Cities offer cost-effective climate solutions, from cooling green corridors to mass tree planting. However, a $4.3 trillion annual funding gap remains for climate mitigation through 2030; in 2021-22, finance averaged just $831 billion. Governments, development banks and financial innovators must all help to bridge the gap.
In 2016, Medellín, Colombia, began planting trees and shrubs along 30 corridors following roads and former waterways. The network cost roughly $16 million to build, about $6.50 per resident and $625,000 a year to maintain.
By 2019, average air temperatures at the planted sites had fallen from 31.6°Celsius to 27.1°Celsius, while surface temperatures dropped from 40.5°Celsius to 30.2°Celsius. Acute respiratory infections also dropped from 160 to 95 per thousand residents.
Few climate investments deliver so much for so little. So why has capital not followed? The answer is that many cities are unable to capture the economic value their climate investments create.
Many cities are unable to capture the economic value their climate investments create.
1. Why cities are among the most cost-effective investments in climate action
Urban areas occupy around 3% of the land surface yet house more than half the world's population, a share projected to reach 70% by 2050.
Cities generate more than 80% of global output and produce over 70% of greenhouse gas emissions. Of the more than 12,000 cities with at least 50,000 residents, 96% have fewer than one million people. Most struggle to attract institutional investment.
The economics are compelling. The Coalition for Urban Transitions estimates that urban measures could reduce emissions by 90% by 2050, generating nearly $24 trillion in net present value. Annual investment of $1.8 trillion could yield $2.8 trillion in annual returns by 2030.
Investments from efficient lighting to electric transport can pay for themselves within five years. Denser development and efficient heating and cooling deliver savings over longer periods.
Climate adaptation also pays. The Global Commission on Adaptation estimates benefit-cost ratios of between 2:1 and 10:1. A World Bank study found that making infrastructure climate-resilient increases costs by just 3%, while generating $4 in benefits for every additional dollar invested.
Yet much of this economic value never translates into revenues that can repay investors.
2. Cities are delivering climate benefits but investment falls far short of what's needed
After a 2011 cloudburst caused over $910 million in damage, Copenhagen developed a 300-project green infrastructure and drainage programme. It was projected to generate DKK 5 billion ($767 million) in net benefits, outperforming conventional sewer expansion by DKK 9 billion.
Freetown has planted over a million trees since 2018. Its digitally monitored pay-to-grow model rewards residents for keeping trees alive, channels 80% of resources into communities and has created over 1,000 jobs.
Despite thousands of city-based initiatives, the money has not followed.
Cities need an estimated $4.3 trillion a year for mitigation alone through 2030, rising to more than $6 trillion thereafter. Actual urban climate finance averaged about $831 billion in 2021 and 2022, less than a fifth of the requirement.
Adaptation is further behind. Only about $10 billion a year went to urban adaptation, including $6 billion for emerging and developing economies against annual needs of $147 billion.
Across urban climate finance more broadly, international flows from developed to developing economies totaled just $12 billion, less than 2% of the global total.
Fixing the pipeline is cheap relative to the capital it unlocks.
3. 4 barriers are preventing climate finance from reaching cities
Pension funds and insurers hold vast pools of long-term capital, yet four barriers keep much of it from reaching urban climate projects.
Scale: School retrofits and bus depots rarely meet institutional investors' minimum deal sizes and few intermediaries bundle them into investible portfolios.
Preparation: Proposals often reach investors before feasibility studies are complete, revenues are clear or risks are properly allocated.
Regulatory constraint: Municipal borrowing often requires national approval, while debt caps and limited tax autonomy restrict cities' ability to raise capital.
Capacity: Green bonds require financial, legal and engineering expertise that smaller cities often lack.
4. Why urban climate infrastructure can offer attractive, long-term returns for investors
Well-structured urban infrastructure can generate predictable, long-term income, making it attractive to pension funds, insurers and other institutional investors.
Unlisted infrastructure equity has delivered income returns of roughly 4-5% a year net of costs, while offering diversification attractive to long-term investors.
Green buildings also command premiums. JLL reports rental premiums of 7.1-11.6% for green-certified offices while UBS finds price premiums of 28% in New York and 19% in London. UBS recommended discounting projected annualized returns on inefficient buildings by 1-3 percentage points through 2030 to reflect retrofitting costs.
Well-structured projects are already attracting investors. Cape Town's inaugural green bond drew ZAR 4.3 billion in bids for a ZAR 1 billion issue clearing 133 basis points above the government benchmark.
Bristol's City Leap initiative attracted over 180 expressions of interest, and aims to mobilize £1 billion in clean energy investment. It also won an international public-private partnership award in 2024.
Bogotá's first international green bond raised $600 million, with 93% of demand from global investors. The International Finance Corporation and the Development Bank of Latin America and the Caribbean were anchor investors, supporting the metro, cable cars and other clean mobility projects.
5. How governments, development banks and financial innovators can unlock urban climate investment at scale
Fixing the pipeline is cheap relative to the capital it unlocks. The City Climate Finance Gap Fund, run by the World Bank and the European Investment Bank, has approved support for more than 390 cities and aims to leverage €4 billion in urban climate investment.
The C40 Cities Finance Facility has worked with 30 cities on 38 projects projected to mobilize $1.25 billion. Against the scale of need, however, these are rounding errors. National governments give creditworthy cities greater borrowing flexibility and help them capture more of the land value generated by public investment.
Development banks can reduce investor risk through guarantees and first-loss capital, while standardized contracts can lower transaction costs across multiple projects.
Better intermediation would help too. CivicNetZero, an AI-enabled urban climate-finance platform we developed, helps cities standardize projects and connect with investors assessing portfolios. It cannot fix weak credit or poor economics but can lower the transaction costs that leave viable projects unfunded.
Cities concentrate emissions but they also offer some of the greatest opportunities to reduce them at scale. The priority now is to turn proven climate solutions into investable projects capable of attracting capital.
