Sustainable cities: for a more global and consistent approach to impact investing

This article includes some proposals from the book "Inventing sustainable cities" (Ed. Dunod, 2022), in which we review the horizons of sustainable cities and the conditions to be met to build them in a broader and more efficient way.

Cities have several sources of funding to implement and accelerate their transformation.

The first category of schemes that could finance the transition of cities is impact investing, both public and private. In the Netherlands, the government has been offering green bonds to investors in return for tax incentives since 1995. The proceeds of these bonds are used to finance green projects in the form of loans at preferential rates. The Green Funds Scheme covers the financing of wind turbines, solar cells, hydroelectricity, heat pumps or the use of waste heat for district heating. Also eligible are large-scale energy renovation projects. Since 2001, Green Funds Scheme projects have led to a reduction in CO2 emissions of an average of 0.5 million tons per year nationwide.

Similarly, for projects related to inclusiveness, social bonds can be issued and the parties (issuer and buyer) subsidized by the State if the predefined social objectives are met (for example, if the project contains a certain share of social housing, or if it effectively allows for the social inclusion of vulnerable groups).

These schemes are encouraged by the European Union. It sees this as an opportunity to finance projects that it also co-finances directly or indirectly, through funds dedicated to the energy transition, social inclusion, new mobility or climate resilience.

A third actor sometimes intervenes to co-finance impact projects within cities, alongside States or supranational institutions such as the European Union: foundations. These foundations are often American and specialize in urban issues. They finance programs related to resilience, inclusiveness or the zero-carbon city. Examples include Bloomberg Philanthropies and the Rockefeller Foundation's 100 Resilient Cities program, which has been put on hold, but which contributed to the financing of the Oasis courses in Paris.

Projects supported by public institutions or non-profit organizations are generally required to produce detailed commons and feedback. This open approach helps promote the sharing of innovative methods and tools across cities. We have seen this with the Oasis courtyard project. Although Paris was not the first city to set up such a project, the resources it was able to produce thanks to the support of the European Union (via FEDER) and the Rockefeller Foundation were very useful for other cities that subsequently embarked on a similar approach.

The cities are not left out of the financing of the transition, and intervene not only as financiers, but also as investors. Rotterdam has created its Social Impact Fund Rotterdam, which offers three types of financing depending on the maturity of the companies supported: technical assistance (in the upstream phase), seed financing and venture capital in the form of loans, equity and combinations of both. The funds consist of grants and convertible debt. They are sometimes accompanied by contracts with local authorities. The fund is managed as a cooperative, which allows for broad consultation around projects and enables the involvement of all local stakeholders. This is one of the major characteristics of this fund, which is not only open in its governance, but also local, with projects that are anchored and have measurable results.

While Paris also has a territorial investment fund designed to support innovative SMEs working in the field of energy and ecological transition, the fund is simply managed by an investor specializing in the field. This implies less consultation on investments and less coordination with city entities (to double the funds allocated with subsidies or technical assistance). The fund is also dedicated to projects applicable in large metropolises. Its scope is therefore not local, which makes impact measurement more complicated. In any case, the mandated fund measures only the return on financial investment.

However, when we talk about "impact funds", we usually mean defining and measuring impact. In this respect, it is crucial to look carefully at the criteria on which projects can be supported and monitored, in order to guarantee cities the expected return on investment. 

For public funds with impact that take into account the triple bottom line of companies: social, environmental and financial

What does the success of the companies we invest in look like, asks the Social Fund Impact in Rotterdam? Each supported company defines indicators specific to the issue it addresses, such as environmental pollution, structural unemployment or poverty. Prior to the investment, an "impact plan" is defined and validated, along with the traditional "business plan", with quantified objectives and the methodology for measuring the achievement of these objectives. A third party partner of the city, The Thrive institute, is responsible for carrying out the necessary measurements based on the impact plan. To encourage companies to reach their impact objectives, the fund has devised a performance contract that allows social entrepreneurs to be paid in proportion to the achievement of social objectives, in order to move away from a remuneration scale strictly indexed to the company's financial performance.

We see this approach as a model. We need to move towards public funds of this kind, which allow for forms of cooperation, guarantee close links with communities, are rooted in the territories, and include a substantial impact plan. It would be necessary to imagine a third-party organization on which the communities would rely, to validate the impact plan upstream and measure the impact of each company post-investment. This organization would develop a methodology that would benefit all cities and would make it possible to homogenize public impact investment practices.

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Complete book available here (in french): Inventing Sustainable Cities: Ideas and Tools to Meet Today's Challenges  (Matthieu Chéreau & Maxime Guillaud)