How Cities Can Attract Private Finance for Climate Action
Cities around the world face a significant gap in financing the climate action necessary to meet their climate targets. According to the United Nations Framework Convention on Climate Change (UNFCCC), the private sector could provide between 70% and 90% of the total funds required globally to reach net zero. While private finance is available, accessing it can be challenging for cities. By creating strong policy signals, establishing enabling environments, developing bankable projects, and engaging early with investors, cities can unlock the private financing they need for climate action. Here’s how cities can achieve this.
Create the Fiscal Conditions for Private Capital Investment
To attract private finance, cities must establish the right fiscal conditions. This begins with building trust among investors and lenders by setting long-term targets and policies that provide a clear direction for climate action. Long-term goals and strategies—such as a Climate Action Plan and a multi-year infrastructure plan—help signal stability and commitment, which are critical for securing the long-term investments often required for urban infrastructure.
Additionally, streamlining municipal financial management is crucial for cities to access loans, bonds, and equity investments. Obtaining a strong credit rating from an external agency can significantly increase a city’s attractiveness to investors, enabling access to lower-interest financing. Even cities in economically or politically unstable countries can benefit from working towards a credit rating, as it demonstrates a commitment to financial stability and responsible management. Steps such as improving budgetary planning, enhancing revenue collection, and obtaining a shadow credit rating can help cities progress toward creditworthiness.
Implementing climate budgeting can also be an effective strategy to mainstream climate goals into the city’s financial planning. By showing clearly which actions the city will self-finance and identifying areas where private investment is needed, climate budgeting enhances transparency and builds investor confidence.
Strengthen Governance and Capacity for Private Finance
Cities must also improve their governance and internal capacity to better identify, prepare, and implement bankable climate projects. Establishing or empowering a unit with expertise in private-sector finance, often within the finance department, can serve as the focal point for managing climate investments. This unit would facilitate early engagement with private-sector partners, ensuring that climate projects meet the financial and technical requirements of private financiers.
For example, Glasgow has committed £4 million to fund a green investment team with expertise in finance, procurement, and law to strengthen its relationship with the private sector. Similarly, cities should streamline their project preparation and pipeline structuring processes, fostering collaboration between technical and financial departments. A well-managed pipeline of planned projects can engage financiers early, ensuring projects align with market expectations and priorities outlined in the city’s Climate Action Plan.
Cities like Cape Town have already implemented such approaches successfully. Cape Town published a ten-year infrastructure project pipeline valued at approximately ZAR 120 billion (US$6.7 billion), covering key areas like energy, waste management, and urban mobility, most of which are linked to the city’s Climate Action Plan. By utilizing a blended finance model, Cape Town secured significant private and international funding, demonstrating the power of a well-structured and transparent investment pipeline.
To increase transparency and build trust, cities should also implement a financial taxonomy that clarifies their definitions of climate and sustainable investments. This step can ensure that projects align with global standards, like the EU’s taxonomy for sustainable activities or guidance from the World Bank.
Work with Higher Levels of Government to Enable Private Investment
Vertical alignment between national and subnational governments is critical for cities to attract private finance. National policies often shape the legal and regulatory environment, influencing the flow of private investment at the municipal level. In some cases, cities may lack the budgetary autonomy needed to pursue private finance or issue debt. Therefore, cities should actively collaborate with national governments to seek enabling legislation, fiscal clarity, and market-access rules that facilitate the flow of private capital into urban climate projects.
Improved coordination between city and national governments can break down barriers to green finance, helping cities leverage private investment and pursue ambitious climate goals. By working towards greater fiscal autonomy and regulatory alignment, cities can create the conditions necessary for private-sector investment to flow into climate action projects.
For cities to close the financing gap for climate action, attracting private finance is essential. By creating strong policy signals, enhancing creditworthiness, building internal expertise, fostering collaboration with private financiers, and working with national governments to improve the enabling environment, cities can unlock the private capital needed to meet their climate goals. With the right strategies, cities can turn ambitious climate targets into tangible, bankable projects that attract private investment and drive meaningful action toward a sustainable future.
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