The right investment drives urban development
The right investment with responsible finance powers an urban Vision
The people who govern and manage cities and towns have to work within their financial limitations. We seldom have enough funding for everything we would like to do, and we need to approach funding and investment needs in a smart way.
Responsible finance links the activities of city and municipal authorities, and others, who are seeking to undertake urban development to organisations that can provide finance. Good governance to manage risk and monitor the achievement of agreed objectives is a key requirement for all financial management.
To work well, responsible finance for the right investment requires the following:
- It has to be aligned to performance-orientated, transparent and collaborative governance that shapes the needs of cities and towns.
- It should be ambitious in its targets, which includes valuing societal and natural capital, and workable sustainability goals.
- Urban investment options should be assessed in a measured way, with the right controls put in place to manage all forms of financial investment and funding.
With an integrated responsible finance structure in place to support the right investment, city and municipal authorities can address their core needs and work towards a Vision for the near-term and long-term future.
Innovation is changing how finance can be sourced and allocated. Part of the team responsible for a city or a town needs to keep track of finance developments and solutions to ensure they understand the opportunities available in order to secure the best types of financial investment.
The availability of finance and appropriate forms of investment can be part of an urban diagnostic review to support the cost of getting from where you stand today to where you want to be in future.
Investment to shape the urban agenda
People seeking urban investment need to know what investors look for
The ability to write good Investment Cases is a key part of creating successful proposals for agreed urban initiatives (remembering that we should involve everyone when we review and agree what is required for our urban area). For small proposals, the investment needs may be minor, but for larger proposals the ability to attract large investors may be key to whether they can go ahead.
Do the people who seek investment for cities and towns know what investors (whoever they may be) look for, and are they skilled at producing compelling investment cases for these investors to review, in a language they are familiar with?
The creation of compelling Investment Cases for urban development should be a key area of focus for key people in city and municipal authority teams. A good "IC" requires:
- Understanding what potential investors and funders are looking for. Investors will have certain performance criteria (financial and non-financial) that they will use to assess the value of an investment, linked to their strategy and objectives.
- Understanding the investment scale of target / potential investors and funders. Some investors think on a large scale, which may mean that they could be interested in multiple linked initiatives in a city, or maybe initiatives that are linked across multiple cities (if this is feasible). Other investors are interested in smaller sized proposals.
- Understanding finance and investment methodologies. For example, a responsible finance solution through an agreed mechanism – such as issuing through bonds, raising capital and / or taking on debt – may link to an identified need that integrates Nature-based Solutions with socio-economics and appropriate physical structures. Options for capital investment ranges and operating costs across a time horizon can be mapped against target income generation.
Would a shared international Urban Finance Centre add value?
Would it be feasible for a central international body to monitor and share (in an appropriate and secure way) the strategies and plans that cities and towns develop for sustainable development, and how responsible finance and investment options can support them? Whilst it may not be appropriate for such a body to be “a clearing house” for urban project and portfolio criteria to rate sustainable investment options, perhaps an “investors connection service” could support Investment Case creation and match investors to worthy initiatives that are aligned to their objectives?
Looking at continent-wide objectives
Consider the approach of the European Union, which wants to become the first climate-neutral continent by 2050. The EU has created a sustainable finance strategy which is designed to support their objective. This finance strategy is governed by criteria that sectors, such as electricity generation or construction, must meet in order to be considered sustainable. Perhaps it could be a model to drive sustainability-focused investment in cities and towns, covering aspects such as the choice of construction materials for low-carbon building through to the preservation of natural environments.
Investment to drive nature-positive change
Some aspects to think about...
In 1989, The Economist suggested in a piece published on 19 May of that year that within the next half-century, the governments of many industrial countries may raise 20 per cent of their revenues from taxes and charges on pollution, and that the largest of them all would be a tax on the carbon dioxide emitted when fossil fuels such as coal, gas and oil are burnt. The article ends on the following note: “The sooner voters are willing to face the true costs of cutting carbon, the sooner will the world stop warming.”
Over 35 years on since this article was published, and despite lots of statements and rhetoric, change is not happening fast enough. Once the world emerged from the COVID-19 pandemic, the use of fossil fuels rose again. Are things going into reverse?
Despite big commitments by governments, the world of finance and business, the so-called race to be Net zero and Nature-positive is a rather slow one, and opinions about it are divided. One area that has raised questions is the use of carbon accounting. The politics of achieving net zero targets is a mix of positive pragmatism but also examples of self-delusion and greenwashing. Municipal authorities and their citizens should be wary of this. Greenpeace has stated that one of the biggest problems today is the use of the word “net”. Why focus on “net” and not simply “reduction”? Can we grow our economies with market principles whilst reducing carbon (CO2) emissions?
An effective way to achieve change is through policy and legislation. For example, is it feasible for governments increase the price of carbon to get people, and businesses, to change their behaviour? Leaving matters to the market alone won’t work. Until now, policies to tackle climate change have been limited in scope because of the “free rider” problem – when the present gets a free ride for our activities while the future pays. The finance sector could play a crucial role to shaping the way forward, by cooperating with policy makers to ensure it costs money when we emit carbon (and other greenhouse gases).
Will the funding that cities and towns raise and the interest rates they pay on capital and loans change for the better if they can source funding that is linked to commitments to significantly reduce emissions, and perhaps even to be carbon extractors? Could this help their credit ratings and influence their ability to raise funds for the initiatives they need, and the issuance of green bonds? Bonds provide cities with an option to raise funds for capital projects that are not funded by regular revenue receipts. Can municipalities qualify for green and nature bonds and can credit ratings improve by demonstrating resilience against natural hazards?
Community investments & Digital finance
How communities can be involved...
Community financing
When it comes to citizens and communities, can a municipality pre-distribution fund, in which citizens contribute a small portion towards a fund that is used for the social and environmental good of an area, be a feasible way for cities and towns to invest, working with national and state governments? It is about advancing broad-based ownership of assets across workers and communities.
Building on the pre-distribution idea, could a “universal basic capital” (UBC) be something for urban societies to consider? The idea is for each citizen to receive a grant on reaching an age of maturity (e.g. the age of 18). Research has shown that if people have assets when they are young, even when these assets are small, they make a big difference for the rest of their lives. Perhaps a UBC can have seed equity from companies or philanthropists in a fund that is allocated to services used by citizens for social needs like healthcare and retirement support.
Community development banking by banks and lenders is empowering people and strengthening communities by expanding their access to capital. Funds such as Climate Transition Real Assets Funds are designed to provide investor groups, including pension / superannuation schemes, with access to climate-focused solutions in real assets such as direct real estate, infrastructure and forestry. This can support SDGs 9 and 11.
Digital finance
The world of digital finance is evolving rapidly. How might digital finance impact urban environments? Digital currencies can be broadly split into “fiat cryptocurrencies” that are market-driven, which include bitcoin and many others, and “stablecoins” which are backed one-for-one by government money. Fiat currencies like bitcoin are not generally seen as adding societal value – they are the preserve of the few. These types of crypto currencies are not considered in the Urban 2.0 system.
As interoperable and programmable money, stablecoins have the potential to rewire the global financial system. Government-backed stablecoins in the form of central bank digital currencies (CBDCs) might provide urban societies with fast, safe and cheap payment systems in due course. We may see urban citizens having CBDC accounts held with a central bank, and no longer requiring retail banks, or maybe there could be a hybrid model in which our CBDC accounts are held by the central bank and administered by private banks. Time will tell if CBDCs can distribute money in a better way than banks and in turn assist the urban socio-economic system and new principles of value.
Decentralised Autonomous Organisations (DAOs) are internet-based organisations collectively owned and managed by their members. They have built-in treasuries that are only accessible with the approval of members. Decisions are made via proposals that the group votes on in a specified period. Decisions are made from the bottom-up, governed by a community that is organised around a specific set of rules enforced on a blockchain. 3-17 Could community financing through DAOs become a viable option, and if so, what are the implications for the socio-economics of urban environments? A host of different responsible private finance initiatives exist, such as community development banking and low-cost electronics payments systems, both of which support urban economies from the ground up. They are examples of innovation by the private sector to offer solutions that citizens and businesses can use to support their own objectives, not trying to govern and determine societal change.