How can climate finance be mobilised to promote low-carbon and climate-resilient development pathways of local governments?

Cities have a key role to play in shaping a low-carbon and climate-resilient future. Already today half of the global population live in cities, accounting for up to 70 % of global CO2 emissions. Therefore, cities will need to scale up investments and define new policies or improve on existing ones in the areas of climate mitigation and resilience (adaptation). This project provided support to the French Development Agency (AFD) by assessing the potential and readiness of local financial institutions (LFIs) to play a role as intermediaries or direct providers of financing for legitimate climate resilient and low-carbon urban investments, as well as the necessary enabling environment and conditions for LFIs.

The key findings of this project can be summarised as follows:

  1. There is a lack of measurement of municipal capital expenditure (overall) and climate-related expenditure at a municipal level which is a major impediment to effective mobilisation of LFIs;
  2. The involvement of LFIs to finance municipal climate projects depend on the strength of the (local) banking and financial sector, the degree of decentralisation and creditworthiness of the local government sector, the extent to which climate action is a genuine priority of the national government and the extent to which climate projects are financially attractive for LFIs and investors;
  3. The market for climate bonds is gradually emerging, which is an interesting new source of climate finance for municipalities if they are big and creditworthy enough, if there is a sufficiently developed domestic bond market and when the central/national government authorises municipalities to tap the bond markets.