Context
Cities play a critical role in driving society’s transition toward a low-carbon, climate-resilient, just, and inclusive future. More than half of the world’s population lives in urban areas, and cities consume 78% of the world’s energy and produce more than 60% of greenhouse gas emissions.
Finance is a key enabler of net-zero transitions of cities, and the challenge to be met is colossal: The C40 cities alone will require annual investments of about USD 50 billion up to 2030 and beyond. If these massive investment flows are to drive structural change in urban areas (and their surrounding regions), financial capital must be deployed in a way that generates systemic effects.
This is particularly true of municipal governments because the finance instruments they control have the power to exert great leverage over the stocks and flows of money in cities. But it is also true of a rising number of non-governmental actors dedicated to urban climate finance, such as multi-stakeholder alliances, impact-driven private sector investors, innovation partnerships, and multilateral financial institutions.
If we are to deliver the systems transformation necessary to meet the climate challenge at the pace and scale required, climate interventions, and the programming and deployment of climate finance can no longer be piecemeal, siloed and incremental. Our proposal seeks to support cities to develop and implement the systemic practices, competencies and mindsets needed to steward financial flows capable of catalysing the sustainability transitions of cities.
Defining the Problem Space
Over the past 6 months, an innovation consortium consisting of the Centre for Public Impact, the TransCap Initiative, and Climate-KIC has conducted a research and design inquiry to understand how to move the needle on urban climate finance. This inquiry encompassed a comprehensive literature review, interviews with more than 30 stakeholders, and several sensemaking and co-creation sessions with sector experts. Our research has surfaced that cities are looking for support on a great number of aspects related to climate finance. However, three need areas have emerged as most salient:
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Translating city-wide climate action plans into climate investment plans
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Building financeable portfolios of projects in a way that reduces complexity for cities
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Partnering with climate finance experts in ways that builds city-internal capacity
Often, cities have a climate action plan but no comprehensive strategy for getting it funded. Such a strategy would entail structuring climate interventions into investment portfolios designed to create co-benefits and amplify impact, and getting these financed through a unified financing and repayment mechanism. This would enable the orchestration of different forms of capital in a “funding architecture” logic centered around ambitious climate missions, and help mobilise capital from multiple capital sources, while also significantly reducing complexity for governments.
Instituting the practice of systemic capital allocation in cities also supports a critical shift away from the more traditional underlying structures and practices that drive resource allocation in cities today, to one that is collaborative, shared and place-based. For city governments, this is not only a challenge of technical expertise but also one of resources (not enough staff) and agency (no designated problem owner).
In addition, cities lack partners that can engage with them in long-term, strategic ways while also centering community and place; banks are often only interested in project-specific transactions, take a narrow view of risk and value, and have an overwhelming focus on emissions reductions, sometimes at the expense of building community resilience and wealth. And consultancies are both expensive and disincentivized to help cities build the internal capabilities necessary for systemic approaches to sustainability challenges.
Proposed approach: Systemic Funding Architecture
What has emerged from this first phase of work is a hypothesis for a value proposition that meets the salient needs of cities while complementing existing support offerings, which we are calling Systemic Funding Architecture (SFA).
SFA is a multi-stakeholder collaboration between CPI and TCI, working in close partnership with municipal governments to help them translate their climate action plans into long-term, multi-pronged climate investment strategies and get these designed, structured, and capitalised.
Objectives & Impact
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Enable the deployment of capital into a systemic climate investment plan in two pilot cities
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Amplify the impact of climate investments through co-benefits and combinatorial effects of interventions across different systems and value chains, within an investment portfolio
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Grow and connect the constellations of funded place-based climate projects in the cities, increasing the potential for synergistic and collaborative work across the system
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Create a blueprint for democratising the management and deployment urban climate finance by centering people and communities in the design
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Build the capacity of municipal governments to design and build strategic, investable portfolios of climate interventions
Process design
Below is an outline of the key work phases we propose to undertake as part of the pilot process with two cities. It is important to note that, throughout each phase of the programme, we will center collective sensemaking and learning, iterating on the key outputs as we learn new information about actors, initiatives, financial flows; and their relationships, levels of influence, and engagement. Indeed, being able to work across two different city pilot locations is critical to that learning arc, because it will allow us to test the systemic funding blueprint in different contexts.
Phase 0: Scoping and pilot selection
During the first two months of the pilot programme, we will set up the key project systems and processes (e.g. Gantt, budget tracker, etc.), and run a pilot selection process, where we will invite cities to apply to work in partnership with our consortium on this initial pilot. While a number of cities have expressed their interest in collaborating with us on the initiative, we believe the rigour and structure of a selection process will help ensure that the pilot city municipalities are fully committed to this mission and process, and that the two locations are sufficiently distinct from each other so as to provide us with two differentiated learning experiences about what it takes to develop systemic funding solutions in cities. As part of the selection process, we will also be awarding the pilot cities with a stipend of £50K each, in order to enable them to dedicate resources to participating in this process in a way which is meaningful, and builds capacity within the municipalities.
Phase 1: System Diagnosis
In this phase, we will work with the municipal government and key city stakeholder groups through a mix of workshops and working sessions, to build a deeper understanding of the system within which they operate.
Mapping the System: This includes reviewing existing climate strategies and programmes and the climate impact objectives behind them; mapping out the stakeholders in their place working on similar/complementary initiatives; mapping the flows of climate finance and investment through their city and the ways by which these actors and interactions do/do not intersect with one another. The systems mapping sessions will draw on information and data from existing plans, reports, and research; and also on the experience of key municipal staff, frontline workers, and communities who engage with the place from different vantage points. The systems map will also be the key resource municipal actors are pushed to return to, to sense-check next steps at each stage.
Identifying Leverage Points: We believe the systems mapping sessions with a diverse cohort of city-based actors will help set the
stage for more in-depth sensemaking around the systems and structures that support the present systems of resource allocation,
and what needs to shift to support systemic, participatory and transformational climate impact. This could include reimagining
financial vehicle design, policy/regulatory frameworks, institutional decision-making structures, skills & capacities, engagement &
collaboration models etc. Once these leverage points have been identified, the climate impact objectives will also be reframed to
ensure alignment.
Phase 2: Climate Portfolio Design
This phase of work involves supporting the municipal government to co-develop a place-based portfolio of climate initiatives alongside key city-based actors and communities. Municipal teams, city-based actors and communities will be supported to identify diverse interventions across the value chains of social, economic and environmental systems that collectively support the identified climate impact objectives. The groups will also be supported in building a deeper understanding of investment needs for the different interventions, and how these can be combined and connected, in order to make prioritisation decisions where needed.
The SFA team will facilitate this participatory portfolio design process, as well as undertake gap-filling research in between the working sessions to build a deeper understanding around specific investment interventions. With the group, we will evaluate different options and make final prioritisation decisions around how to compose the investment portfolio.
Phase 3: Financing Architecture
With the support of financial modelling analysts, the constellation of prioritised interventions in the portfolio will be assessed to understand total investment needs, the right capital stack (i.e. the right mix of public finance, market-rate investment capital, concessionary capital, philanthropic grants, etc.), the financial flows and key beneficiaries.
We will produce a financing architecture report containing detailed modelling articulating overall investment need broken down by
key climate action areas, and specific projects/assets within those - with a breakdown of the capital stack needed to finance it. This report will be shared with the city stakeholders for input, and stress-testing, and then refined.
Phase 4: Capital Raising
Structuring and governance
The financing architecture work will then be used to develop the funding structure for the climate portfolio through a series of
consultations with legal advisors, which will be recommended via a summary report to the municipality and key stakeholders. The
SFA team will use this structure as the basis for a phase of consultative research work to develop an inclusive governance
framework for the funding vehicle, as well as an operational plan (addressing questions such as who will administer the fund, etc.).
The governance framework and operational plan will be co-designed with the city stakeholders. We can then proceed with entity
formation, registering with the relevant regulatory authority, creating key organizational documents, and so on.
Capital raising
We will then identify a spectrum of potential investors and support the city in developing marketing and outreach materials. We
will set up, conduct and follow up on capital raising conversations. Our aim for this phase is to support the municipality to get the
funding vehicle capitalised (soft commitments).
Pathways to scale
To minimise the risk that this innovation effort gets stuck at the end of the pilot stage, we are already actively conversing with existing city networks, such as the Net-Zero Cities (NZC)1 program orchestrated by Climate-KIC (our partner on the initial phase of scoping work), C40 and the UNDP Mayors for Economic Growth (M4EG) programme. Many of the cities in these networks face similar challenges that prevent them from taking a systemic approach to financing the climate transition, so if we succeed at developing an SFA blueprint through an initial pilot, we will have a ready platform for scaling our impact. Additionally, a key component of our programme will be setting up the sensemaking and learning infrastructure needed to ensure we’re building a deep understanding of the enabling conditions for systemic climate finance in cities, so that those learnings can be scaled beyond the pilot.
One additional dimension of scaling which must be explored through experimentation in the next phase of this project— is whether an SFA mechanism must have agency over investment capital. Some believe that as long as investment portfolios have the right risk/return characteristics, they will be able to obtain finance from banks and other investors. Others are of the view that the two functions of systemic technical assistance and systemic capital deployment must be housed in a single organisation/collaboration in order for systemic investing to become possible. Depending on the answer to this question, the pathway to scale for the SFA could involve raising its own capital in the logic of an investment bank.
Anticipated challenges
Challenge | Mitigating action |
We are unable to secure further funding to take this initiative beyond the initial pilot project. | We are currently in the midst of an active fundraising campaign where we are engaging with potential funders based on their funding interest areas, and putting together an engagement strategy for the coming months. We have also designed the process so that one of the key deliverables is a ‘blueprint’ for developing systemic climate finance portfolios. This is so that there is a pathway for cities to take the work we’ve done and use it, even if our initiative fails to take off. Finally, we have sought from the start to embed strategically into platforms and networks that offer scaling conduits (e.g., Climate-KIC’s Net Zero Cities, ICLEI, C40, UNDP’s M4EG programme). |
The process of designing and capitalising climate investment portfolios is perceived as being in service of profit-seeking investors. | SFA would be a non-profit collaboration, which would seek primarily foundation and public funding to cover the costs of the work we would do with cities. When it comes to capital raising for the portfolio(s) of climate interventions, the mechanism we design and fundraise for would necessarily seek to bring in different types of capital, depending on what is appropriate for the impact outcomes we are seeking. This will include margaret-grade capital, but also concessionary capital, public money and mechanisms such as tax incentives and subsidies. We believe that having such poly-capital structures will mitigate the risk of this being seen as beholden to private capital. |
There is a lack of buy-in for the process because it is perceived as top down and ‘expert led’ | We have designed our process so that there is meaningful engagement and input from urban communities and other key stakeholders throughout the pilot. This will ensure the SFA team gets a deep understanding of context in which the work is happening. The pilot design also has the SFA team and municipalities working side by side, to ensure capacity building. The pilot project will also be governed jointly by finance professionals and civil servants. |
We cannot find partners to participate in the pilot because there is no interest in the service | A number of cities have already expressed their interest in engaging with us on this work. In addition to that, we are in active dialogue with the team that runs the Net-Zero Cities (NZC) program orchestrated by Climate-KIC (our partner on the initial phase of scoping work), C40 and the UNDP Mayors for Economic Growth (M4EG) programme, to ensure that there is a broad platform of potential city partners for this work |
Timeline and budget
We are looking for a consortium of funders committed to scaling systemic climate solutions in cities, and interested in solutions which create new and innovative financing mechanisms for sustainability transitions. We anticipate that this work will take approximately 12 months to complete across two pilot cities, and a budget of £565K to deliver. The funding would be broken out as follows:
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£385K for programme design, delivery, and management by the CPI and TransCap teams
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£50K participating stipend for the city, with an assumption of 2 pilot cities
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£80K for external costs including contractor fees, financial modelling, workshop venues etc.
Team & experience
The pilot will be led by a blended project team composed of staff from the Centre for Public Impact and The Transformation Capital initiative. We have formed this partnership because we - between our two organisations - have a deep understanding of both public finance (and the political and institutional context in which cities operate) as well as finance/financing at the transactional level. More information on our two organisations and our individual track records can be found below.
The TransCap Initiative is a think-and-do-tank at the nexus of real-economy systems change, sustainability, and finance. Our mission is to build the field of systemic investing. We do so by building a collaborative innovation space for developing, testing, and scaling systemic investing through research and prototyping and by nurturing a community of practice.
The Centre for Public Impact (CPI) is a global not-for-profit organisation, founded by the Boston Consulting Group, with regional offices in North America, Europe. Australia, and India. At CPI, we believe in the potential of government to bring about better outcomes for people. Yet, we have found that the systems, structures, and processes of government today are often not set up to respond to the complex challenges we face as a society. As outlined in our vision, we serve as a learning partner for governments, public servants and the diverse network of changemakers who are leading the charge to reimagine government. We work with them to collectively make sense of the complex challenges we face and drive meaningful change through learning and experimentation.
