From sustainable city to sustainable performance

Case study From sustainable city to sustainable performance

Case study designed and implemented by the CCMP (Centrale de Cas et de Médias Pédagogiques), Stéphanie CHASSERIO, Human Resource Management Professor at Skema Business School and Constantin ERODIADES, Strategic Management Professor at Skema Business School

Centrale de Cas et de Médias Pédagogiques 81, avenue de la République 75543 Paris Cedex 11 - +33 1 49 23 57 24 http://www.ccmp.fr Leading Francophone case study publisher The CCMP publishes and distributes online academic products and enterprise cases for business schools, universities and enterprises.

Source: Société Générale

2 © 2012 – Case study designed and implemented by the CCMP, one of the Paris’ Chamber of Commerce and Industry’s services, Stéphanie CHASSERIO, Human Resource and Management Professor at Skema Business School and Constantin ERODIADES, Strategy Management Professor and CCMP editor

Forward This case’s objective is threefold:

1. First of all to provide the necessary theoretical knowledge in order to understand the complex problems sustainable cities present,

2. Then, to illustrate the situation via actions and completions in sustainable cities throughout the world,

3. Lastly, and most importantly, to generate original project plans from the case study readers as their response to one or more of the questions raised in the case.

Projects put forward must create value and be in line with Corporate Social Responsibility. They must include an environmental section, a human section and an economic section.

Furthermore, they must involve all sustainable city matter stakeholders, and in particular the financial community. For the latter, it would be preferable if in your project you were to suggest new techniques and new banking services to face the different problems raised by sustainable cities.


Case questions

Question n°1

Upon reading the case, which are the issues you feel are essential to the development of sustainable cities?

(2 points)

Question n°2

A corporate project is on the whole a person, or a group of people’s, response to an identified need. Within the context of a sustainable city, which corporate project would you suggest in order to meet the players’ needs? You will need to offer precise solutions with regards to the selected activities, to your client value offer, to the resources and competences required, and to achieving your business model. The main criteria to decide between the different projects put forward are:

• The concrete aspect of the project (we will favour a specific city or district context, with the problems it raises),

• The project feasibility,

• The innovative and original aspect of your plan,

• Taking into account negative externalities and your project’s positive input using a systems approach.

(10 points)

Question n°3

Identify the stakeholders concerned by your project and for each their specific expectations.

(2 points)

Question n°4

You will need to request bank support in order to implement your project. In order to best assess the risks involved, your bank manager asks for your business plan.

(3 points)

Question n°5

You are a bank manager. In view of financing a sustainable city project, which traditional investment project evaluation criteria would you maintain in your analytical grid, and which new criteria would you add?

(3 points)


Case contents

I. Definition of a sustainable city .......................................................................... 5

II. Fundamental theoretical knowledge in order to approach the complex issue of sustainable cities .......................................................................................... 6

A. Systems principles as applied to sustainable cities ........................................... 6

B. Stakeholders and sustainable cities .................................................................. 7

C. Externality theory applied to sustainable cities ................................................ 8

D. Economics of function and sustainable cities .................................................... 9

III. Illustration of the different issues raised by sustainable cities ....................... 10

A. City centrality in the world’s social and economic system .............................. 10

B. City model plurality ........................................................ Erreur ! Signet non défini.

C. Sustainable city challenges ............................................ Erreur ! Signet non défini.

D. The relationship between “city” and “sustainable”: ratio between positive input and negative externalities .............................................................................. 11

E. Recurring city issues ...................................................... Erreur ! Signet non défini.

IV. Financing a sustainable city ........................................... Erreur ! Signet non défini.

A. The different stakeholders in sustainable city financing ................................. 16

B. Possible sources of finance: tools and situations ............................................ 17

C. Role and position of commercial banks in sustainable cities ........................... 18

D. Project evaluation method .............................................................................. 18


I. Definition of a sustainable city

There are multiple ways of defining a sustainable city. Indeed, sustainable towns and cities may be viewed differently, and the approaches may vary according to the culture, to the level of economic development, and to the geographical specificities of the city. Due to their density, sustainable cities considerably impact the environment, the need for resources, and the management of human-nature interactions. All sustainable city projects come within the framework of a sustainable development approach that takes 3 aspects into consideration: economic, societal and environmental. The main quality a sustainable city can have is coherence between the problems, the objectives and the solutions.

Despite their diversity, on the whole, sustainable cities give themselves six strategic objectives to achieve:

1. Preserve and sustainably manage the planet’s resources

Since natural resources (water, fossil energies, raw materials, biodiversity, etc.) are limited, and hence exhaustible, sustainable cities seek to preserve them and manage them sustainably.

2. Improve the quality of the environment

The goal of sustainable cities is to have a neutral impact on the environment. This implies improving insulation in building design for example, as well as greater restraint in the use of energy, ultimately aiming to reduce greenhouse gas emissions. The management both of the impact upon air and of waste and water requirements is also an important factor. The same is true for urban and peri-urban transport and their impact on the greenhouse gas effect and global warming. This also requires an organisation that is adapted to urban waste collection, sorting and valorisation.

3. Respect and integrate the diversity of city dwellers

We are seeking to create a lifestyle that offers a space for the city’s inhabitants and for their diversity, whatever their culture or wealth. Thus, for example, the quality and low energy consumption new buildings must be affordable, even for lower income earners. This is why, and in order to render such properties available to all, overall prices will need to be applied. The higher acquisition price will be offset by lower energy consumption during the building's life span. This contributes to social equality. Similarly, it is advisable to respect inhabitants’ cultures (customary and religious practices, access to culture and to cultural sites, everyday household habits).

4. Implement a balanced urban layout

For years, the urban model has consisted in developing suburbia on the outskirts of large towns: urban spreading. The further you are from the cities’ historical centres, the lower the building inhabitation density on the whole. Considering the number of detached houses and the construction of road infrastructures and communication networks, this type of urbanisation takes up more surface area than town-centre housing. But beyond the wiping out of millions of acres of agricultural-land in the past decades, this urbanisation model raises other issues such as the lack of social diversity for example. Indeed, on the one hand we have housing estates with people of similar incomes, and on the other hand we have housing in the form of high buildings for lower income earners.


Suburbs have also become bedrooms suburbs that cause daily commuting with greater transport time and lack of inhabitant comfort as a consequence. Lastly, the increased use of individual cars for travelling from home to work and back is both a source of pollution and a waste of energy.

Conversely, sustainable cities favour a reasonably dense and controlled urban model aiming to optimise space and movement. Public spaces (pedestrian areas, utilities, public gardens) are more present and easily accessible. Greater urban densification facilitates moving around on foot or by bicycle, and renders the public transport network more efficient.

5. Create an active and participative democracy where decision making is concerned

Sustainable cities require stakeholder consultation and player cooperation, since the issues are transversal. For such a project to be efficient, it needs to be managed with a common vision, and the information and concerted actions must be shared.

6. Work towards the attractiveness and economic development of the relevant geographical zone

This is to enable the establishing of lasting companies inside sustainable cities in order to move towards a better integration of the population via job offers close to home and to favour the presence of socially responsible enterprises. This encompasses companies whose strategies include objectives that respect the environment and favour social integration.

II. Fundamental theoretical knowledge in order to approach the complex issue of sustainable cities

A. Systems principles as applied to sustainable cities

A sustainable city is an overall system that includes three large sub-systems: environmental, economic and social.

The fundamental principles of the systems theory apply to the urban system economy. The sustainable city project must therefore take the following systems theory principles into account:

• The more we try to adapt subsystems to their environments’ specific constraints, the more we will differentiate them. However, the greater the differentiation, the more we need to swap information and coordinate between the different subsystems.

• The efficiency of an overall system is due more to the coherence between the three subsystems than to the quality of each subsystem when viewed independently.

• The subsystems interact. This means that any evolution of one will influence the others.

• The subsystems do not change at the same rate, and do not evolve in the same time-space. This is why it is necessary to anticipate certain changes.


• Contingency is the underlying rule of urban systems. As such, there is not a unique sustainable city model, there are urban projects that are adapted to their specific environments’ and sub-environments’ requirements.

B. Stakeholders and sustainable cities

In 1984, R.E Freeman defined the stakeholders as “any group or individual able to influence or be affected by the objectives of a project put forward by an organisation”. Thus, following on from the work on Corporate Social Responsibility (CSR) carried out in the United States in the ‘80s, and with a pragmatic concern, we briefly asked ourselves towards whom or what is CSR exercised. In fact, the integration of stakeholders approach seeks to account for the relationship between the project holders and the different categories of players that may be impacted by such a project and who could threaten its completion and influence its level of performance.

The decision making model that takes into account stakeholders, offers the four following propositions:

1. With the prospect of an open project, the decider’s thought process includes a relations environment where the different partners have requests, implicit or explicit identifiable preferences with regards to the project.

2. All the stakeholders cannot influence the decision-maker in the same manner. Since the decision-maker cannot meet all the requests, he or she must select those deemed a priority to respond to.

3. Demands that may slow or prevent the completion of the project will be considered a priority.

4. Deciding is arbitrating on the one hand between contradictory stakeholder requests, and on the other hand between their levels of influence with regards to the project’s success.

In this context of a managerial approach that takes into account the stakeholders, it is essential to go beyond the influence and simple battle of wills aspect, and to adopt a more dynamic attitude towards collective action. It is a matter of using this plurality of relations system in order to draw out knowledge, expertise, and information with regards to the individual and collective interests of the stakeholders, thus building reciprocal interactions that highlight a wider view of the reality itself.

For sustainable cities, stakeholder consultation is necessary in order to come to decisions and to co-construct a strategy for sustainable urban development.

This consultation will encourage the stakeholders’ different points of view to be expressed. It is a voluntary process where everyone’s points of view can be expressed in the form of analyses, critiques and proposals. This type of exchange displays cooperation dynamics, but is not necessarily seeking a consensus. The prevailing logic of such a consultation demonstrates the evolution from confrontation to collective construction.


Concretely, we are calling upon stakeholders’ intelligent reflexes rather than feelings of frustration and rejection. The end goal is to enrich decisions thanks to the dialogue and to support the legitimacy of urban projects. Paradoxically, such consultations enable both greater efficiency and time saving, contrary to what one might assume initially. Indeed, when the consultation method is clear, stated and shared, the project moves forward rapidly. For example, many Brazilian towns thus use the Participatory Budgeting System, a direct, democratic and voluntary process via which the populations are given the opportunity to discuss and decide the budget and local policies.

In sustainable city projects, the project initiator will necessarily generate externalities that will need assessing and controlling. In the management of the project, attention must always be paid to the balance between the economic and financial objectives, and the internalising of social and environmental externalities.

C. Externality theory applied to sustainable cities

An externality is the effect a transaction may have on a third party that is not involved in the transaction. An externality is said to be positive when a party is favoured by the action without being made to pay. Conversely, an externality is said to be negative when a party is put at a disadvantage by the action without receiving any compensation.

Externality is an interesting concept for economists working on issues to do with pollution, sustainable development and thus sustainable cities. Indeed, faced with the lapses in the neoclassical market theory with regards to environmental issues, taking externalities into account by internalising1 them, enables answers to this type of question.

To correct the effect of an externality, there are two main options:

1. An exchange between stakeholders

Discussions between impacted stakeholders can provide a satisfactory solution to the externality. However, for a solution to be possible, it is necessary on the one hand that the rights of one of the parties be recognised by the other party, and on the other hand that the cost of the transaction remains acceptable. For example, for pollution, the cost of the overall transaction includes the investigation costs (who is polluting?), the negotiation costs (come to an agreement) and the execution costs (ensure the agreement is implemented).

2. Public authority intervention

When discussions between parties are difficult, ineffective or impossible, and are so for reasons to do with goodwill or negotiation techniques, Public Authorities may need to intervene, and this can be twofold:

• Via taxing,

• Standards that can set maximum limits, such as the amount of CO2/km per vehicle, or minimum limits, such as the number of national dramas to be shown on

1 Internalisation consists in the enterprise taking into account the externalities, and if possible their processing and valorisation by, for example, collecting the effluent heat and using it to heat collective buildings.


a television channel. The standard may go hand in hand with quotas that are exchangeable between the different players concerned by an externality. Thus, in terms of pollution, pollution quotas (the right to pollute) have enabled the setting up of a demand/offer system and to impose sanctions on those that exceed the standard. Those that pollute more than expected buy rights to pollute from those who pollute less than the norm. The monetisation of externalities then becomes effective since the less righteous pay the more righteous for pollution.

D. Economics of function and sustainable cities

The awareness that we are living in a world where natural resources are not unlimited is forcing us to review a share of our consumption. Faced with this fact, the answer that arose in the early 2000s was coined “Economics of function”. It seeks to sell the function an object fulfils, as opposed to the object itself. It gives an original form of both taking into account resource limits and the optimisation of them.

Compared to traditional economy, which advocates stock accumulation (be it capital, production factors, or goods), economics of function thinks in terms of flow. In this paradigm, the seller rationalises the product upstream and optimises the use of resources, thus reducing its environmental impact. Since the seller remains the product’s owner throughout its lifespan, downstream his objective interest is to reduce operational costs.

Within the context of sustainable cities, and where urban mobility is concerned in particular, the economics of function and anti-pollution measures (it is interesting to see that currently in Europe over 250 towns and cities do not allow polluting vehicles into their town centres) impact both urban mobility and the financing of it. The bank manager’s role could thus evolve from that of being a financial intermediary, to being the one offering transport solutions. With this in mind, several questions concerning the evolution of bank managers’ roles with regards to urban mobility deserve to be considered:

• What is the future of individual vehicle financing for inter-urban movement? For individuals, should one be selling a rental service or financing an acquisition?

• Faced with environmental issues and fiscal constraints, will enterprise fleets continue to develop?

• To initiate progressively replacing current thermic motors (petrol or diesel) by cleaner motors that are more expensive to buy but less expensive to use, will banks not need to invoice an “all-inclusive” service in the form of a rental per kilometre travelled?

• What type of financing will be needed for electric-vehicle battery recharge infrastructures?

• Are organising the common use of vehicles (car sharing) and the optimisation of the use of fleets not part of a bank’s intermediation role?

The same reasoning can be applied to other key sustainable city issues such as habitat, water, energy and waste management, with of course that constant underlying attention to quality of life and individuals’ wellbeing.


III. Illustration of the different issues raised by sustainable cities

A. City centrality in the world’s social and economic system

Over half the world population now lives in towns and cities. This urbanisation movement is ever increasing. Indeed, forecasts indicate that this figure could increase to 70% of the population around 20502, i.e. one third of the world population will be urban. Thus, cities in developing countries are experiencing huge development in very short lapses of time (such as Africa with Lagos in Nigeria or Mumbai in India). Conversely, certain towns, and in particular in Western countries, are experiencing considerable population declines. This can also be observed in the United States in cities such as Detroit or Cleveland, or even until not too long ago in Malmö, Sweden. Cities are now living ecosystems, with permanent movement and constant transformations.

Both international organisations and governments now unanimously consider cities to be inevitable players in thought processes to do with both the future management of populations and the future of the planet. Indeed, large towns and cities have always been economic growth drivers, technological innovation centres and places where social and cultural changes occuri. More often than not, they are places for innovation and change. The concentration of individuals in a relatively small space favours social interaction. But this does not go without its share of negative externalities.

Cities, and the urban systems in which they are and grow, are characterised by the huge diversity of urban layouts.

B. City model plurality

One must bear in mind that there is not a single city model, in fact quite the opposite. Plurality and diversity are truly a rule in the matter. Different urban systems, and hence city layouts, are taken into consideration according to the cultural, economic and social context:

• Megalopolises and small to medium cities,

• Towns and cities in developed countries, versus those in emerging and developing countries,

• Growing and declining cities,

• City structure itself, vertical ones (Hong-Kong or New York) and horizontal ones (Los Angeles).

Thus each city has different characteristics and therefore different issues. Hence, one must approach city issues – and in particular sustainable city issues – individually, case-by-case. The system analysis and understanding and solution formulation must be in line with the city’s concrete reality.

C. Sustainable city challenges

2 World urbanization prospects: The 2009 Revision, United Nations, Department of Economic and Social Affairs, Population division. http://esa.un.org/unpd/wup/Documents/WUP2009_Highlights_Final.pdf


Considering how central cities are nowadays in the organisation of human societies, we cannot neglect the possible role and actions of cities in the overall sustainable development thought process.

Many international organisations ((UN-Habitat3, World Bank4, Clinton Climate Initiative5)) and groups of cities (C40 Cities Climate Leadership Group6, ICLEI7 – Local governments for sustainability) throughout the world now join forces to share their practices and promote actions in order for cities to become sustainable, or at least attempt to fulfil the three sustainable development requirements, i.e. economic growth, equality and respect for the environment. It is therefore cities’ missions, as economic drivers, to promote their economic development in order to ensure ever increasing quality of life for their populations while ensuring that such development takes into account social diversity as well as the ecological and environmental dimension.

D. The relationship between “city” and “sustainable”: ratio between positive input and negative externalities

A city cannot be sustainable just via the essence of itii. Indeed, because of resource consumption due to the high human concentration, cities will draw upon their territories’ natural resources and will also go and seek resources elsewhere, those that cannot be found on their own territories. Whatever happens, a city marks its territory, uses resources and transforms them. Of course, this contributes to its economic activity, to the population’s wellbeing, but these actions have consequences on the environment amongst other things. Indeed, according to its size and human density, a city will cause a number of negative externalities such as atmospheric pollution, the production of different types of waste, road traffic congestion, criminality, and a degree of social alienationiii.

Thought processes and routes for action must therefore be designed following the analysis of negative externalities that are generated by the city’s activities versus the positive input created by the urban activities overall.

The following chart shows the different components of an urban system:

Figure 1: Physiology of an urban system (Source: Bithas Christofakis, 2006)

3 http://www.unhabitat.org/ 4 http://www.worldbank.org/ 5 http://www.clintonfoundation.org/what-we-do/clinton-climate-initiative/ 6 http://live.c40cities.org/ 7 http://www.iclei.org/


Thus, among the negative externalities that are now clearly identified, cities throughout the world produce the major share of greenhouse gases, in particular due to the intense urbanisation and the types of transport used. The International Energy Agencyiv deems urban areas responsible for 71% of the greenhouse gas emitted; forecasts plan 76% by 2030. Towns and cities play a major role in global warming, and are responsible in large part for the climate change.

Cities are really taking into consideration matters to do with the climate change since some are already suffering the consequences. The recurring violent storms and the frequent flooding are now critical situations that must be taken into account in city management (Rio de Janeiro has experienced several floods and landslides, natural phenomena that are linked to the climate change but have disastrous consequences for humans).

E. Recurring city issues

Cities throughout the world are now faced to different degrees with a number of issues. Depending on the city’s characteristics (its size for example), its geographical location (north or south), or even its level of economic development, these problems will be more or less present and have more or less impact.

A number of recurring themes are detailed below:

• Water management, distribution and processing (rain water, wastewater, sewer networks),

• The quality of air and of atmospheric emissions,

• The management of solid waste (collection, processing, recycling),

• The management of energy sources, the production of clean energy to reduce greenhouse gas emissions, and alternative energy sources,

• Transport infrastructures in order to ensure the mobility of people,

Humans

Production methods

Transport methods

Immeubles

Energy Input

Material input

Organic components

Desirable outcome

Undesirable effects

ENVIRONMENTAL ECOSYSTEMS


• Habitat (renovation and development of new constructions), the urban spreading issue, social blending in individual districts, renovation of industrial districts and rehabilitation of the land,

• Social, cultural and sports infrastructures to ensure social blending and cohesion,

• The dangerousness of certain industrial activities for inhabitants living nearby,

• Sound and light pollution,

• Space occupation conflicts.

Let us now develop a few examples throughout the world of how these problems are addressed in order to highlight the diversity of both situations and solutions. What follows is only a very short glimpse of some of the possibles via some initiatives implemented in the world.

Access to resources: water

Being able to access water is vital for populations’ lives. The management and distribution of water, and then the collection and processing of wastewater are key challenges for any town or city, and in particular in developing countries. Thus water management, distribution and processing issues are particularly present in African countries and in South America. We can refer to the action undertaken in three Kenyan towns (Kisii, Homa Bay, and Gusii) and two towns in Tanzania (Muleba and Bukoba)8 in order to improve the drinkable water distribution network infrastructures, with particular attention to network operations and maintenance. This is an amazing initiative in that it aims to increase the distribution system’s profitability while ensuring a continued and quality service. Making this profitable once more, means that the water distribution operator can ensure a lasting service and thus improve the inhabitants’ quality of life. This project was implemented as a partnership with international organisations, local authorities and private enterprises. Private banks do not yet seem to be extremely present or involved in such projects.

Waste management, recycling and transformation

One of the large negative externalities in cities remains the production of waste, the outcome of human activity and consumption.

Waste management (collection, processing, recycling and transformation) is one of each town’s main preoccupations since it is highly correlated with the population’s health and hygiene. For a long time burying outside the city was the rule. The negative externalities were transferred to another territory. Now, in order to work at reducing the ecological footprint, town and city councils are looking at ways to reduce the quantity of waste produced as well as at the use of this waste. As such, Nottingham (UK) is an example. The city is trying to increase the volume of waste that is recycled, to reduce its energy consumption, and to reduce its greenhouse gas emissions. The city invested in an incinerator that transforms part of the waste into biomass that is then reused in the form of energy.

8 http://www.iwaponline.com/w21/01301/w21013010033.htm


The production and distribution of renewable energies

Cities’ and towns’ roles in the climate change and in global warming have been clearly demonstrated. Many towns and cities have therefore taken action to reduce the production of greenhouse gases caused by human urban activities. Some actions have been taken to reduce traffic in town centres (such as London, UK and Curitiba, Brazil) and develop green-energy consumptive public transport. Huge action has been taken in the construction sector in order to rehabilitate buildings to current environmental standards. The development of green roofs for example, aims to reduce the heat effect and hence warming. Similarly, much thought is being put into reducing the large paved and tarmac surfaces that generate heat in cities, to the benefit of developing green areas and planting trees, which are all excellent CO2 captors.

Transport infrastructures and mobility

Several towns and cities such as Los Angeles, Sao Paulo or Nairobi, are faced with urban spreading, which in turn renders movement and transport to and in town critical. The challenge for these cities is the access to public transport at a cost that is accessible also to the population with little or no income in order to enable them to integrate both socially and professionally. The aim remains to reduce traffic and its negative externalities such as road congestion and the subsequent greenhouse gas emissions. Here again, the main difficulties are the financing of public transport infrastructures, that are on the whole very costly and for which the return on investment can take a long time.

The solutions that have been developed vary according to geographical contexts and situations. Thus, in Africa, one of the privileged action plans is to formalise and support the public transport network, which thus far relied on a rather informal economy, in order to better plan the network organisation for buses in particular (Dakar and Johannesburg for example). Similarly, action is being taken to improve the quality of roads, thus also contributing to developing water distribution and collection networks. We can see here how the issues are interconnected.

Space and housing management

Certain northern towns and cities are faced with the rehabilitation of sometimes contaminated industrial wasteland (Malmö in Sweden). These cities are undertaking to reconvert such sites into attractive housing districts, often sustainable districts that obey very high environmental standards in terms of construction, with zones dedicated to proximity utilities, leisure and cultural activities.

City councils must also arbitrate between the inevitable densification of cities and the maintaining of green areas, which are vital. Programmes for planting trees and vegetation are established. A large number of city councils now also set strict construction standards that respect the environment. Thus, in San Francisco, new buildings must be LEED9 (Leadership in Energy and Environment Design) certified. This is an American standard relevant to energy efficiency and to efficiency in terms of water consumption and heating.

9 http://www.usgbc.org/DisplayPage.aspx?CategoryID=19


New city districts and new cities

One must also bear in mind that these issues are interconnected and must be addresses and managed together. Therefore, developing new districts must be thought out taking into account all of these issues together (waste, energy, housing, transport, social blending, economic activity, social life). Thinking and resolving sustainable development issues cannot be done using a system/holistic approach.

The development of new districts, often called sustainable districts, is a good example of integrated design. A famous example is that of Bedzed10 (or Beddington Zero Energy Development) in London. This district was developed in the early 2000s aiming to reduce its ecological footprint with a neutral carbon balance and the reduced usage of fossil energies (low consumption buildings and car sharing). Similarly, the waste production is lower, as is the water consumption. The entire district was designed aiming to respect the environment and to promote economic growth by establishing local utilities and enterprises. Lastly, equality and social blending were also sought via cultural actions as well as ones to promote communication between the district’s inhabitants. This is rendered possible by creating new districts or new cities.

However, for existing towns and cities, and in particular megalopolises, the current issues need to be addressed and managed in order to progress and improve practices and policies.

Three principles are given as unavoidable in current city design and management:

• Density

• Blending

• Compactness

IV. Financing a sustainable city

In the coming years, considerable financing will be necessary for sustainable development projects. The International Energy Agency (IEA) estimates that to implement the Plan Bleu against global warming – i.e. a 50% reduction in greenhouse gas emissions – by 2050, going from a 100 base in 2010, 316 trillion USD will need to be invested. The sources for such an investment should be 20% public and 80% private. With the different activity sectors, the breakdown of this huge investment should be as follows:

• 50% for transport,

• 26% for housing,

• 20% for energy production,

10 http://www.bioregional.com/what-we-do/our-work/bedzed/


• 4% for industrial production.

Among the issues that are most frequently raised with regards to establishing sustainable cities, the lack of financing is recurring whichever the geographical zone in question. Indeed, cities are faced with increasing financial needs in order to finance, amongst other things, new infrastructures or rehabilitate them, to develop and promote new green economic areas, or even to implement projects that promote social blending. But at the same time, towns’ and cities’ tax income is not necessarily rising. This situation is particularly present in developing countries (Africa, Asia, South America and the Caribbean)v. In some countries the national or federal governments use fiscal resources without necessarily redistributing them at a local level. Town and city councils do not always have sufficient autonomy to create new local taxes. There is also on the whole a lowering of public financing to try and favour private financing, with a lack of specific established legal context and terms. Lastly, the context of the world crisis for town and city councils has also resulted in lower tax income; consequently budget attribution arbitration is becoming increasingly difficult. Sustainable development, fighting global warming, and inequalities are sometimes areas that get relegated to second place in terms of priority in times of budget restrictionsvi.

This lasting sustainable city development context necessarily implies new financing and greater intervention from new sustainable city players.

A. The different stakeholders in sustainable city financing

Here is a chart that gives the sustainable city issues and the different stakeholders concerned by the financing of sustainable cities.


(Source: Communities and local government, 2007vii)

Among the inevitable players, there are public investors (local, national, international) who are often the main sources of finance for high-investment programmes, in terms of infrastructures for example.

The overall review is that we now need to attract private investors, of which commercial banks, and convince them that investing in cities can be interesting for them. For this we need to develop evaluation tools that would make it possible to assess the value and interest of such projects.

B. Possible sources of finance: tools and situations

After the Kyoto protocol was signed, a number of tools were developed, such as the CDM (Clean Development Mechanism)11 for which one of the challenges was to reduce greenhouse gas emissions by setting up a number of financial tools relevant to carbon (carbon trading, carbon offset schemes).

Public investors also set up fiscal incentive measures such as income, sale and corporate tax reductions. In France, for example, there are areas called “zones franches” (free

11 http://cdm.unfccc.int/


zones) that offer tax and social charge exemption in order to encourage companies to establish there and thus revive the area.

One can also benefit from subsidies, or low interest loans for installing equipment that uses less energy for example.

Some town and city councils have issued obligations relevant to projects, or green bonds for financing projects, thus addressing the stock market. However, this type of approach is not commonplace.

Public investors may also develop guarantee funds to enable individuals to access private loans and reassure private lenders, such as commercial banks for example. This situation arises in particular to enable ownership access for people with low or irregular incomes.

Private-Public Partnerships (PPP) remain fairly sporadic. There are a few examples of such successes in Europe, between the European Investment Bank, commercial banks and public or semi-public organisations. In the social housing renovation programme undertaken in Glasgow (UK), the European Investment Bank’s participation persuaded the Halifax Bank of Scotland (HBOS) and the Royal Bank of Scotland to finance up to 90% of the project.

C. Role and position of commercial banks in sustainable cities

It seems to be unanimous via the examples, that commercial banks are expected to play a major role in financing sustainable city actions.

The financial needs are large and growing. One of the questions is to work out how to attract such financing. This question is in fact a recurring topic for sustainable city playersviii. The right thing to do is therefore to diversify the sources and to find the right allocation mechanisms in order to coordinate the offer and the demand.

This same thought process applies to capital investment companies (private equity) that are looking into and taking action with regards to financing sustainable cities (possible references are a research report produced by Siemens in 201012 or a document produced by Price Waterhouse Cooper selling their competences in terms of sustainable finance13). Similarly, professional associations, such as the construction industry in the United States, are looking into valuing construction and real estate investmentsix.

D. Project evaluation method

Where sustainable towns and cities are concerned, there are multiple challenges. But introducing CSR into decision processes is one of the first difficulties since it requires new evaluation criteria to be developed as well as a different thought process. Furthermore, as long as the social and environmental risks have not been integrated into the information given to banks for sustainable city project financing, socially responsible financing will remain limited in numbers. For such financing numbers to grow, three financial engineering innovations need to be implemented beforehand:

12 http://www.siemens.ae/sustainable-cities/pdf/whitepaper_2010_sustainable-cities.pdf

13 http://www.pwc.com/ca/en/sustainability


• New accountancy standards that take externalities into account,

• New risk analysis tools,

• New financial intermediation instruments.

The choice of a project and the financing of it obey an economic rationality based on the fact that the advantages of the said projects must be in excess of its overall cost.

However, this type of reasoning assumes that the costs and advantages are included in a monetary valuation. Where sustainable cities are concerned, there are three questions to consider for this type of analysis:

1. Externalities

The question here is to find out how to evaluate projects, using a unit of measure, where some of the components – such as externalities – are outside the market thus far.

2. Discounting

The time scale for sustainable cities is invariably long term. We therefore need to use financial discounting techniques that are adapted to the nature of the situation.

3. The discrepancy between collective rationality and individual rationality

Collective rationality is not simply the sum of individual rationalities. Indeed, one can observe that each person’s individual rationality does not necessarily lead to public interest as it is sought by collective rationality. There are two reasons for this. On the one hand equality is not each individual’s priority in their economic reasoning, and on the other hand, externalities are not taken into account individually while they are often internalised collectively.

Several criteria have been put forward to demonstrate that investments in sustainable cities can be of interest and value to investors. Here we can look at this table detailing six criteria.


Criteria to evaluate urban development financing sources

Financing sources/ Criteria

Pubic investments Public loans

Commercial loans/Capital -

investments

1. Investment requirements XX XX XX

2. Technical criteria X XXX XXX

3. Institutional solidity and creditworthiness X XX XX

4. Financial profitability X XX XXX

5. Economic profitability XXX XXX X

6. Environmental aspects XX XX

7. Other political objectives XXX XX

X: relative importance XX: important XXX: very important

(Source: Communities and local Government, 2007)

Moreover, it is also possible to alter projects’ classical evaluation criteria.

• One can carry out a prospective cost analysis for the project’s entire life span. Thus the costs can be higher upon acquisition but lower during when implemented.

• One can also evaluate the strategy of sustainable versus classical (business as usual). Here, it is a matter of assessing how much is saved by opting for the sustainable solution compared to a status quo, or of looking at this backwards by assessing how much has been lost by not investing in an efficient energy project for example.

• Lastly, we can also evaluate the different collateral benefits of an investment, the co-benefits.


References

i Kizilbash, Masood H. (2007) Urbanization and sustainable development of cities. Economic Review, Vol. 1, p.13-14.

ii Bithas, Kostas P. et M. Christofakis (2006) Environmentally sustainable cities. Critical review and operational conditions. Sustainable Development, vol.14, p. 177-189.

iii ditto

iv International Energy Agency (2011) CO2 Emissions from fuel combustions. Highlights 2011 Edition. http://www.iea.org/co2highlights/co2highlights.pdf

v Kajumulo Tibaijuka, Anna (2003) Innovative urban financing. Habitat Debate, vol.9, n°1, p.1.

vi Caïxa Economica Federal (2010) Workshop Proceedings: Green city development in Brazil: Financial and technical solutions for sustainable cities. Juin 2010. http://www.esmap.org/esmap/sites/esmap.org/files/Green%20Cities%20Proceedings%20July%2019%20js.pdf

vii Department for Communities and Local Government (2007) Financing investment in sustainable cities and communities in Europe – The role of the European Investment bank. London. http://www.communities.gov.uk

viii Kerste, Marco, Nicole Rosenboom, Bernd Jan Sikken et Jarst Weda (2011) Financing sustainability. Insights for investors, corporate executives, and policymakers. VU University press. http://www.dsf.nl/assets/cms/File/Media%20Campus/Financing%20Sustainability_Full%20Book.pdf

ix Muldavin, Scott R. (2010) Value beyond cost savings. How to underwrite sustainable properties. http://www.GreenBuildingFC.com