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Cities and Climate Change

17/12/2021
Climate Change
COP26
ESG
Responsible investment

The United Nations Climate Change Conference (COP26) ended with modest progress across most climate issues. Yet one fact became clear: cities around the world must work towards radical decarbonisation as atmospheric emissions continue to accumulate.

Urban areas consume 78% of the world’s energy and produce more than 60% of greenhouse gas (GHG) emissions, and likely to feel the impact of climate change more acutely and disproportionately. Coastal cities face the direct challenge of flooding, tsunamis and hurricanes, while some cities may face extreme temperatures, droughts and water scarcity.

In this issue of #WhyESGMatters, we discuss the potential impacts of climate change on cities and how they should respond. We also highlight some of the financial instruments that will help fund mitigation and adaptation efforts in urban areas.

Did you know?

Source: UN-Habitat, Global report on human settlements 2011, OECD, Sustainable Buildings Market Study 2019, Ramboll Buildings, The future we don’t want, C40 cities, February 2018.

1. How does climate change affect urban areas?

For cities, climate change is likely to mean higher temperatures, higher sea levels, air pollution, and destruction of property following extreme events. It could also affect the water and food supply, and the overall health and prosperity of people living in urban areas.

Rising temperatures

Global warming increases the earth’s surface temperature. Today, nearly one-third of the world’s population is exposed to life-threatening levels of extreme heat for at least 20 days each year1. With temperatures soaring, higher energy demand is likely as more household devices are needed to beat the heat.

The cooling industry consumes up to 30% of global electricity and generates 8% of GHG emissions worldwide. By 2030, the number of air conditioners is projected to increase by two-thirds from the two billion units currently installed, and electricity demand for cooling in buildings could also rise by as much as 50% globally2.

 

1 The future we don’t want, C40 cities, February 2018.

2 IEA (2020), Cooling, IEA, Paris

Water: too much or too little?

Higher sea levels due to climate change increase the chances of flooding and tsunamis for coastal cities (Figure 1), putting assets at risk. Asia and Northern Europe may see heavy precipitation, putting dwellings at a high risk of coastal and high tide flooding, and tsunamis. But equally, if climate change makes weather more erratic, some regions, such as the Middle East and South America, may face extreme droughts and water shortages.

Less rainfall, a lack of renewable water resources, and poor urban management or pollution could lead to water scarcity. This may become more pressing if water demand increases by 20-30% by 2050 (as expected by the UN). In emerging markets, cities such as São Paulo, Bangalore, Cairo and Beijing, could all face water stress in the coming years. In developed markets, Tokyo, Miami and London could experience similar issues, with the Greater London Authority suggesting that the latter could have serious water shortages by 2040.

 

Figure 1: The top 20 cities exposed to coastal flooding

Source: Nicholls et al (2007), OECD, Paris

The rank is based on the amount of assets exposed in future.

2. What should cities do?

The C40 initiative – a global network of city mayors aiming to tackle climate change – will be key to sharing best practices and driving the discussions further in the coming years. While much of the climate policy is set at a national level, local authorities are responsible for policy that could be far more important. Cities need to react to the threat of climate change. The solutions are two-fold: mitigation and adaptation.

Mitigation

Actions to reduce GHG emissions, and put the world on a path to deliver global ‘net zero’ emissions and limit future average temperature rises.

Adaptation

Steps taken to adjust assets, populations and economies to withstand, and be able to operate in, an expected future changing climate system.

Mitigation: the essential big steps

In many cities, after decarbonisation of the power sector, transport and building emissions still remain the most significant. To date, over 1,000 cities and regions globally have committed to being net zero, covering over one-fifth of the global urban population. Much more must still be done, however, if the world is to avoid hitting crucial climate tipping points.

Urban climate mitigation will centre on transport policy – more public transport, greater incentives to walk or cycle, and cutting down on the use of petrol or diesel-powered vehicles. There are many ways to do this, but Amsterdam and Copenhagen may offer a blueprint for providing the infrastructure to make cycling and walking easier, safer, and more appealing (see Figure 2).

While electric and autonomous vehicles will likely play a large part in cutting urban emissions, there’s still a significant role for public transport. In fact, if global warming is to stay on track at 1.5°C, public transport in cities across the world will need to double in capacity by 2030 (this was also announced by the C40 initiative during COP26). The exact type of transition will depend on city size, geography and wealth, but investment is needed across the board.

 

Figure 2: Amsterdam and Copenhagen are cycling towards net zero

Source: Eurostat

During COP26, world leaders were called on to ensure that “everyone living in urban areas has safe, frequent, affordable and accessible public transport within a 10-minute walk from their home3”. In addition, USD208bn (equivalent to 0.2% of global GDP) was requested as annual investment to upgrade public transport in 100 C40 member cities, accounting for 25% of the global economy.

Greener buildings will also be a key part of the story – urban buildings, including homes, workplaces, schools, and hospitals, are responsible for an estimated 40% of global emissions – as will changing the energy mix that fuels cities. A step towards a more circular city could help too, cutting waste and increasing re-use and recycle rates. For example, Berlin aims to replace hard surfaces with green space and water-permeable surfaces, to combat the urban heat island effect and enable the city to adapt to heavy rains. Planting rooftops with mosses or grasses increases the ability to absorb water and creates an evaporative cooling effect.

Adaptation

While an estimated 95% of global funding on climate action goes to mitigation, there’s a growing acceptance of the need to prioritise adaptation. That is, adapting to become more resilient in the face of the climate risks that will invariably arrive. Some cities have already taken action to adapt to a changing climate.

At COP26, the goals for adaptation were focused on financing resilience, habitat protection and restoration, and communication. It was agreed that adaptation finance flows will reach USD40bn by 2025 (“at least double” of 2019 levels) – to help meet global needs.

 

3 C40.org

3. Where will the funding come from?

To tackle the substantial environmental and social challenges created by climate change, we expect cities to step up their investment in coming years. This is clearly a significant funding cost – and while much of it will have to come from national governments, both private-public partnerships and capital markets are likely to play a role.

Green, social, sustainability and sustainability-linked bonds, collectively known as ‘labelled bonds’, are currently USD2.2trn in size. Three green project types stand out as being particularly suited to funding cities: clean transportation, climate change adaptation, and green buildings. Social bonds could also be aimed at providing affordable housing and are well suited to funding cities. Issuers could be sovereigns, regional authorities, or even corporates, especially those in real estate.

 

Types of labelled bonds

Figure 3: Global labelled bond markets

Green, social and sustainability bonds also offer two advantages: visibility of the underlying projects and cheaper funding – the ‘greenium’, or spread at which green bonds trade to non-green bonds, is on average slightly negative.

 

Source: HSBC calculations, Dealogic, Bloomberg (as of 26 November 2021)

Other financial instruments used for environmental, social and overnance (ESG) activities are highlighted below:

Green loan

A form of financing that seeks to enable and empower businesses to finance projects with a distinct environmental impact, or rather, which are directed towards financing ‘green projects’.

ESG-linked loan

The proceeds of the loan are used for general corporate purposes, rather than ‘green projects’. However, the loan pricing is based on the borrower’s ESG score or overall sustainability achievements, such as emission reductions. If the borrower achieves its sustainability target(s), it benefits from favourable interest rates on the loan.

Several large real estate investment trusts have tapped the green bond market over the past year, drawing new, sustainability-focused investors to commercial real estate debt and raising money to finance Leadership in Energy and Environmental Design (LEED)-certified development projects. LEED is the internationally known rating system and symbol for sustainable and environmentally sound buildings.

4. Conclusion

Cities and climate change go hand in hand. While the focus of climate policy has been at the national level in recent months, what the world’s urban areas do is likely to be just as important, if not more so. And with a more geographically mobile labour force, making cities work better – with improved public transport and lower levels of pollution – will be key to attracting people to live in them in years to come.

  1. This report is dated as at 09 December 2021.
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