Driving finance to urban adaptation: City networks call for COP 27

This document is a joint effort between the C40 City Climate Leadership Group and members of the GCoM Finance Technical Working Group, including the Cities Climate Finance Alliance (CCFLA), Carbon Disclosure Project (CDP), Climate Policy Initiative (CPI), Global Covenant of Mayors for Climate and Energy (GCoM) and ICLEI – Local Governments for Sustainability (ICLEI) in preparation for COP27. 

City leaders have a clear call: Climate adaptation is more urgent than ever to address the cascading impacts of the climate emergency and safeguard a sustainable, just and prosperous future for all. Cities are calling for: 1) increased technical assistance to assess, plan and respond to climate risks; 2) governments to integrate and prioritise urban climate resilience at the national level; and 3) finance providers to develop innovative finance mechanisms to enable cities to better respond to climate risks. 

More than half of the world’s population lives in cities, and nearly all are exposed to some level of climate risk.  With 80% of GDP concentrated in urban areas, it is in cities where climate catastrophes can have the most devastating effects.  For example, in South Africa,  flooding in Durban (South Africa) in April 2022 killed nearly 500 people, left more than 6,800 homeless, and damaged more than $1.58 billion of infrastructure, while drought in Cape Town in 2018 led the city to nearly shut off the water supply to its 4 million residents.  New CDP data shows 4/5 cities (80%) facing significant climate hazards, from extreme heat to floods, in 2022.  Climate impacts are already a reality with tangible damages to health, built assets, ecosystems, and economies. By 2050, 800 million people living in cities will be at risk of sea level rise. Further, 685 million people in cities will face a decline in freshwater availability.

To make matters worse, the world is warming at alarming levels, as the recent Intergovernmental Panel on Climate Change (IPCC) Sixth Assessment Report (AR6) showed, where severe and irreversible impacts are already expected in the near future threatening the future of communities. The effects of climate-related hazards are often concentrated in cities due to the convergence of vulnerable populations and exposed infrastructure and assets, which in turn is exacerbated by urban sprawl. As these trends accelerate, particularly in low- and middle-income countries – cities need extensive technical and financial support on building resilience, reducing vulnerabilities, understanding risks, and pre-empting disasters, where possible.

Adaptation Finance Challenges

  • Low level of investment: Despite the clear benefits of investing in adaptation for the wellbeing and health of populations, ecosystems and the economy, investments in urban adaptation are still low and, compared to mitigation resources, are significantly lower.  
    • According to the United Nations Environment Programme (UNEP),  US$140 – 300 billion per year by 2030 is needed to fill the overall adaptation gap.  Much greater funding is needed at a global level, including in cities, to meet adaptation needs.  As the cost of adapting and responding to climate impacts will only increase over time as the planet continues to warm up, closing the finance gap will be more effective if action is taken sooner.   
    • Multilateral development financial institutions (DFIs) provide the vast majority of urban adaptation funding, estimated to be at nearly 80%, but this funding is channelled through national governments  
    • Budget transfers from the national government are important sources of adaptation project funding to cities but often depend on the relationship between national and subnational governments.
  • Limited direct financial returns: From the city budget perspective, adaptation projects typically are a net expenditure with little or no associated revenue sources to offset the costs.   
    • Urban climate mitigation projects from local solar power generation to electric buses have stronger business models that make it easier to access finance.  
    • Adaptation projects tend to lack revenue-generating potential, therefore, direct financial returns are weaker. This constrains the ‘bankability’ of these projects necessitating more reliance on public finance, blended finance or innovative finance mechanisms.  
    • However, the broader economic case for adaptation projects is very strong: according to the World Bank,  every dollar invested in resilient infrastructure results in $4 in net benefits to society.     
  • Limited capacity, analytics, and planning: Many cities around the world lack local quantifiable assessments and data on climate risk and vulnerabilities and how they will evolve over time, and few have developed comprehensive adaptation plans, making it difficult to identify priorities for investment and create a pipeline of projects.  Local governments often have weak technical capacity, creating a barrier in developing bankable projects that can respond to the requirements of financial institutions. Finally, local governments are also constrained in terms of policies that constrain own-revenues while limiting their ability to seek finance.
  • Weak vertical integration: National actors are critical players in supporting cities to advance the implementation of adaptation measures and mainstreaming climate resilience into sectoral development agendas. However, limited coordination among levels of government on climate risk assessments, adaptation planning, policy formulation, and programme development, hinders the identification and strategic prioritisation of urban adaptation measures within NAPs and NDCs.

Given this critical context and the urgency of investments to support cities in confronting the rising impacts of climate change, city leaders are calling on international climate finance donors, DFIs, climate funds, and national governments to increase their support for adaptation and resilience, particularly in the Global South and for communities most impacted by the climate crisis.  It is crucial that national governments, financial institutions, and donors place greater resources and focus on urban adaptation and resilience through increased technical assistance, stronger integration at the national level, and increased financing. 

To effectively address urban climate risks and accelerate progress on urban resilience, city leaders have identified four key asks: 

1. Boost technical assistance funding to cities to assess, plan and respond to climate risks

  • Boosting technical assistance to cities on urban adaptation and resilience is one of the most impactful measures donors can take to advance overall progress on addressing climate risks. 
    • Research demonstrates that actions that can have the highest impact on strengthening urban resilience aren’t necessarily massive capital investments: technical assistance funding to cities enables them to better identify, assess, plan for, and respond to climate risks.  
    • Cities need access to dynamic, local level data on climate risks and impacts, support to develop adaptation plans and hazard risk maps, and to integrate this information in spatial planning, urban planning, sectoral plans, and risk disclosure.  National governments can help facilitate this access to data. 
    • With better data and plans, cities are better positioned to identify and prioritise policies and projects that can enhance urban resilience.  It is critical, however, that such support is delivered in direct partnership with cities who are best placed to understand their needs and challenges.
  • Technical assistance can also play a critical role in designing transformational urban policies and critical programmes to enhance resilience: for example, revamping building codes to respond to flood risk, creating water conservation programmes, or establishing early-warning systems. 
  • Cities need increased technical assistance to build their capacity to use and develop different finance mechanisms and business models and access expertise to design appropriate solutions that address their needs and are framed on short and long-term planning.   Project preparation facilities like the donor-funded City Climate Finance Gap Fund managed by the EIB and the World Bank, the C40 Cities Finance Facility and the Urban and Municipal Development Fund at the African Development Bank play a critical role in helping cities to plan and deliver capital investment projects.

2. Integrate and prioritise urban climate resilience at the national level 

  • Urban adaptation and resilience need greater focus and prioritization in the national agenda
    • National transfers are particularly important sources of adaptation project funding to cities but the efficacy of funding transfers is often dependent on the relationship between national and subnational governments, rather than on adaptation needs.    
  • There is a great opportunity for stronger integration and synergy between national-level adaptation planning, policy-making, and investments across sectoral agendas including health, urban development, environmental conservation, economic development, and poverty alleviation.  
  • Few national governments have integrated a climate lens into their budgeting process, missing an important opportunity to ensure every expenditure is aligned with the national adaptation agenda.  National Governments should integrate and mainstream adaptation and resilience considerations into all planning, policy-making, and budgeting; this holistic approach will also produce strong benefits for cities, who lie at the intersection of sectoral agendas. 
    • Governments can adopt a climate budgeting approach, as the Philippines has done, as well as allocate specific expenditures for adaptation and resilience, following the example of the State of California or the City of Boston
  • As institutions that understand the local context and can act as policymakers and market makers, national and subnational development banks have an important role to play in driving and financing urban adaptation and resilience– but this requires greater prioritisation of the urban agenda within these institutions.
  • Prioritizing urban resilience requires greater engagement and collaboration across different levels of government to develop coherent solutions to urban adaptation challenges.  Multi-level governance solutions can also be developed to strengthen the design and coordination of national adaptation programmes and sectoral initiatives.
    • As the recipients of internal climate finance from the Green Climate Fund (GCF) or the Global Environment Facility, national governments need to engage with cities and consider urban needs as they identify strategic priorities and pursue funding opportunities.  One solution is the use of non-objection letters by national governments to allow subnational governments to access GCF funds directly.
    • The Global Covenant of Mayors for Climate and Energy has developed a Multilevel Climate Action Playbook for Local and Regional Governments provides guidance for developing  an enabling environment for effective collaboration, communication and engagement to accelerate vertically integrated NDC implementation and investment plans.

3. Promote innovative finance mechanisms to respond to climate risks

  • Given the inherent challenge of developing a strong financial case for adaptation investments, a significant share of funding for major capital investments in urban areas (eg, flood defences or sea walls) will need to come from sources external to a city, including concessional and market-rate finance.  
  • Cities need more innovative finance mechanisms, creative business models,  concessional finance, and risk mitigation mechanisms to attract public and private capital for urban adaptation investments.
    • For example, cities like Freetown have developed a unique business model for its Freetown Treetown tree-planting program that builds on World Bank and philanthropic funding to create a market for reforestation and tap into corporate responsibility funding. 
    • Land value capture can be a critical means of financing infrastructure development including those that integrate nature-based solutions and resilience improvements.   
  • Concessional and blended finance mechanisms have been positively used to lower the cost of capital,  enable risk reduction in projects that do not have clear risk-return profiles or credit-worthiness, and attract private finance by enabling risk mitigation and commercial viability in the medium term.
    • For example, the Subnational Climate Fund and the International Municipal Investment Fund both provide equity finance for climate investments through public-private funds that are anchored by concessional development finance providers. 
  • Insurance mechanisms could be a potential source of funding, depending on geography, capacity, types of projects, etc.; promising research is happening in this space.

4. Give cities a voice in the adaptation agenda

  • Cites are essential actors in constraining the economic and humanitarian impacts of a changing climate.  Cities need a seat at the table to provide local perspectives on climate risks they are facing and engage in the national and intergovernmental dialogue on adaptation finance as well as loss and damage.  
  • City networks welcome the creation of the COP27 Presidency Sustainable Urban Resilience for the next-generation (SURGe) initiative as a means to elevate and prioritize the urban climate agenda.

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