Cities in the Era of Climate Change

Written by Madeleine L.

Cities are engines of economic growth, lifting populations out of poverty and rural deprivation. In Age of the City (2023), Ian Goldin and Tom Lee-Devlin explore the history of human progress and how cities will shape our future. They represent over half of the global population but are directly and indirectly accountable for most of the world’s emissions. Cities are already facing existential threat as seen in vulnerable coastal communities and the rise of urban heat stress. Investors should be aware of the risks and opportunities of real assets that offer climate solutions which underpin many financial assets, as Bruce Usher describes in Investing in the Era of Climate Change (2022). Neglecting to make positive investments for our cities will only magnify the perils ahead.?

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An Existential Threat?

Taming the environment has been key to human prosperity. “With concrete, steel, and bitumen, we bend and shape the physical environment to our will. But these monuments to human ingenuity are far more vulnerable than many realise”, Goldin and Lee-Devlin state [1]. Being at the mercy of the planet due to climate change has always been part of the story, as seen in the rise and fall of the Indus Valley civilisation [1]. Before 3000 BCE, monsoon summers made the region unsuitable for agriculture but because of axial precession, a 26,000-year cycle in the earth’s orbital rotation, the severity of the seasons were lessened?[1]. A thriving civilisation formed as the region became compatible for farming, but then the rivers dried up and the land became arid, unable to support the booming population. By 1800 BCE, the cities of the Indus Valley were abandoned.?

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In recent years, humanity has experienced higher occurrences of extreme weather due to anthropogenic climate change?[1]. Devastating wildfires in Australia made headlines over Christmas in 2019 and Europe experienced heatwaves in 2022 that buckled rail tracks and melted runways. Urban heat island effect, a phenomenon where temperatures in major cities can be as much as 10 degrees Celsius higher than surrounding countryside, is compounded by waste heat generated by cars and machinery. Increased heat has worsened lethal air pollution in developing cities like Delhi, where hazardous air quality is responsible for thousands of deaths each year?[1].?

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Rising sea levels threaten Shanghai which has installed vast drainage system of over 120 miles of flood-prevention walls?[1]. Miami’s waterfront city is on track to being submerged as king tides, an especially high spring tide, flood downtown streets more frequently?[1]. In 2022, Pakistan saw record temperatures followed by fatal floods displacing 33 million people?[1]. Jakarta, home to over 10 million people, is at risk of sinking by 25cm each year?[1]. Developing nations are most vulnerable as monumental investment is required for building sea walls and drainage. Low-cost strategies do exist, such as reintroducing coastal mangrove swamps as natural barriers, but global coordination is necessary to support fast growing cities while limiting their demand on emissions?[1].?

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Urban Solutions?

In Age of the City (2023), the authors state that cities must “be front and centre in efforts to avert the catastrophe we are hurtling towards”. As cities tend to be richer with higher standards of living, reducing their carbon footprint will be pivotal. Direct emissions from driving cars and heating/cooling buildings can be averted through profitable solutions such as reducing urban sprawl that makes living centrally more affordable, prioritising energy-efficient buildings that also reduce costs and integrating more green spaces, which invites tourism. Singapore, already covered by more than 40% greenery, is the home of Gardens by the Bay, a major tourist attraction of artificial trees that act as vertical gardens and solar power generators [1]. Embracing electrification and encouraging cleaner modes of transport also improves air quality while reducing emissions.?

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Indirect emission solutions include reducing consumption by wasting less and moving agriculture from rural to urban areas. Agriculture is a major contributor of greenhouse gas emissions but roughly a quarter of the food worldwide is wasted through spoilage from supply chain, household, and retail, particularly in richer countries?[1]. Reducing consumption should be prioritised as every year, almost 100 million tonnes of waste go to landfill in the USA that could have been recycled. Investing in vertical farming with the benefit of artificial lighting and temperature control to increase yields, can also free up land for carbon-absorbing forests and reduce emissions from transport and food spoilage. If powered by renewables, a lettuce grown in a vertical farm could generate 70% fewer emissions than one grown in an open field.?

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Real Assets with Positive Impact?

If rich countries stopped all emissions tomorrow, the world would still miss targets to avoid climate peril. Developed countries account for 60% of accumulated historical emissions, but through legislation and investment in decarbonisation, now produce just 30% of today’s annual flow of emissions [1]. ?Investment into real assets, which are physical assets that are tangible and are contractually valuable, will aid in leapfrogging emitting technology in developing countries with rapidly growing populations and cities. Large capital commitment is needed for development, construction, and technical expertise of real assets with positive impact, and Usher introduces three in his section Investing in Real Assets that underpin many financial investments of climate solutions [2].?

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The first explored is the large and rapidly growing sector of renewable energy projects, which deserves its own article. In brief, Usher considers these to be stable with low technological risk and potential for long term cash flow. Solar projects generate predictable electricity, allowing for accurate cash flow modelling to forecast return on investment. The highest risk is in project development, but once operational, risks are low apart from interest rate risk. Wind power projects have slightly more complex risks. Predicting wind speed is difficult so investors typically conduct sensitivity analyses for lower than forecasted speeds. Renewable sources drive demand for energy storage projects, which is still at an early stage of development, facing high technological risk. Higher risk comes with greater rewards. Investment bank Lazard has estimated equity returns ranging from 8.1-33.7% in renewable energy projects, though this will come down as the sector matures [2].?

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The second category explores real estate investment. Commercial property assessed clean energy (C-PACE) is a financial tool used by 30 USA states and local governments that encourage energy efficiency by allowing small and large building owners to finance upgrades with up to 20-year loans. C-PACE financing has improved returns on energy efficient projects by offering very low interest rates because the tax assessment mechanism is secure and very low risk. This tool provides an alternative to investing in infrastructure hardening which is becoming a challenge as climate change surpasses government-funded construction projects. In 2023, Venice began construction of a flood barrier designed for 8-inch sea-level rise, but latest projections on sea-level rise indicate a rise of 14 inches by 2100 [2].?

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The last category of real asset investment takes place outside of cities but contributes to reducing indirect emissions generated through food waste and transportation. Avoiding deforestation and investing in reforestation and afforestation projects could reduce more than 20% of global emissions by 2030 [2]. As conservation projects are often unpopular when economic development takes priority, securing payment through carbon markets is common but comes with its own complexities (read more). Beyond forestry, Usher describes Bioenergy Carbon Capture and Storage (BECCS) investment as an attractive option that uses biomass as a fuel source to sequester greenhouse gases and generate power, but this has been criticised due to its high cost and ineffectiveness while requiring large amounts of land that challenges biodiversity [3]. In contrast, regenerative agriculture can reduce emissions at a very low cost through planting cover crops and using low tillage on agricultural land to manage both soil and the rate at which carbon is returned to the atmosphere. By prioritising indirect emission reduction through agriculture and forestry, we can further reduce the carbon footprint of our cities, which depend on our natural environment, while protecting vulnerable communities and people’s overall standard of living.?

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The Battle for Our Future?

Positive investment in real assets will shape our future as humanity continues its fight against climate peril. Cities have always been incubators of human progress, having the power to bring together solutions for our communities and potentially holding the answers to our greatest challenges.?

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Sources?

[1] Goldin, I. & Lee-Devlin, T. (2023) Age of the City. London, UK, Bloomsbury Publishing.

[2] Usher, B. (2022) Investing in the Era of Climate Change. New York, USA, Columbia University Press.

[3] Hanssen, S. V., Steinmann, Z. J. N., Daioglou, V., ?engi?, M., Van Vuuren, D. P., & Huijbregts, M. A. J. (2022) Global implications of crop-based bioenergy with carbon capture and storage for terrestrial vertebrate biodiversity. GCB Bioenergy. 14, 307–321. https://doi.org/10.1111/gcbb.12911?