Cities are set to dominate humanity’s way of life in the coming decades; with more people, businesses, and capital flocking to the opportunities they provide. As a result, cities are now the frontline of the fight against man-made climate change. If cities cannot build a zero-carbon growth model by mid-century, it is unlikely that global temperature rises can be kept to the agreed maximum levels.

    "Cities have the opportunity to lead the charge in the transition to a low carbon economy – they are the places where the world’s best talent meets the most challenging global megatrends."

    Dr Daniel Klier, Group General Manager, Global Head of Sustainable Finance, HSBC

    Cities across the world are now defining what a zero-carbon transition means in practical terms, and seeking ways to finance it. It’s a daunting task, involving big changes across much of the city economy, the urban systems that underpin it, and the choices and behaviours of citizens themselves.

    Many cities are at the very beginning of this process. Leaders are emerging, and the imperative for innovation and collaboration clear. If acceleration and scale are to be achieved, cities must take bold steps and do things in new and different ways.

    To help guide the debate and connect cities to sources of finance, HSBC released Towards the Zero-Carbon City report. This report lays out potential technical and financial solutions to reduce cities’ greenhouse gas emissions. It focusses on how cities can get to net zero carbon whilst managing population growth and delivering the vital services, infrastructures and connectivity that citizens and business need.

    Evolving Consensus

    Over 180 businesses, civic stakeholders, and thought leaders from the across public and private sector joined HSBC for the launch event, highlighting both the evolving consensus and some of the key uncertainties about the zero-carbon transition in cities.

    "Climate action from cities is crucial for limiting rising temperatures. Clean transportation, energy efficient building standards and promoting renewable energy use are just a few ways that cities can help and this forum provided the ideas, connectivity and energy to accelerate the practical response."

    Zoë Knight, Managing Director, Group Head, HSBC Centre of Sustainable Finance

    Attendees were polled live on a number of questions throughout the event. When asked to define the key benefits of pushing for zero-carbon cities, there was a clear broad consensus that doing so will hasten the low carbon transition, improve air quality and public health, increase innovation, reduce technological costs, and encourage wider progress at national and international levels.

    There was also a clear view on sectors that require the most change – 79 per cent chose energy production and distribution among their top three priority areas of de-carbonisation, while 57 per cent chose real estate and 47 per cent chose mobility. However, 74 per cent felt that cities in general do not yet have clearly applicable business and operational models to achieve de-carbonisation.

    "Cities need to think more innovatively to address the dual critical challenges of urbanisation and climate change. We need to fundamentally shift the way we live in cities, how we work in cities and how we move around cities in order to mitigate the risks of global warming. Today’s city leaders require capacity building for changing our physical, digital and social connections to achieve zero carbon cities that are not only fit for the 21st century but resilient enough to last into the 22nd century."

    Dr Amy Hochadel, Director, Connected Places Catapult

    A similar number of respondents also felt that the right financial instruments and capital are not yet available to help cities transition. They observe that although we understand what is needed to make the transition, we do not yet have the financial tools and capital flows needed to make it work. There is an observable ‘investment gap’ that must be tackled, and a need for a new financial strategy to make the zero carbon city a reality. Without investment the transition to zero carbon is impossible.

    "Visionary mayors and engaged citizens give cities across the world the mandate and opportunity to act as leaders on climate change. As part of this process, cities are developing climate action plans as a strategic roadmap for reducing emissions and building compliance with the goals of the Paris Agreement. However, finance remains a key barrier to the implementation of these plans. In particular, cities lack capacity to develop finance-ready transactions and require enhanced mayoral powers to raise and control financing. Equally vital is the active engagement of the private finance sector, which should take steps to engage in the financing of sustainable urban solutions, a sector with huge investment opportunity."

    James Alexander, Director of the City Finance Programme at C40 Cities

    Graham Smith, Director of HSBC’s Sustainable Financing Unit, believes there are solutions out there if policymakers at national level make necessary reforms and if cities enter new agreements and partnerships with the private sector.

    “Globally, only a few cities are currently able to raise debt, in part due to their credit ratings but more often due to limitations imposed by national governments. They can, however, encourage the private sector to invest in city projects for acceptable returns or award concession contracts. This however means cities need to understand the risk and reward concerns of the private sector. Those cities that best understand and react to this will find themselves the strongest magnets for private sector investment,” he said.

    The Towards the Zero-Carbon City report lays out a range of innovative financing solutions that are open to cities around the world, from much discussed products and strategies such as green bonds and carbon taxation to more innovative options such as performance-based contracts and land value capture. It also cites cases of cities using different investment vehicles and financial products to achieve specific goals, such as improved waste management or a switch to renewable energy production.

    Cities have the opportunity to lead the charge in the transition to a low carbon economy – they are the places where the world’s best talent meets the most challenging global megatrends

    Building a common vision

    One particular emphasis of the report is that a successful transition to zero-carbon will involve the efforts not just of city authorities and legislatures, but every layer of society – public bodies, large and small businesses, charities, and individual citizens themselves. As well as a significant change in public planning, private business models and personal action.

    This is especially true of the large number of corporations involved in delivering urban services and systems (real asset investors, infrastructure, energy, waste, water, utilities, architecture, engineering, planning, design, real estate, and mobility). These sectors now constitute a kind of ‘cities super-cluster’, rapidly growing and integrating as a result of global urbanisation. City building and city management are now big business.

    Attendees at the event acknowledged this. For instance, many questioned the existing level of consumption, and the management of waste, inherent in the current economic system. Adopting circular thinking and circular systems are key to the zero carbon transition.

    "Shifting our production and consumption model from the linear take-make-waste model to a circular economy model, in which waste and pollution are designed out, products and materials stay in use, and natural systems regenerate, is going to be key to achieving the climate change objectives that cities around the world are striving for."

    Miranda Schnitger, Cities Project Leader at the Ellen MacArthur Foundation

    This will also require significant behavioural changes at all levels of society, and reflects a general recognition among attendees that technological solutions are not the main impediment to zero-carbon transition.

    "Communicating the benefits of zero-carbon cities and democratising the decision-making process so that every layer of society has a stake in the transition seems to be our major issue from here. The soft techniques of co-learning and collaboration need improvement. This HSBC report and its broader cities initiative is a good step in that direction. Leadership at a city level to move beyond the current economic and climate cycle is critical, but patchy."

    Geoff Roberts, Deputy Chief Commissioner on the Greater Sydney Commission

    According to several attendees, cities need to focus on overall operating models and solutions, not specific projects. Taking carbon out of urban systems of operations involves the integration of otherwise separated systems. By bringing waste, water, food, energy, transport and land use in new combinations cities are able to internalise changes to drive our carbon and to cross-subsidise activities more effectively.

    "Success will come from expanding public-private-citizens partnerships to finance, build, operate and use the required assets and services. Furthermore, smart regulations that favour sustainable businesses and green mechanisms are also required for private capital to deploy its resources into the zero-carbon agenda."

    Pierre Patrick Buffet, Director of Analysis and Strategy at the Spanish infrastructure developer Acciona

    Planning the Future City

    Many of the stakeholders in the room highlighted the crucial importance of planning, particularly from city authorities. This can come in many forms – plans to increase the use of renewable energy, to improve waste management, to retrofit existing buildings and build new, zero-carbon structures. Doing so helps set a target and pathway that can spur on efforts from the private sector and individuals. In the coming decades, many cities will face booming populations, increasing demands for public services and space. Clear planning will help cities avoid more carbon-intensive development.

    "Cities must plan effectively to tackle their emissions, particularly in the context of managing growing populations. These plans must be clear, actionable and have buy-in from stakeholders."

    Pete Daw, Director of Urban Development and Environment at Siemens

    For Daw, these plans must make room for increased automation and digitisation offered by new technologies.

    "Digitalisation is allowing cities to get their existing infrastructure to work harder and new infrastructure to do more. To realise the full potential from digitalisation, cities must develop and implement data strategies that connect infrastructure and information from different sectors and agencies together."

    Pete Daw, Director of Urban Development and Environment at Siemens

    Michal Olszewski, Deputy Mayor of Warsaw, stressed the importance of better building standards to produce low-or-zero-carbon buildings, and a development model that reduces carbon emissions through affordable, efficient public transport and localised supply chains.

    "One of the missing points in cities’ strategies on de-carbonisation is urban planning, which may destroy every good plan to tackle carbon use by cities. In many cases de-carbonisation of cities is also distorted by national policies, such as the coal industry in Poland."

    Michal Olszewski, Deputy Mayor of Warsaw

    Despite recognising the importance of planning and communication, only 57 per cent of the attendees were sure that they live in a city that has set out a zero-carbon plan. This suggests that cities need to do much more, either to establish agreed plans, and to better communicate those that exist, so that citizens and others can get behind the plans and act in concert with them.

    Seven Action Points

    Despite the complexity of the topic a consensus emerged amongst the 180 people on cities and the zero-carbon transition. The discussions held at this event produced seven areas of common ground that can help guide the next steps for cities and other key stakeholders.

    1. Adopt new integrated business and operational models

    Focusing on a piecemeal, sector-by-sector approach to de-carbonisation won't work. Planning and co-ordination are necessary to maximise results. For cities to emerge as a unique asset class, city governments need to understand what investors require and share risks with them.

    For instance, cities may need to differentiate between ‘bankable’ projects, where private finance can play a role, and ‘non-bankable’ ones that should fall to the public sector because the risk is too high or returns too low to interest outside investors. Local leaders can help the private sector identify opportunities where financing is needed, and can bring different sectors together to foster collaboration on specific projects or overall policy design. Collaboration is also the best way to engage smaller cities and ensure they are not left behind. There should be a knowledge-sharing network between similar types of cities.

    "Public-private partnerships between cities and investors are the only way to accelerate wholesale climate change transition. All the evidence is pointing to the need for investors to move beyond a single project focus to back cities more comprehensively and over the long term. Not only will this deliver a step-change in transition, it also has the potential to deliver greater returns. With clear political commitment, strong urban planning and good governance cities could become an ‘asset class’ in their own right."

    Jerome Frost, Global Cities Lead, ARUP

    2. Embrace innovation

    The shift towards a greener, more sustainable economy requires innovation in financial products, business models, governance, urban design and technologies.

    "We must support cities in the transition to zero carbon where strong leadership and good governance are crucial. Environmental disclosure allows cities to demonstrate commitment, leadership and accountability and to track their progress towards a low-carbon, water-secure world."

    Pandora Batra CDP

    3. Leverage technology and big data

    There is a need for greater accountability, both from city governments and businesses, and greater transparency is required to make them more accountable. Data can help city governments and businesses improve their operations to decrease carbon emissions. It can also enable them (as well as other stakeholders such as citizens or board members) to implement targets, track progress and drive future actions.

    "Cities are increasingly focused on responsibly managing their environmental footprint and creating environmentally conscious solutions to aid economic growth, drive inclusion and improve efficiencies. Through our City Possible platform, we are exploring new approaches with cities that can be used to empower citizens to reduce their carbon footprint, from evidenced-based urban planning through to the implementation of sustainable mobility and energy efficiency initiatives."

    Ian Slater, Senior Vice President, Enterprise Partnerships, Mastercard

    4. Close the investment gap

    The financial sector occupies a unique position, in that it connects every layer of society and can act as a conduit for the types of investment that cities need. Event attendees agreed that participants in the sector, particularly large banks such as HSBC should continue to work with investors to arrange the right financial solutions for zero-carbon transition in cities, bring stakeholders together to discuss common problems and solutions, and help clients raise capital for transition projects.

    "Tackling climate change is an issue facing cities across the EBRD region both large and small. EBRD Green Cities is playing its part in assisting cities to tackle climate issues, through the adoption of a more systematic approach and a delivery tool known as the Green City Action Plan. There are now 30 EBRD Green Cities, with the ambition being 100 within the next 5 years."

    Lin O’Grady, Head of Sustainable Finance, EBRD

    5. Make action popular and easy to adopt

    If demand shifts to more sustainable products and development models, businesses and governments will have to follow. Some cities have already launched educational campaigns to change citizen behaviour and reduce waste. These include making buildings and home more energy efficient, adopting new mobility modes, increasing recycling, switching to renewable energy, encouraging rewilding and reforestation.

    At an individual level, many actions can be taken, from lobbying business and governments to shift to zero-carbon investments and activities, to getting involved in grassroots movements and switching to more local products.

    Making the link between financial savings such as cheaper energy, waste, and food bills, or improving health through better air quality and more exercise are key tools in making climate action in cities more popular and adoptable.

    6. Make incentives bite

    The event highlighted the importance of incentives to engage stakeholders in the green transition. New standards are often as the easiest way to drive the transition, but this can be boosted by other forces, such as policy performance bonds, where returns are linked to specific targets.

    This could exhort governments or private suppliers and contractors to make sure they meet their sustainability targets. At a business level, bonus remunerations linked to carbon reduction could spur changes in employees' behaviour. Making de-carbonisation a rewarded corporate goal is one important way for firms to accelerate their investment.

    7. Embrace collaborative leadership

    There is still some uncertainty as to who should lead the efforts towards city decarbonisation. Because so many different actions need to synchronised and systematised to achieve net carbon reductions, and because measurable progress only comes from large scale take up, successful strategies need to present clear and singular opportunities to all stakeholders. This requires leadership and coordination.

    Client change is about behaviour change so there is an urgent need for leadership that engages citizens in a new high trust / high impact model. At the same time, systems modernisation requires coordinated action across the public and private sectors. So public/private leadership is essential.

    Because investments depend on investors' level of confidence, the financial sector looks to governmental actions to ignite change in cities and urban services. But all the players understand that innovation should not be through governmental institutions alone, and can come from the financial sector itself, as illustrated by HSBC issuance of green bonds.

    Stakeholders are looking towards the financial sector to adopt climate resilience and zero-carbon as core considerations for investment decision-making, and see cities as an asset class in their own right. Investors may have to sacrifice some yield in the present to limit future risk.

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