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Delivering net zero carbon places through blended finance

The Connected Places Catapult hosts regular events that share the latest research and insight about sustainability in transport, the built environment and places. The event on Thursday 21 October looked at the case for blended finance to deliver net zero investment at the level of places, particularly neighbourhoods and districts.

The recorded event is available on Youtube (lasts ~1h30 minutes).

If one should summarise the event in a single statement, it would be: place-based delivery through blended finance.

For the longer script, I share the following notes and additional leads.

The event formally marked the release of the City Investment Analysis Report by the UK Cities Climate Investment Commission (UK CCIC), “a partnership between Connected Places Catapult, Core Cities and London Councils, that adopts a novel approach to addressing the challenge of financing Net Zero in major cities across the UK”. Bankers Without Boundaries and Eunomia are key partners.

Rufus Grantham of Bankers Without Boundaries shared the highlights from the report.

In a nutshell, the report makes the compelling case for a local, place-based delivery of net zero carbon efficiency fueled by blended public-private finance. A key challenge for the just net zero transition is not to excessively burden taxpayers, tenants or landlords. This is why private finance at the individual level can only go so far, and is rather difficult to incentivise. Instead, blended finance should target neighbourhood-wide retrofits to deliver low but stable returns in the long-term, with the great added value of multiple co-benefits that arise from future-proofing neighbourhoods, among which reduced costs in public health, greater well-being and productivity, reduced home energy costs, and so on.

The report focuses on six interlocking areas of intervention, namely:

1. Deep building retrofits (not that economically attractive)
2. Renewable energies and heat generation and storage (the most economically attractive!)
3. Smart mobility
4. Community assets
5. Waste management
6. Green infrastructure (the lowest ROI, but a large value in terms of co-benefits)

Blended public-private finance would have to comprise both repayable and non-repayable capital that would both deliver impactful cross-sectoral co-benefits at the level of neighbourhoods. In terms of repayable capital, place-based decarbonisation could attract pension fund investment as they value long-term returns. Pension fund capital in the UK, for instance, manages £2.5 trillion of assets. There are also opportunities for community investment. In terms of non-repayable capital, traditional government grants and subsidies for energy-efficient retrofits, economic recovery funds, green infrastructure and transportation can all add up, and be coupled with preventative public health funding to reduce the financial strain on the NHS thanks to the resulting co-benefits in terms of quality of life and well-being. Additionally,

In all, the approach would benefit from the creation of a central national agency or body that could help coordinate local endeavours as well as provide expert support at little cost to local authorities and other stakeholders. A series of demonstrator programmes characterised by a ‘learning by doing’ innovation methodology would particularly demonstrate the value of and build capacity for neighbourhood-wide net zero retrofits and the associated interlocking benefits. The demonstrators would provide a blueprint for replicability, and be initially kickstarted with the help of public funding.

The presentation of the report was followed by individual presentations and panel discussion by other high-level participants: Marvin Rees (Mayor of Bristol), Bruce Katz (Co-founder of The New Localism in the USA), Keith Bottomley (Vice-Chair of City London Corporation), and Liz Pearce (distinguished expert in the property sector at Connected Places).

On the property side, many large real estate players see decarbonisation no longer as a competitive advantage but as a competitive requirement. Even before the 2009 economic crunch, well-performing buildings were seen as more sound assets, with owners and tenants alike struggling to attract ‘talent’ to dirty old buildings – with lots of embedded carbon in them, which means they cannot be simply demolished without forethought. However, Liz Pearce indicated many owners simply do not have the means to refurbish old, poorly-performing buildings.The sacrosanct Landlord-Tenant law may also lead to ‘split incentives‘, whereby investments made by property owners would largely benefit tenants who would pay less in energy bills. Given that about 50% of occupiers of commercial real estate are tenants, this is a real issue. And then there are also real estate owner that either don’t know about the case for decarbonisation, or simply don’t care, which is ‘worrying’. As properties below EPC rating B will not be able to be let by 2030, owners have to start planning for retrofits now, considering also refurbishment works might require tenants to vacate, for example at the end of a rental agreement. Given the current push from legislation, ‘old dirty’ buildings will become both a liability and a cost going forward.

Discussing the role of city and metropolitan authorities across the Atlantic, Bruce Katz highlighted pending challenges in bridging US federal objectives of ‘building back better’ with local capacity. Essentially, federal and local government follow very different logics in terms of organisation, programme sequencing, requirements, delivery channels, and so on. While federal government tends to be more siloed, cities and metropolitan governments are more collaborative and cross-sectoral in their approach. Federal and local just ‘don’t speak the same language, at all’ and don’t operate in the same way. At the same time, there has been a crisis in local delivery since the 1980s. Apart from leading metros like New York City that display a high capacity in terms of local government and corporate and philanthropic activity, the conversation must focus on how smaller cities, towns and metros can build capacity toward deep decarbonisation. Individual cities cannot figure it out on their own. Instead, a national intermediary could act on their behalf to work directly with utilities and financiers and help build capacity at scale across the country. The years immediately ahead will likely see a burst in institutional and financial innovation to enable collective city action.

Regarding the UK Financial and Professional Services industry, and particularly the City of London Corporation’s partnership with the UK Cities Climate Investment Commission, Keith Bottomley shared the vital role which local hubs play in leveraging tailored approaches to work with the existing strengths of regional economies. Particularly, local support can help embed skills locally and align investment with much-needed infrastructure. The capacity to move capital to invest in cross-sectoral decarbonisation will also rely on new financial instruments such as a price-based mechanism for nature-based solutions (NBS). The required scale of investment is ‘eye-watering’: £500 billion for the Core Cities and London alone. Investment will help support local businesses active in decarbonisation and sustainable growth.

At the city level, Marvin Rees shared the socio-economic and political opportunities and constraints for cities such as Bristol have in delivering net zero locally. In particular, the poorest and most vulnerable should not end up paying the highest price for the net zero transition, at the risk of creating a political backlash against political programmes for decarbonisation. As highlighted in the UK Cities CIC report, the pathway to net zero should be about a just transition. The capacity to tackle poverty is both a moral and political imperative for local authorities. There are clear constraints in terms of local government capacity, such as compromises between paying expensive consultants and repairing potholes and maintaining high quality public parks. Local councils also need to adopt the skills in-house to deliver decarbonisation locally. Going forward, a national intermediary, as highlighted in the report and by Bruce Katz, would particularly help in facilitating local actions. Therefore, the decarbonisation stimulus cannot simply be top-down from central government, but instead empower local authorities through the right structures that would provide a pooled resource of skills, expert staff and guidance at low cost for all local authorities across the country. As council taxes may be rising, taxpayers should not feeling they are bearing the full burden of the net zero transition.

A case in point – the Sneinton area in Nottingham.

A case I came across in my own research is the district-wide retrofit of the Sneinton area in Nottingham. The approach featured successive rounds of demonstrator programmes and progressive upscaling of cumulative experience in the form of social housing retrofits, innovative district heating, and local supply chain maturation across the construction sector to deliver on the retrofit programmes. It required substantial coordination of efforts and blended funding applications from national and European grants on the part of project leads at Nottingham City Homes (ALMO for the city council). The housing provider worked in close collaboration with the city council, local trades, and other stakeholders, not least of which social housing residents. The retrofit methodology and business model originated in the Energiesprong approach, a European-wide affordable retrofit approach aiming at high replicability, customisation, building performance guarantee, and economies of scale, which was initially kickstarted by the Dutch government. The approach has led to the upscaling of the experience in other parts of the city as well. It does display all of the components of blended finance and demonstrator exemplarity discussed during the event, but it is as good as it gets, given all the hard work and initiative in particular on the part of Nottingham City Homes in partnership with local stakeholders.

A key phase of the district-wide retrofit was the REMOURBAN neighbourhood-wide demonstrator project, which you can read about here for the Nottingham demonstrator:

Ianakiev, A. (2020). Retrofit social housing report: Better homes improve lives. Retrieved from Nottingham: http://irep.ntu.ac.uk/id/eprint/42131/1/1404742_Ianakiev.pdf

A personal reflection

A personal insight I gather from Nottingham City Homes’ efforts to future proof its housing stock, is the tenacious efforts at securing project-based funding every other year or so, from various rounds of central government grant applications as well as multiple different EU project-based funds. This, in my view, illustrates the current predicament of local net zero pathways, with the long-term ambition of becoming sustainable faced with the short-termism of demonstrator projects, that somehow seek to leverage long-term socio-economic and environmental impacts.

Although single demonstrator projects are indeed needed to make the business and financial case for replication and upscaling, it is promising to see new opportunities for more massive blended finance to support local initiatives beyond single projects. The net zero revolution, I reckon, will not be ‘projectified’.

Forthcoming events by Connected Places Catapult

·         28th October – Virtual Connections Café: A journey to Net Zero

·         3rd Nov – Investing to Achieve Net Zero

·         5th Nov – Addressing Net-Zero Challenges: UK-Sao Paulo-Latin America Partnership

·         11th Nov – Enabling Net Zero Investment

·         24th Nov – Innovation procurement to unlock the Net Zero opportunity for housing retrofit

Related Resources

In the housing sector, related reports the EIT Climate-KIC White Paper: How Blended Finance can Catalyse Building Renovation, and the Scottish Zero Emissions Social Housing Taskforce report (August 2021).

You can also catch up with the Connected Places Catapult’s recorded events on their Youtube channel.

Of particular relevance here, you can watch the recorded launch of the UK Cities Climate Investment Commission (23 July 2021).