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Green Bonds – the future for Smart City Financing?

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Starting with 2007 green bonds opened up a new way for public institutions and private companies alike to invest in green solutions. During the nine-year period since they appeared on the market, green bonds have grown exponentially with the demand for environmentally friendly and sustainable solutions to the challenges of urbanisation. Last year green bonds had a market value of $41.8 Bn and the target for 2016 is to grow to $100 Bn with a total of $46.03 Bn issued until August.

The Climate Bonds Initiative shows in a report for 2015 that almost half of the total amount issued last year went to renewable energy proceeds, this was followed by energy efficiency on which $8.2 Bn was spent. Another $9.5 Bn were invested in low carbon transport along with sustainable water proceeds and the remaining $4.9 Bn went to waste and pollution, including climate adaptation, agriculture and forestry.  Over the years this type of funding has evolved into a much more stable and trusted way of investing in climate change solutions, this has been achieved by means of regulations and transparent requirements for issuing green bonds.

If not yet a mainstream means of funding, green bonds are on track to become so, developing regulations make them trustworthy for investors and help them to lead the way towards improvements in quality of living.

Ahead of Nordic Smart Cities – The City 2.0 we conducted an exclusive speaker interview with Kaj Embrén, Senior Adviser, The South Pole Group about Green Bonds and Smart City financing.

Kaj Embrén is a Swedish sustainable development expert, he has more than 30 years experience of working in the field and is currently based in London. He has extensive knowledge of and experience in collaborating with public, private and social sector institutions across Scandinavia, Europe and globally.

How do urban planning strategies differ in industrial countries and developing countries?
Developing countries have more difficulties finding experts and competence and this is a result of the lack of education and experience. The transformation requested in this situation concerns both knowledge, skilled people and experience and can be realised by making a transfer of the three from developed countries to developing countries.

For developed countries is easier to find finance into low carbon projects to fight climate change. The decision-making process is more developed and, as an example, the Scandinavian countries have a good model for planning monopoly in the city/municipality/urban area which is a positive and well-functioning strategy tool for urban planning. It is not only a question of money, but money from funds is needed to support this kind of transfer. It would also help if local municipalities, for example from Sweden had some sort of restriction by the law to use taxpayers money for work abroad and give a certain amount outside their own community. Carbon offset programs with the offset in developing countries could attract a stronger transformation of both capital and expertise. The condition for this to happen is that the law supports this transformation by inviting local governments to work and invest in developing countries.

How can municipalities pick the most suited financing form?
More and new models for municipalities to become self-sufficient are needed. The national government would have to set the legal framework and allow municipalities to directly access green bonds and together with incentives (tax credits or other incentives) to support Green Bond development as an attractive tool for municipalities on Low Carbon Investment programs.

What are the benefits of Green Bonds over other forms of funding?
It depends from case to case because green bonds are not the only finance tool for urban investment. The need for transparency, certification and reporting is what can secure the development of green bonds. Green bonds can give a better rate, longer term conditions and with transparency, certification and reporting in place, they could be an interesting investment tool for municipalities.

So far, what are the visible effects of this type of funding?
What we can see mainly is a growing number of green bonds being issued by different entities. The main two issuers last year were the European Investment Bank and the World Bank.  When speaking about national governments Sweden, France, UK and Germany in Europe as well as China and India have each taken a step forward by engaging in dialogues with stakeholders in the climate market. In the case of private owned companies, relevant examples are Apple, Toyota, Hyundai and energy services company SolarCity have issued Green Bonds encouraging people to invest in hybrid cars and to install solar cells.

Are there any risks of environmental benefits being more message than substance?
The main threat to this being the case and is a lack of transparency, certification and reporting or rating in place. The absence of these elements increases the risk of greenwashing and in order to avoid these threads they must be clearly defined, a stable framework must be established. At the beginning of every new development you don’t have all the tools in place, they are not integrated into a legal frame, it’s voluntary then to find a legal framework which helps with transparency and you also need certification, maybe ranking and reporting which provides security for the investors as well as for decision-makers who have taken up this development so they can see and compare. This minimises the risk of greenwashing.

What would a city with a perfect quality of life look like in the future?
The concept of a sustainable city is a model for the future and it means integration of economical, social and environmental targets with zero use of fossil fuels with an enjoyable life and a low carbon footprint from each individual. There is also the need for many diverse social and cultural activities that make the city vibrant and fun.