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Insights from the World Urban Forum: An Interview with Sean Kidney

The Theme of the Ninth session of the World Urban Forum (WUF9) “Cities 2030, Cities for All: Implementing the New Urban Agenda” — places the Forum’s focus on the New Urban Agenda as a tool and accelerator for achieving Agenda 2030 and the Sustainable Development Goals. +SocialGood Connector Shariha Khalid interviewed global leaders at the forum to explore innovative urban solutions.

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Meet Sean Kidney, CEO, Climate Bonds Initiative.

Sean Kidney is CEO of the Climate Bonds Initiative, an international NGO, working to mobilize debt capital markets for climate solutions. Projects include a green bond definitions and certification scheme with $34 trillion of assets represented on its Board; working with the Chinese central bank on how to grow green bonds in China; market development programs in Brazil, Mexico, Colombia and East Africa; and a green finance aggregation platform with UNDP. He is co-Chair of the India Green Bonds Council and a member of the EU High-Level Expert Group on Sustainable Finance.

*Note: Interview edited lightly for clarity

Shariha Khalid: Sean, thank you for joining us in this series on financing the SDGs. Could you start by sharing a bit about the work that you do and how it intersects with the Sustainable Development Goals?

Sean Kidney: Our mission is to mobilize capital for climate change solutions. We focus on the bond market: It’s the largest piece of the capital pie, a 100 trillion dollar bond market, versus 60 trillion for equities. It’s also the dominant investment vehicle for pension and insurance funds, which have a particular regulatory requirement to focus on long-term investments because they have to match assets and liabilities. So we work with them on the heavy end bonds.

We have a vast challenge before us: to shift our economies to low carbon or climate resilient in double time. Really double time, otherwise we have runaway climate change. We have the capital sitting in very low earning instruments. 21% of all institutional investment capital in Europe is in zero or negative interest rate bonds, for example. That’s no way to pay my pension. So, we have the capital, we now need to make a bridge between what we’ve got to do and where the capital is.

That bridge has got to be a North-South bridge, fundamentally. Because the bulk of investment and infrastructure in the next 30 years is going to be in emerging markets. At least 70%, if not 80%, is going to be in emerging markets. We’re already building cities of 20 million people all over the place, scattered around different countries. And they’re being built too often in an unsustainable fashion. They’ve been built in a way that exacerbates fossil fuel usage. They’re built in a way that makes them very climate exposed. We haven’t got proper water infrastructure in place, we haven’t got flood defense, we haven’t even thought about these things.

We’ve got to get all that in place because, otherwise, we’re going to have a massive humanitarian disaster in our lifetimes. So, that’s the first part. Now, of course, what we’re talking about in emerging markets is not just mitigation, it is resilience. Sure, it is true: Emerging markets, with the exception of China, haven’t made a significant contribution of carbon in the atmosphere. But they are going to be the largest victims of climate change, because the biggest impacts are going to be in places like India, or in the Sahel, or in the Amazon, or in South East Asia.

When we start thinking about these cities, we’ve got to be thinking about sea level rises being somewhere between one and four meters high over the next 60 years. We’ve got to think about storm surges. Storms are going to become much more intense: 3x the intensity of cyclones by the middle of this century. That means, when you get a cyclone, it’s gonna wash over the whole of the city, like Shanghai, or Hong Kong, no longer just buffered at the edges of the city. That requires different approaches in infrastructure. If you build a subway system, it has to be waterproof so it can be filled up with water, pumped out, and operated the next morning. That’s just design, it’s doesn’t cost a lot of extra money. But that’s climate resilience.

With agricultural systems, we need to be thinking about water retention to cope with droughts, in India in particular, where we have a good chance of seeing the monsoon failing one year in five. We’re gonna have to have water storage to be able to cope with a one year outage. We’re already experiencing extreme heat incidents across northern India which are killing people. It’s chaos. We need water systems that are sealed that connect and give people liquid when those incidents happen. In the big heat incident last year in India, three months of fifty degree Celsius heat, God knows how people survive. Well thousands didn’t, they died. The government was trucking water around to villages.

These are the things we have to plan for. Now, if you look at the Sustainable Development Goals, with a climate frame, you start thinking: “alright, that’s the goal with economic resilience; that’s the goal of infrastructure resilience.” They’re not two separate parallel paths here, it’s a deeply intertwined discussion. Sustainable finance will also lead to sustainable development which will also lead to climate resilience and climate mitigation if we do it right. So it’s not just one of the seventeen Sustainable Development Goals, it’s everything.

Better give you an example. There’s a great study that’s been done by Paul Hawken, the author of Natural Capitalism, with a team in San Francisco, where they looked at the top 100 steps to take to reduce carbon in the atmosphere. Know what number seven is? The education of women. Because the education of women is about mitigation, fewer families, it’s a population issue, there’s greater wealth as a result. If you look at Bangladeshi development versus some of the Indian rural development, Bangladesh has now overtaken India in life expectancy. The key factor over the last forty years has been the education of women. Fundamentally.

We also have social resilience. Because when you’re starting to talk about very extreme and significant climate volatility, it’s a bit like when you watch those old Hollywood movies and someone gets punched and they stand up again, and then punched and stand up again. Well, actually that’s how our economies are going to be in the future. Because we’re going to get climate volatility that will punch us out every three years. That means we need this development very quickly, because unless we are strong enough for societies to hold together and rebuild, we will collapse.

What does collapse mean? Collapse means Somalia and Syria. It means states that fall apart. It means war, it means famine, it means large movements of people. Where will they go? Across the Mediterranean to Europe. Across the Atlantic to the US. So I’m saying to you, investors, “Guys, you need these countries to be in a much better position economically. They need to be economically resilient, they need to be socially resistant. We know, for example, of the direct correlation between inequality in societies and the fragility of states. In highly unequal societies, you get one big shock and you can easily descend into war. A more equal society pulls itself together again. These are things we know now; we’ve been studying this for 50 to 60 years.

We know it works exactly the same way with ecosystems. Degraded ecosystems without enough biodiversity, collapse when a big shock happens. If there is a lot of biodiversity in a society, they have a much better chance of bouncing back. That’s resilience. That’s the Sustainable Development Goals. We’ve been working with the European Commission for the High Level Expert Group on Sustainable Finance. They have proposed a sustainable finance taxonomy to guide investors and issuers of green bonds and so on: What are sustainable investments?

We’ve taken a climate mitigation frame, and I talk about a 1.5 degree pathway by the way, not a silly 2 degree pathway which allows coal to be around for far too long. We’ve taken the climate resilience and adaptation work we’ve done on the climate bonds taxonomy and we’ve taken some work that Dutch investor APG did looking at the Sustainable Development Goals, and mapped that to practical investments that can be made to achieve those. Put it all together and that can serve as guidance for the European financial industry.

It’s now about how we manage a world so that we can have some kind of confidence about our future existence. So, it’s sustainability on a macro level. It’s not sustainability just in your backyard, it’s gotta be sustainability of the species. How to build ecosystems up again, because we’ve been walloping them for the last fifty years, the last 20 years to be honest. Fisheries are degraded around the world, stocks are disappearing, soils are toxic in China, top soil is disappearing in the US. These are things we can fix, but we’ve got to really, really, work at it now.

So, that’s my general picture. And green bonds are evidence that people would invest if you provide them deals they can invest in. Investors want to see a world where their assets can lapse their liabilities forty years out. They understand that unfortunately they’re hostage now to environmental issues and to these issues about equitable development around the world.

Shariha: You’re bringing up some very interesting topics there, but one thing that stood out is the inter-dependability of systems and countries to each other. To make this work, it’s not about there being a good investible project somewhere in China, it also means that there is capital that can be mobilized from somewhere else.

Sean: Correct.

Shariha: One thing you mentioned is about cities and how they’re both hot spots for opportunities for financing, but they’re also one of the things that need to be addressed very quickly. It’s where most of the population is, and it’s where a lot of the pollution is generated. We’re at the World Urban Forum, here in Kuala Lumpur. What could be a message that you would like to share with policy makers, with investors, and also with innovators who are attending, around this?

Sean: It’s a time for ambition. Not ambition because we want to be ambitious, but because the alternative to ambition is the total destruction of our society, the possible loss of our species. At the moment, we’re on a chart where the senior climate scientists I speak to think we’re going to actually lose 1/2 to 2/3 of the world’s population by the end of the century on the basis of the cities we’re building. Because we’re building cities that are high carbon.

We’re building cities that are making the problem worse, not better. It’s not a matter of nice apartment blocks, it’s the fact that we’re using cars. It’s the fact that we’re using cement that is high in GHG and produces 7% of the world’s emissions. We’ve got to convert quickly to sustainability approaches here. Now, that does mean low carbon cement, which exists by the way. It costs a bit more, a feed-in tariff would solve that. A feed-in tariff in the sense that if people use low carbon cement they get a minor subsidy or they get more contracts or so on.

These are things we can do, it takes active measures though. Planning around dense urban cities that are highly livable is the future, and we have to do it fast. We haven’t had the capacity in most emerging markets. We don’t even have the planners, the architects, we can’t even get people to actually pick up the rubbish half the time. So we have incredibly polluted cities. So there’s a lot to be done, I get that.

But at the same time, the drift to urbanization is so fast, you know. We already have over 50% of the world living in cities, and it’s going to get worse. You know in agricultural areas, especially with climate change volatility, every 3 years millions of farmers will get forced off their land in different parts of the world. Like they did in Syria, in 2008 and people would go to the cities and the government didn’t help them, didn’t give them a job, so we now have a civil war raging for years.

Unless we want civil wars all over the place, we have to build jobs in cities, we have to build livable cities, we have to make sure there is some chance of viability for them. That of course, will mean that our agriculture will become more mechanized, more capital intensive, which it needs to be. You know, the FAO did a report a few years ago which showed that in emerging markets, we could on average improve productivity five times.

Already, with mechanization, their application of capital. That’ll mean larger lots. That’s inevitable, it’s happening. You know, in some places like Rwanda, small lots work because of the terrain, but in most of the world people are moving to the cities. From an emissions perspective, cities produce 73% of all emissions, 80% if you count the energy systems outside the cities to feed them.

So from a climate change perspective, it’s about fixing your cities. Don’t get me wrong, we have to stop deforestation in the Congo and in Indonesia as well, that’s a big part of it. But the biggest game is rethinking cities. Making them low carbon but also climate resilient. You know, think about Dubai. We are going to start seeing sixty degree temperatures, not fifty degree temperatures. We can no longer have this foolishness of having lawns out in the sun. Everything is going to have to go underground. That’s a planning issue we can tackle now, because I’m afraid that is now a done deal, it’s going to happen in the second half of the century. Let’s start planning accordingly, unless you want to move the whole of Dubai and Abu Dhabi to a cooler climate. Well, good luck negotiating the land rights.

So, that’s a part of urban development. In rich countries, there’s still huge amounts of work to be done to make them low carbon. In the US it’s lunacy, it’s a fossil fuel paradise, and shifting to electric doesn’t solve it. Shifting to electric is important, sure, but denser cities are low carbon for lots of other reasons. And by the way they’re healthier, because you walk and you bicycle. You’ll live longer. Why aren’t we making this standard kit for every city in the world? We’re focusing on the wrong things half the time. And then we need financial models.

Shariha: Let’s answer a different question in connection to what we can do with regards to the situation we have right now with cities as hubs for climate action.

Sean: Well, one thing we’re pushing is mass transit systems. In Lagos, Sao Paolo, Mexico City, Jakarta, the traffic is unbearable. All of them need mass transit systems. Beijing has 20 lines. It’s building in 550 kilometers of subway now. It’s building another 450 kilometers by 2022. We haven’t even got one yet in Jakata. We’re building the first one. We’re planning a second.

We’ve got to start building 40. How do we rebuild the city really fast? Finance is a bit of a challenge. There was a model in financing which can make it much more scalable, which is to link it to property development. It’s called Land Value Capture or Value Capture.The best example I like are the Tokyo railway systems and MTR. Tokyo is private. The private railway systems made deals with landowners on the outside of Tokyo in the 1980s where they gave them a share of profits, bought up land, built big shopping centers, and paid for the railway line. MTR, which is a 75% government owned entity in Hong Kong, listed on the stock exchange, does the same thing. It develops the property above rail lines and that pays for the subway.

It’s a very simple model. It does require governance because you’ve got to be able to resist the land developers saying, “No, no. Give me the deal. I’ll sort it out,” and then capturing all the profit, which is what usually happens, even in rich countries. That’s the tricky part. On the other hand, you get a subway, if you can deal with that. Do a deal. Give them half the profits. Get them to help you develop it, but make sure you capture enough to pay for the subways.

That could be applied in any country in any city where land values are going up. Because there are middle classes and all these spaces are going up, land values are going up. If you do it right, and this is where the public civic becomes important because they can ensure the quality of the development, and make sure it’s properly integrated and not just a block of apartments plunked somewhere, like you get in Mumbai. You get blocks of apartments plunked in the streets in the middle of the slums. If you go up to the 12th floor, you got a swimming pool, but of course, you can’t even get enough water in because the water system hasn’t been built, so they have to truck the water in for 1/3 of the usage to fill the swimming pool and to fed the taps. This is lunacy.

With the proper planning system, and capturing the value from the development that happens as a result of transport hubs, you can build the right infrastructure. Cities need property taxes in general, but transport is rather unusual because the uplift in property over a railway line is massive. That’s got to be shared. Give the property developer some if you want to do it with private developers, but you need to drive a tough bargain, because you haven’t got enough task money. You haven’t got a tax space. You might have middle class people who are not paying the taxes. So, if you don’t do it this way, it just doesn’t happen.

That’s a big model. We could rebuild all the emerging market cities, the world’s, with that model and scale off. What I can tell you is, there’s enough capital. You create these deals, the capital will flow.

Shariha: Any final words you’d like to share about how we can finance the achievement of the SDGs or on the city agenda?

Sean: We need to be thinking about investability. I don’t mean purely private sector because at the end of the day, in complex economies, investabilities is underpinned by government action. So, that’s government action about infrastructure or it might be straightforward government direction, like the securities commissioner or a central bank. The link between policy priorities and the allocation of capital is nominally held by private entities like insurance funds and pension funds, but they’re actually highly regulated, so it’s our money. It’s not someone else’s money. It’s our money, pooled capital. That’s the first thing we need to think about.

The second thing we need to think about is that it is urgent. This is not, unfortunately, a long-term project for us. We’ve got to do it in the next few years, because of the slightly crazy situation we’ve created for ourselves in relation to climate change and greenhouse gases, and so on. That’s unfortunate, but the positive side, from my perspective, is probably represented by the global demographic pyramids.

That’s not sustainable. If you look globally, actually the distribution’s perfect. The distribution of young people to old people is a perfect pyramid. If you can invest in those young people, wherever they are, create jobs and livelihood so that it gives them an economic future, they will give you a return, which will pay your pensions.

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