Investment

City Climate Finance Planning and Creditworthiness

Assessing the market need for cities’ climate finance planning to improve creditworthiness and unlock investment.

Urban areas account for a generation of more than 70% of global greenhouse gas (GHG) emissions and they constitute more than 80% of gross domestic (GDP) worldwide. This places cities at the forefront of the battle with climate change. Recent estimates by the Cities Climate Finance Leadership Alliance (CCFLA) report show that the current needs of cities in meeting their infrastructural targets are $ 4.3 trillion per year and an additional amount of $1.1 trillion is required to ensure a low carbon, 2 degree compatible future.

Current support from national governments as well as cities’ own financial sources are not sufficient. To fill this investment gap, cities are required to search for alternative sources to finance their projects. One possible way is to raise debt from the capital market. A key element in shaping the decision of potential investors to lend to cities is creditworthiness, which strongly relies on sound financial planning by cities. Creditworthiness is referred to as the ability of a debt issuing entity in meeting the debt obligations and its likelihood of default. Creditworthiness is inversely proportional to the cost of capital, which means that cities with lower credit ratings are usually asked for high investment returns. It is noteworthy to mention that 96% of the largest cities in developing and emerging economies are not creditworthy in international capital markets, and 80% are not creditworthy in local markets.

While initiatives exist by the World Bank Group and the Inter-American Development Bank to increase the creditworthiness of cities, they have only reached a very small number of cities so far and hope to see more actors, especially private ones, to join their efforts.

To address the issue, this project assesses the market need for cities’ climate finance planning and for improving creditworthiness to unlock investment (demand side). It also refines ideas of what improvements (climate finance planning, transparency) at city level are best suited to satisfy demand for investors (supply side). Both aspects build the basis for the development of a concrete offering.

Compact aims and objectives

  • Assess the demand from cities in for improving creditworthiness and integrating finance planning
  • Assess the demand from investors for supplying capital to cities
  • Develop a concrete, standardised and scalable offering for improving cities’ creditworthiness