Unlocking Sustainable Finance Opportunities in Latam Cities

Latin America stands at a critical juncture in its urban development. Home to some of the world’s fastest-growing cities, the region faces pressing challenges, from rising greenhouse gas emissions to increasing vulnerability to climate change impacts. Urban areas, which account for the majority of Latin America’s population, are not only hubs of economic activity but also offer opportunities for environmental recovery and for addressing deep social inequality. This requires significant investment in infrastructure, technology, and social programs. However, securing the necessary funding presents a complex challenge. In this context, unlocking sustainable finance is crucial for the cities in the region for achieving a just, resilient, and low-carbon future.

Several interconnected barriers to accessing sustainable financing for cities include institutional weakness, prioritization of short-term projects, limited municipal technical capacities, the complexity of integrating sustainable development plans with other development and land-use plans, the lack of climate and sustainability studies on an urban scale to guide the development of climate plans and investments, difficulties in developing bankable projects and budgeting investments, as well as the difficulties cities have in monitoring the use of green resources transparently and the positive environmental and social impacts they generate. Other challenges to accessing urban sustainable financing include low creditworthiness, lack of incentives for private investment, income uncertainty, and restricted access to capital markets. There are also challenges related to the lack of political alignment between different levels of government and the generally small size of urban sustainable infrastructure projects, which can also deter investors.

Despite these significant hurdles, Latin America has demonstrated remarkable innovation in sustainable financial products and their application across various sectors. The issuance of green and sustainable bonds by both public and private entities has emerged as a powerful tool for financing projects in sustainable mobility, housing, and resilience. Mexico City's issuance of green and sustainable bonds to fund Metrobús lines and other public transport projects serves as a prime example. In the sustainable housing sector, private companies have successfully issued bonds to finance efficient housing developments, particularly in the social housing segment. The development of a specific Climate Bonds Initiative standard for Mexican sustainable housing further demonstrates this progress. Furthermore, innovative financing programs such as EcoCasa in Mexico have played a crucial role during the last decade. In the area of resilience, FIRA's 2023 resilience bond issuance, aimed at promoting investment in climate risk reduction projects within the agricultural sector, highlights the expanding scope of sustainable finance instruments. International examples, such as resilience bonds issued by the European Bank for Reconstruction and Development for energy, water, building, and transport infrastructure, provide further inspiration.   

Public-private partnerships (PPPs) have also emerged as a vital strategy for mobilizing resources and expertise for urban sustainability. In Latin America, successful examples include the expansion of Bogota’s TransMilenio bus rapid transit system and the deployment of smart water management systems in Sao Paulo. These projects demonstrate how collaboration between public authorities and private entities can accelerate the delivery of high-impact solutions.

Another innovative approach is blended finance, which combines public and private capital to de-risk investments in sustainable urban projects. Development banks, such as the Inter-American Development Bank, have played a crucial role in structuring blended finance deals in the region. By providing concessional loans or guarantees, these institutions can attract private investors to participate in projects that might otherwise be deemed too risky.

Bridging the financing gap for urban climate adaptation requires a concerted and multifaceted approach. While global climate finance flows for cities reached US$10 billion between 2021 and 2022, this represents a mere 1.2% of total climate finance. This stark reality underscores the urgent need for increased investment in urban adaptation. Cities must strengthen their capacity to identify climate risks and enhance the resilience of essential public services. Subnational and local governments must collaborate with Development Finance Institutions, national governments, and private sector actors to implement strategic reforms that address barriers related to creditworthiness, regulation, and legal frameworks.   

Studies indicate the existence of significant untapped financial resources, particularly within the private sector, that could help close the financing gap. Institutional investors and pension funds have shown a growing appetite for climate-resilient infrastructure investments. Capitalizing on this interest is essential to unlock financing for urban adaptation. The use of innovative instruments like resilience bonds, coupled with established criteria and standards, can facilitate the development of targeted project portfolios for cities.   

Access to finance alone is not enough; cities must also strengthen their institutional and technical capacities to plan, execute, and monitor sustainable projects. This involves training municipal staff in areas such as project management, financial modeling, and environmental impact assessment. It also requires the development of robust data systems to track progress and report on sustainability outcomes.

International cooperation can play a pivotal role in this regard. Programs like the Cities Climate Finance Leadership Alliance and the C40 Cities Finance Facility provide technical assistance and knowledge-sharing platforms to help cities navigate the complexities of sustainable finance. By fostering peer-to-peer learning and connecting cities with global expertise, these initiatives can accelerate the adoption of best practices across the region.

In addition, facilitating cities' access to sustainable finance requires prioritizing tools and support from international cooperation organizations and multilateral, bilateral, and national development banks. These tools should address the specific barriers faced by each city, recognizing the diverse contexts and challenges across the region. Tools like APEX, developed by IFC and strengthened with support from the Carbon Trust, help cities identify and prepare investments in sustainable solutions across key sectors like energy, water, waste, and public transport. These tools not only identify investment opportunities but also evaluate their environmental and economic impact, enabling informed decision-making based on cost-efficiency and environmental and social benefits. Moreover, emerging technologies like AI-powered platforms, such as the Climate Project Explorer, are improving the matching of investors with sustainable projects by providing access to information on projects and programs funded by multilateral climate funds. This facilitates due diligence for investors and simplifies funding discovery for project developers.   

In conclusion, unlocking sustainable finance for Latin American cities requires a comprehensive strategy encompassing financial innovation, institutional strengthening, and robust collaboration between public and private actors. Let us remember that climate action and sustainable development is a shared responsibility. While the challenges are significant, the opportunities are even greater. Given the increasing frequency and severity of climate-related events, urgent action is imperative. The transition will not happen overnight, but the momentum is building. This is a key moment, and an opportunity to definitively promote the sustainable development of Latin American cities, aiming to secure the necessary investments to build a low-carbon and resilient future for the region and the world.