Greener cities: Who should pay?

By Blair Seiler, Associate at Social Finance

Visitors arriving at the K‑11 shopping complex in Hong Kong are greeted with a nine-meter tall peacock statue, 70 destination restaurants, and an atrium designed to look like a galaxy. For a modern mall these features may not be surprising; but what you might not expect are 4,600 sq m of green walls, and a rooftop urban farm growing produce for the restaurants below.

K‑11’s green walls and urban farms are part of a group of tools called Nature Based Solutions (NBS). NBS use nature to address societal and environmental challenges. As NBS are integrated into urban infrastructure across the globe, K‑11 demonstrates just how much the greening of cities is becoming mainstream. NBS are used for everything from creating jobs, to social inclusion of residents, to counteracting the effects of climate change, and are an important feature of the new green economy.

The CLEVER Cities consortium is a testbed for these nature-based solutions. CLEVER (a Horizon 2020 project) uses NBS to address urban challenges and promote social inclusion in cities across Europe, South America and China. With London, Milan and Hamburg leading, an additional six cities will share expertise and learn alongside them.

Social Finance is a partner in the consortium, focused on the financing aspect. During my time working with the CLEVER cities to develop funding solutions for NBS, it has been clear that a key roadblock in increasing urban NBS is figuring out how to pay for it.

Who should pay for greening cities?

According to the Urban Nature Atlas, around 75% of NBS are funded directly through public budgets. This leaves little room for innovation in financing or to bring a diverse set of actors to the (funding) table. Why is this case?

There are a few major obstacles to funding. First, the social and environmental benefits of NBS are distributed and often toe the line between ​“public” and ​“private goods” — meaning that there is not always a single clear payer. Second, some benefits of NBS can be difficult to measure or attribute. These benefits may have long time frames or exist in complex systems (e.g. biodiversity) making them less easy to fund than other benefits. And yet, I think this is exactly why creativity in financing NBS is needed. While there may not always be a single clear payer for NBS, there are many different actors who could play a role in funding or facilitating funding for these projects. In recent years unique and multi-stakeholder financing mechanisms have cropped up, blending various funding streams to fit the specific needs of NBS projects worldwide.

Three areas where new funders and methods of funding have arisen:

1. Market-based instruments for NBS

One solution to challenges of distributed incentives / benefits are market-based instruments (MBI). Because of their ability to address these incentives, MBI will be a key channel to shifting funding from direct public funding to additional sources. For example, as part of the CLEVER project, Milan has announced €1.1 million in subsidies for green roofs. These subsidies will cover 25–35% of the cost of installation of green roofs, and will attract co-investment from businesses, public building owners and citizens. The subsidies are part of an overall strategy to increase urban nature in Milan to improve air quality, decrease water run off and enhance citizen well-being; Milan’s subsidies induce other actors to pay for these co-benefits also.

2. Equity finance for NBS

Funding of NBS has historically relied on direct and non-repayable funding sources. Equity investment in NBS has been rare and focused on private investment in a handful of commercial NBS such as sustainable forestry — which produces market rates of return while generating social and economic outcomes such as carbon sequestration, land restoration and rural job creation. Recent years have seen new approaches however. On the equity crowdfunding platform Seedrs, hundreds of citizens have financed NBS startups in exchange for equity shares: including funding a vertical gardens venture and an aquaponic farming startup. The Natural Capital Financing Facility, in pilot stage through 2021, brings together European Commission and European Investment Bank funding for equity (and debt) investment in NBS. These new players are paving the way for revenue-generating and riskier NBS ventures to access funding.

3. NBS investments to save costs

Stakeholders have shown increased willingness to invest in NBS on the basis of a cost-benefit case. These include investors, foundations, public utilities, land owners and private companies. An interesting example of this is the Goldman Sachs and Calvert Foundation investment of $25m in for flood preventing NBS in Washington D.C. — the public water authority committed to repay these investors on the basis of cost-savings if flood prevention was successful. The investment took the form of an Environmental Impact Bond, a unique financing mechanism that is set to be replicated in an even bigger investment in Buffalo, NY. In another example, the private water utility Anglian Water constructed a wetland filtration system to replace energy intensive water infrastructure. Their water filtration project shows how investing in NBS can save money for business and customers.

A new framework for NBS financing

As part of the CLEVER project, Social Finance has created a framework for financing NBS (part of ​“Governance, business, and finance models,” CLEVER Cities, 2020). Our framework explores how to build a funding structure which takes advantage of the diverse benefits of NBS and the possible stakeholders involved. We have aggregated examples and recommendations from across the globe to highlight innovations in paying for NBS.

While we have directed the framework at cities preparing to green urban areas, the increase in NBS is also being led by businesses, community groups, and developers. Our six step framework enables a new perspective on funding for a diverse range of potential funders. We hope this framework will help stakeholders to fund NBS in new ways, and bring in needed capital for the greening of cities.