Marketing communication – For professional investors only
Urbanization, aging populations, and climate change are putting pressure on cities to adapt. Why is it crucial for them to use innovative private sector investment?
The global average temperature for July 2023 was the hottest in 120,000 years, according to the European Copernicus Observatory1. Global warming amplifies extreme events – in length, intensity, and frequency – such as droughts, fires, heat waves, and floods, and it’s within cities, which are home to 55 percent of the world’s population2, where vulnerability to these events is so keenly felt.
One problem is that the minerals made to construct many cities are unfortunately very good at absorbing the heat of the sun during heatwaves, turning them into «heat islands» and causing a rise in temperature and air pollution.
Advanced Cities Are Developing Planning Tools
Researchers at the Department of Environmental Systems Sciences in Zurich have calculated that 22 percent of the world’s 500 largest cities will experience previously unknown conditions in 20503. Higher temperatures and less precipitation could be the new standard for cities in Southeast Asia, for instance3.
Transport and buildings within these urban areas are responsible for nearly 75 percent of global CO2 emissions and have a major impact on the environment4. That’s why the most advanced cities are developing planning tools and engaging both mitigation and adaptation policies.
Role to Play
Of course, these policies come with a cost attached. Yet the cost of adaptation is still much lower than the perceived cost of climate inaction and repairs, which could undermine the economy5.
Finance therefore clearly has a role to play in helping cities mitigate and adapt to the consequences of climate change. Here is an example of investment that aim to make a difference.
Financing a Transparent, Sustainable Transition
Green bonds, which differ from traditional bonds by seeking an environmental benefit, are one of the levers available to local authorities to finance the transition fossil-based systems of energy production and consumption to renewable energy sources.
The ambitious objectives of the European Union to reduce greenhouse gases (-55 percent by 2030 and carbon neutrality by 2050) fuel the objectives of green bonds to support everything from the electrification of transport to the development of renewable energies or the improvement of the energy performance of buildings6.
Financed Through Green Bonds
Local authorities have joined the ranks of green bond issuers, a market initially dominated by sovereign states, supranationals and agencies, to finance local transition policies.
To reduce urban pollution, cities encourage the development of soft mobility – cycling, walking, scooters – and public transport. In Paris, for instance, the Grand Paris Express (the Paris metro) aims to extend metro lines in the Paris region by 20307.
This project is financed in part through green bonds underwritten by sustainable investment specialist Mirova, which ensures that the money paid is well signposted to the Grand Paris Express in accordance with the Green Bond Principles. Traceability and transparency of such a green bond project also reduces any fears about «greenwashing».
Extra-close Attention
«Green bonds are a great way for investors to have transparency over their portfolio, so they can see how their money is invested from an ESG impact perspective. Moreover, we pay extra-close attention to the level of detail and transparency of the impact reporting provided for every project we consider,» Marc Briand, co-head of Fixed Income at Mirova, says.
«The bond from the Société du Grand Paris will finance the construction of four new automated metro lines, and the extension of existing lines, in addition to the construction and development of 68 new metro stations and seven technical centres. The project is expected to benefit two million passengers per day and lead to the creation of 15,000 direct jobs per year8.»
Public Policies Have a Cost
Whether it’s transforming the buildings, mobility or infrastructure, there are many levers available for the mitigation and adaptation of cities to some of the worst impacts of climate change. Moreover, public policies have a cost that sometimes requires a partnership with the private sector, in a context of high public debt and interest rate levels.
For example, innovative «blended finance» approaches use public funds or government support to encourage private investment, the result of which can finance projects or businesses that, under normal circumstances, would be considered «un-investable».
When it comes to helping cities manage climate change today, and in the future, all financial paths to progress need to be carefully considered.
Sources:
1 Le Monde
2 In 2018. (from 30 percent in 1950 to 55 percent in 2018, 2050 is forecast to be 70 percent urban.)
3 Weforum.org
4 UNEP, Cities and Climate Change
5 UN.org
6 As defined in the Green Bond Principles
7 Grand Parix express
8 Mirova Research
Written in March 2024.
Additional Notes
Marketing Communication. For professional investors only. Past performance is not indicative of future results. All investments involve risk, including the risk of capital loss. The provision of this material and/or reference to specific securities, sectors, or markets within this material does not constitute investment advice, or a recommendation or an offer to buy or to sell any security, or an offer of services. Investors should consider the investment objectives, risks and expenses of any investment carefully before investing. The analyses, opinions, and certain of the investment themes and processes referenced herein represent the views of the portfolio manager(s) as of the date indicated. These, as well as the portfolio holdings and characteristics shown, are subject to change. There can be no assurance that developments will transpire as may be forecasted in this material. In Switzerland: This material is provided by Natixis Investment Managers, Switzerland Sàrl, Rue du Vieux Collège 10, 1204 Geneva, Switzerland or its representative office in Zurich, Schweizergasse 6, 8001 Zürich.
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