Financing Green Resilient Urban Infrastructure

BY JULIA AMBROSANO

Opportunities in integrating climate mitigation and adaptation and resilience criteria into mainstream infrastructure planning.

Failure to incorporate climate change impacts into infrastructure planning presents serious economic risks at national and project levels. For long-term investments, climate impact can easily translate to financial losses, so when we talk about green finance, we see an opportunity to mitigate financial risks.

Integrating climate mitigation resilience and adaptation criteria into conventional infrastructure planning can create financial opportunities to project developers by offering investors financial risk reductions.

If I’m delivering a project in an area I know will have a change in precipitation patterns that will have a cost of the appreciation of my assets, I will be offering a greater risk to my investors who consider the climatic factor crucial for making decisions. So there is also an opportunity to reduce risks and attract a new pool of investors through green finance—those looking exclusively for green-aligned investments.

So, the question is: What is green? What is climate risk infrastructure that can be financed via green bonds at a city level? Sectors with great potential for green investments generate a high impact on the urban infrastructure, which is a substantial part of the portfolio of public authorities: low-carbon transportation, water infrastructure, waste management, buildings, energy, and industrial efficiency.

The U.S. has one of the largest green bonds markets, led by muni-bonds and climatealigned issuers like the New York MTA and the California Control of Pollution Control Financing.

In general, the greenness of a project is based on two components: climate mitigation and climate adaptation and resilience. For climate mitigation, your project first needs to demonstrate that it is aligned with the net-zero emissions trajectory until 2050. For water, the project must decrease or not increase emissions over its operational life. For transportation, it must be zero carbon.

We also have the adaptation and resilience component, which is investments that improve the ability of assets and systems to persist and adapt in the face of climate-related stresses in a way that reduces risk and creates benefits to the broader system. The investment can be either asset-focused, when it ensures that the asset or activity performance fits the purpose over its lifespan, or system-focused, when it delivers climate resilience benefits to the broader system.

Accessing green finance depends on the regulatory framework of the country where the infrastructure is located. It also depends on how stakeholders access capital markets. This is an important reminder because before any green bond is green, it is a bond, which has an extra layer of labeling to safeguard investors from green-washing.

I mentioned how in the U.S., muni-bonds are scaling up the green bond market and green climate-resilient infrastructure. But in Brazil, municipalities have some regulatory hurdles, so using loans in partnerships with private market actors is critical to financing local infrastructure development. Things will be different in other markets, yet there are key players who can access investment opportunities in the infrastructure market.

For example, financial entities can integrate green investments to a larger share of the operations, benefiting from aggregating loan portfolios of green projects or green sectors or providing loans. This is known as green tagging. Then they can refinance their aggregated green portfolio in the green bond market to expand their credit capacity, ultimately benefiting municipalities and other public sector borrowers.

We have financial institutions that are extremely relevant to implementing green infrastructure projects. They have mandates to support developing countries, and these mechanisms are becoming ESG-aligned, including credit enhancement, risk reduction, collaterals, anchor investments, and others.

Another key actor is private companies involved in public-private partnership structures to manage, deliver, or maintain the urban infrastructure. In many countries, these structures have been the primary model for delivering urban infrastructure.

It is important to note that these projects can come from public planning, so public municipal authorities need to be aware of how to plan climate-resilient infrastructure and offer private stakeholders the opportunity to access green financing through the delivery of these projects.

We also have the local public authorities that can directly access green capital markets. For example, Massachusetts completed its successful green issuance in 2013—a $100 million deal whose proceeds were used for clean drinking water projects, energy efficiency, river revitalization, habitat restoration, and others. The success led the state to pursue a larger program in 2014 and beyond.

There is a lot to learn from Massachusetts because it was offering green and non-green bonds at the same time with the same rating. In some ways, the state had an even easier time marketing the green bonds because they could tell potential investors a more persuasive story about the impact.

Another example is the DC Water and Sewer Authority, which issued a green bond for the Clean Rivers Project. The deal was oversubscribed multiple times.

Green capital has a large demand from investors that hasn’t yet been met. Integrating climate mitigation and adaptation and resilience components to projects and assets can yield positive financial outcomes for developers, issuers, and, most importantly, investors.

Julia Ambrosano

Infrastructure Manager, Climate Bonds Initiative

São Paulo, Brazil

As Infrastructure Manager for CBI, Julia Ambrosano leads the infrastructure agenda and efforts to drive the development of a Brazilian green finance market. She manages a number of programs for leveraging financial instruments for climate risk mitigation through technical assistance, public policy, and capacity programs.