Cities can play a crucial role in mitigating climate change, stimulating innovation, reducing and avoiding costs for the local government in the long term. The findings show that there is an increased appetite from institutional investors to finance urban mitigation projects, as they offer economies of scale, quantifiable results and effective opportunities for carbon reductions.
However, cities still face significant barriers when it comes to accessing the necessary finance for mitigation projects. Preliminary Climate-KIC funded studies identified several barriers to investment in urban mitigation projects. These barriers include climate change being low on the city’s agenda, lack of capacity and knowledge to report on projects in a way that is suitable for investors, lack of cooperation between public and private partners, low creditworthiness of cities and the difficulty of finding finance for soft, non-infrastructure or less-quantifiable measures that can have significant carbon reductions.
Based on this assessment, one solution stands out: the need for better presentation of city climate mitigation projects to public and private investors. There is not a lack of finance but a lack of bankable projects being presented to investors. The matchmaking facility will increase the number and quality of the projects that reach interested investors, and create a marketplace for city project data to fill knowledge gaps of what is expected both from cities and investors.
Objectives and beneficiaries
The Matchmaker project aims to reduce greenhouse gas emissions by facilitating cities to find financing to undertake transformative action on sustainable transport, renewable energy, waste management and energy efficiency activities.
CDP 2015 data shows that 38% of cities are looking for private financing for mitigation actions. By facilitating these cities to access finance, including for their most difficult projects, the matchmaker can significantly contribute to reducing GHG emissions from cities. In 2016 this project will catalyze investment flows to city mitigation projects leading to a reduction in emissions.
In 2015, 132 cities (out of 308) reported they have city-wide emissions reduction targets. While this is an important first step (researches have shown that cities with emissions reduction targets are taking on average 12 mitigation actions compared to cities without an emissions reduction target that take on average only 3.7 actions) having a target is not enough. Cities need significant (private) financing to undertake transformative action.
An initial 2011 study by Dan Hoornweg et al. estimated that the total capital cost of infrastructure investment needed to mitigate the emissions of C40 cities alone, without accounting for population growth, was approximately $3 trillion.
The Matchmaker will enable private sector investors to finance these worthy projects. By engaging investors, the Matchmaker will cut down the amount of time investors spend building and maintaining their sourcing pipeline of investment ideas, shortening the time to investment for critical projects.
Strong points of the practice
The matchmaker platform can transform the way that cities seek finance for climate mitigation projects. By harnessing data flows and making use of our networks, the Matchmaker can eliminate a major barrier keeping cities from the capital they need. This project will facilitate partnerships between cities and investors and provide—for the first time—a standardized, uniform and comparable method of presenting bankable projects to investors.
A key innovation of the project is that it addresses the challenge of financing urban climate projects by bringing together both public and private investors. Most of the initiatives tackling urban climate finance today focus on one or the other. However, these projects miss out on the potential synergies between the two funding sources. By working with both private and public investors this project can help reduce risks of creditworthiness, create partnerships between public and private investors, and enable investors to take a system-wide approach to financing urban climate mitigation.
The Matchmaker will also aim to overcome knowledge barriers both for cities and investors. It will provide cities with an overview of the different finance streams available for climate projects and the basic requirements to access these and investors with a simple overview of project pipelines.
The Matchmaker's partners will work jointly to actively connect cities and investors via a matchmaking service, and design a business model for the service that is impactful, scalable and financially viable. This work will inform the requirements for an IT platform that will be used in the future to facilitate this service.
Expected results and benefits for climate change adaptation and mitigation
Based on the assumption of 130ktCO2 emission reduction per project, the Matchmaker aims to enable 100 projects to receive funding through the platform, totaling 13 MtCO2 saved in the next 4 years.
By 2025, Climate-KIC expects an aggregated total of 500 projects to have been funded through the Matchmaker, equaling to 65 MtCO2 saved. In the first year of 2016 the project will make 15 climate project available via the service to investors. In later stages the Matchmaker will also include adaptation projects.
Replicability potential of the practice
Replicability and scalability is at the heart of this practice. The Matchmaker aims to create a platform enabling cities with various context and capabilities. The pilot projects used to test the matchmaking service with private and public investors will be selected with the aim of having a geographic spread and including projects that might not be ‘easy-wins’ to prove the additionality of this facility. To test their attractiveness to public and private investors, at least one of the test projects should include one or more of the following characteristics to ensure additionality of the matchmaking service:
• A project that partners public and private investors via guarantees or other risk reduction mechanisms
• City projects with low creditworthiness or lack of track record to start a discussion with investors on what is needed to make investment attractive
• City without strong public commitments on climate change to show advantage of adding climate components to existing efforts to attract finance
• Smaller projects aggregated into one project for investors to engage with
• Project in a very early stage to partner with investors
If the 15 test projects include the characteristics above and are from different geographies, the replicability of the financing mechanism will be tested and adjusted to ensure additionality of the project.
[Editor's Note: All information published as submitted by the author(s). Minor edits may have been made to increase readability and understanding.]