.

Investment in infrastructure

Over two-thirds of Reykjavík greenhouse gas emissions come from transport. The city has a problem in that public transport is seen as a way for young and poor people to travel, leading to only 13 per cent of travel in Reykjavík being green, (compared to 44 per cent in Oslo). To change this, the city wants to invest €300-500 million to increase the quality and size of the bus network, build bus lanes and bike paths.

But how can they best raise the money? What examples of green finance can they take from other Nordic cities?

From green bonds to sustainability bonds, and blended finance

In Malmö the municipality is creating a ‘Green Bond Framework’, to finance clean transportation, climate adaptation, energy efficiency, renewables and green buildings. The city is working with closely with a local utility company to find investment opportunities for infrastructure and insulation.

However, the city aims to go beyond the now well established green bonds and create investment opportunities into more diversified sustainable projects, combing environmental and broader societal targets. These sustainability bonds or structured finance mechanisms could become the next generation of urban infrastructure finance.

But what societal targets will investors be ready to invest into? Who are the potential investors? How can a return on investment be measured? And can the traditional annual budget planning in cities be reconciled with longer term investment targets?

These are the challenges the city is currently working on. Trevor Graham, Head of Sustainable Development in Malmö thinks it helps if cities adopt their partnership approach, opening a dialogue with future potential city developers on how to raise the bar.

One challenge he’s faced is in getting investment for areas that are socially and economically weak, even though returns might be attractive as property value is low. He envisages using Malmö’s AAA financial rating (the highest) to leverage broader risk sharing across the city. He’s also considering whether a crowdfunding mechanism could be used to support investment at a district or neighbourhood level.

Similarly, the City of Copenhagen also wants to target fewer ‘return oriented’ investors, having often struggled to find funds after a demonstration phase. Their aim to pursue ‘blended finance’, from a much broader pool (pension funds, investment funds, family funds, business angels and philanthropic funds), and at a much earlier stage forms their roadmap to structuring impact investments in and around their sustainable urban development projects.

Learning from the Nordic example of innovative finance

With increasing focus on the role of non-state actors following the Paris Agreement, Nordic cities continue to pave the way for city leadership in climate action.

From implementing green bond frameworks to establishing municipal or community funds, and engaging pension funds for long term impact investments, Nordic municipalities are showing that scaling up climate finance is a multi-dimensional challenge, successfully addressed through ambitious planning, diverse engagement, and innovative financial thinking.

 
Location
Sweden
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