Ensuring sustainable places and spaces: the role of private finance in achieving SDG11

What role do investors play in the climate, regeneration and cultural heritage of our cities and communities?

The shutdown of businesses, transport systems and social activities in 2020, in response to the Coronavirus pandemic, has had another, unintended, consequence. 

“Many city residents are seeing clean air for the first time in a generation,” observes Iyad Kheirbek, the head of air quality for C40 – an initiative coordinating nearly 100 cities around the world in the fight against climate change. Recent studies show that, in the first half of 2020, nitrogen dioxide pollution over Northern China, Western Europe, and the US decreased by up to 60% compared with the same time last year. “That's quite powerful,” says Kheirbek, “and it shows that air quality can improve quickly by changing activities like traffic volume within cities.”  

Although the dip in air pollution has clear links with the temporary lockdown measures being taken globally, there are hopes that cities and communities can use this momentum to make more permanent changes, supporting the ambitions of SDG11: Make cities and human settlements inclusive, safe, resilient and sustainable.

The C40 Mayors Agenda for a Green and Just Recovery, launched in July, outlines steps to deliver a fair and sustainable recovery from COVID-19, and has secured backing from the mayors of London, Los Angeles, Berlin, New York City, Cape Town, Oslo, Vancouver, New Orleans, Durban, Pittsburgh, Milan and Bristol, as well as grassroots climate change organisation 350.org. 

But Kheirbek believes the ambitions shouldn’t sit with the public sector alone. “There's a necessary role for the private sector – cities are setting ambitious targets that will require collaboration across all public and private stakeholders,” she tells RI. “Many private companies are thinking about how they can reduce emissions from their supply chains and reduce the impacts their operations have on the communities they serve. These efforts are beneficial to the companies themselves, but also beneficial to cities they operate in.”

Around 55% of the world’s population lives in urban areas, and this is expected to increase to 68% by 2050, causing cities to swell and urban sprawl to increase, particularly in the developing world. To be beneficial in the long term, this growth needs to be environmentally, socially and economically sustainable.

Development banks have been working hard to create products that encourage institutional investors to support this mammoth challenge. The World Bank recently launched a Climate-Smart Urbanization Programme via its Climate Investment Funds, aiming to support developing cities to address everything from their carbon footprints to their exposure to physical climate risks. The fund has secured $8bn from 14 donor countries, with which it hopes to leverage $53bn in co-financing. 

It has also partnered with fellow development giant the European Investment Bank, alongside the Governments of Germany and Luxembourg and the Global Covenant of Mayors, to launch a City Climate Finance Gap Fund, which seeks to leverage €4bn of investment for cities and local governments currently unable to secure financing for climate-smart projects. The fund offers technical and advisory services to assist municipalities in creating pipelines of bankable, green projects.

SDG11 goes far beyond climate objectives, though: one of the widest-reaching of the 17 Goals, it also covers inclusive development, safe and affordable housing, disaster resilience, good quality public spaces and much more. 

“The solutions to delivering on SDG11 are interdisciplinary in nature,” says Andrew Angeli, Head of European Real Assets Research at $110bn real estate specialists CBRE Global Investors. When it comes to investing in residential real estate to support the Goal, he tells RI it’s “about improving access to safe, stable housing, primarily by constructing or preserving existing units and by regenerating and remediating underserved areas to serve those in need”.

In a research note for CBRE GI published in August,  Angeli writes: “The Covid-19 pandemic is proving transformational for real estate, in terms of how we engage with the built environment and think of sustainable financial returns. It comes at a time when systemic inequalities, injustice in society and fears of irreversible climate change are part of an ever louder global conversation”.

He tells RI that impact investing in residential real estate is one way of responding to these two developments, investing in buildings that “use less and give back more, stand the test of time and are resilient to change”.

The paper also points out the need for investors to be aware of potential regulatory risks as rulemakers move to safeguard tenants and homeowners in light of Covid-19. “One likely outcome of the current pandemic is a push for greater regulation of private rented residential accommodation to protect tenants who are at risk of eviction to no fault of their own. This could mean new terms to letting agreements or result in some form of rent control.”

Angeli believes that, in future, real estate investors – like all investors – will demand more data on how investments contribute to environmental and social objectives; and more products will come to market to cater for the growing interest in sustainability in real estate. 

CBRE GI recently launched an impact fund dedicated to housing in Europe; and it isn’t the only one. Italian asset manager and real estate investor COIMA has just raised €400m at first close for its ESG City Impact Fund,  a 20-year investment strategy aimed at urban regeneration in Italy. 

“The cornerstone sponsors were three major Italian pension funds,” explains COIMA’s Founder and CEO Manfredi Catella, who says the fund’s investments will address decarbonisation, inclusive neighbourhood, and building design in cities – as well as taking accountability and disclosure measures – and will be aligned with the guidelines of NextGenerationEU, Europe’s strategy to recover from the COVID crisis.

Catella says that it is important that real estate investors don’t simply address SDG11 by allocating capital to affordable housing. “We believe that impact investing based upon ESG targets ought to be a market standard, and should be applied to all investments,” he explains, saying that COIMA uses “elaborate quantitative scorecards” to establish metrics and targets across ‘protection’, ‘inclusion’ and ‘growth’. 

“You set the objectives before you start the acquisition, so obviously you have to assess the cost of implementing those targets,” says Catella. “But you also measure them at the end of the development, and during operation, to assess whether you have met the objectives or, if you deviated, why.”

He says that, while COIMA was the first Italian firm to receive a European Leadership Award from the US Green Building Council, and uses LEED certification on its properties, there needs to be more done to create a benchmark for socially-focused objectives in real estate. “The market is in its infancy in this regard, but it will quickly catch up,” he predicts.  

SDG11 also seeks to “strengthen efforts to protect and safeguard the world’s cultural and natural heritage” – an issue that has made global headlines in recent years. The controversial Dakota Access Pipeline in the US has been at the centre of high-profile protests by activists and Native American tribes since 2016, because developers planned to build it close to the Standing Rock Indian Reservation, threatening the community’s water supply. More recently, there has been outcry over the destruction of the 46,000-year-old Juukan Gorge caves in Western Australia, blown up by Rio Tinto in May as part of attempts to expand a mine. 

A number of investors and banks have been caught up in these scandals – both for financing the projects, and for playing a leading role in challenging the companies running them. In 2017, ING, ABN Amro, BayernLB, Nordea, BNP Paribas and the Dutch central bank DNB were among those to sell loans linked to the Dakota Access Pipeline and its parent companies because of the controversy surrounding the project. Just last month, Rio Tinto’s Chief Executive and two other senior executives resigned following pressure from investors.

“The Juukan Gorge destruction demonstrates that cultural heritage is of material significance to mining companies and their investors,” says Brynn O’Brien, Executive Director of the Australasian Centre for Corporate Responsibility, which has been coordinating investors on the response to the Juukan Caves disaster. “The iron ore that [Rio Tinto] could access by destroying those sites was calculated to be worth more than the value of their cultural heritage. But in this instance, that calculation has been totally rejected by the community, by Australian Parliament, by the media, and by the investment sector.” 

In future, investors must push companies harder to demonstrate they have engaged with communities and addressed cultural heritage before making business decisions, says O’Brien. They should enforce global standards like the UN Declaration on the Rights of Indigenous People and the UN Guiding Principles on Business and Human Rights. 

“Investors are making decisions from offices in London and New York and Sydney, and the mining industry has relied on the assumption that they aren't very interested in the day-to-day operations of iron ore mines, or very well informed about cultural heritage matters in the Pilbara, for example,” she says, adding that 2020 has seen those attitudes begin to change, with the institutional investment community working more closely with civil society to develop better understanding and monitoring of such issues.