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New Models to Finance Smart City Development

Updated: Mar 1, 2019


The direction that city development takes is always strongly dependent on financing.


It will be one of the key factors that will impact cities, countries and in fact the world as we attempt to meet sustainability goals set forth by the COP21 agreement.


One financing solution that can help to deliver a cleaner future is green bonds, but they are not accessed by a lot of cities because there is a lack of understanding about how they work.  Nevertheless, there are two main reasons this form of financing is valuable for city development. The nature of this fund is targeted towards sustainable development so it can help authorities with the challenge of financing large-scale infrastructure projects for buildings, waste management, and energy production facilities. It is not only large-scale infrastructure projects that can benefit, smart ICT solutions can also be financed with green bonds as it is important to be able to finance these solutions at low cost.


Companies are becoming increasingly interested in this form of financing because it carries a guarantee that the investments have a green impact. Still, private companies are reluctant to issue green bonds. The main reason is the lack of legislation and standards to differentiate this new financing possibility from other funding possibilities.

It is important to gather knowledge around green bonds in order to make the most of their advantages.


The Nordic Smart Cities conference in Stockholm hosted the New Models to Finance your Smart City Development panel discussion in which experts offered insight on their experience working with green bonds.

Cities and private companies are pioneers in issuing green bonds which they saw as a solution to financing green services and products. The main challenge issuers had to overcome was the lack of standards and a good framework to guide them. Before being able to issue green bonds, both public authorities and companies had to work together with experts in standardisation to be able to establish the guideline for the certification process, pre-issuance requirements, post-issuance requirements and a suite of sector-specific eligibility & guidance documents.


Moreover, the need for such guidelines was expressed by investors, whose concerns about the credibility of green labelling is also growing. Standards and certification are essential and will ensure the credibility of green bonds which will in-turn lead to further market growth.


The city of Gothenburg is the first city to issue a green bond. Sara Pettersson who is Urban Development Officer in Gothenburg recognised that the biggest challenge they had to overcome was the lack of standards and a good framework to guide issuers and receivers.


The Swedish energy company, Fortum, is another pioneer in issuing green bonds, in this case for utilities. They decided to go to external markets to finance their operations after taking into consideration traditional forms of funding with finance from the Swedish Investment Bank or the European Investment Bank. Having a profile of building energy efficient and sustainable buildings meant that the company is a perfect candidate for a green bond.


The most valuable lesson that we can take from the Fortum example is that financing possibilities become numberless if the focus is put on sustainable development. What Anders Egelrud, Managing Director at Fortum Heat & Power points out is that there are many aspects that define sustainable development, therefore the need to establish guidelines for these aspects is imminent. Otherwise, nothing separates green funds from traditional funding.


Even if it’s still at an early stage, the green bonds market is growing, reaching a total of $50 billion by September 2016, keeping in mind that by 2013 only $11 billion green bonds had been issued. Green bonds have the potential to become one of the best financing solutions for sustainable development, therefore regulations are needed as quickly as possible in order to unleash their potential.


#financing

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