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ViewpointSeptember 27 2021

Banking on cities to renew the planet

Covid-19 has amplified, rather than muted, the importance of funding and developing well-connected, sustainable and liveable cities.
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Greg Clark

One of the strangest media stories of the pandemic has been the mass predictions of ‘de-urbanisation’ or ‘death’ of our cities. To the urbanist-turned-banker these headlines read as naïve, perhaps skewed by the cardinal sin of extrapolation of short-term measures as if they were long-term trends.

Let me explain.

The century of cities

By 2080 we will have around 10 billion people living in approximately 10,000 recognisable cities. The recent acceleration started in about 1980. By 2080 our great 500-year human trek towards the city will be complete, and the imperative will be to get more good urbanisation and less bad urbanisation.

Can we compare the multi-city mega-regions of China such as the Greater Bay Area and Yangtze River Delta with the managed metropoles of Europe, the new network of super-connected Middle Eastern gateways, or the coastal linear urban-regions of the US, including the 50 million-person Boston to Washington north-east corridor? Which version will win?

Continents that already have 80% of people living in cities (North America, Latin America, Oceania and Europe) will add more to reach a new ‘peak urbanisation’ of between 85% and 90%. Rapidly urbanising continents will accelerate until they reach similar urban peak levels. India (34%), Africa (45%), the Association of Southeast Asian Nations (Asean, 47%) and China (64%) will each develop their urban pattern emphatically in the next three decades.

But this does not mean large numbers of people moving to ever-larger cities. Urbanisation takes different forms according to local and regional specificities. The sector mix, technology, land use and connectivity play crucial roles in the new geometry of settlement. Well before Covid-19, much urban population growth was already occurring in smaller cities and large towns, especially those well connected with larger cities.

Well before Covid-19, much urban population growth was already occurring in smaller cities and large towns, especially those well connected with larger cities

Regional networks of larger and smaller cities with interdependent markets, shared populations and common infrastructures were already the newly prevailing shape of our urban world. As we can see easily in the UK, London has driven the growth of connected smaller cities in the wider south-east such as Reading, Brighton, Oxford and Cambridge. In south China, this network pattern is the intentional policy focus of the Greater Bay Area, the Yangtze River Delta and Jing-Jin-Ji.

The post-pandemic cities

The pandemic is changing the calculus of our cities. As technology adoption increases, there is a new ‘sorting effect’, separating things that are best done virtually from those that are not. The new imperative for our cities is to embrace this hybridity, and focus on those activities that require the unique face-to-face proximity that a physical location provides.

This encourages those mega-regions of multiple cities, metro areas of multiple towns and new high-value corridors that connect populations with places of work and residence over much larger distances than before.

In many small nations, this effectively means that the country becomes one functional city. Take, for example, Ireland, Denmark, Chile or New Zealand. They will operate as single housing and labour markets where one might live in any location while still having a job based in a prominent city or specialised hub. For larger countries, we will see vast sub-regions and cross-border regions as the patterns of hybrid life and work emerge. 

But let’s be clear. We will not see the same new patterns across all markets. There are significant differences that will shape how post-pandemic cities evolve. The sector mix in urban economies will determine what proportion of the workforce can embrace agile working. The degree of urbanisation already established in countries will reflect that sector mix and define the appetite for continuation of the rural-to-urban migration, rather than the newer urban-to-regional shifts. National preferences regarding population movement, technology use and mobility systems will also affect how the new agility takes shape.

So, the greatest location of population change could be likely in North America and Oceania, with more modest change in Europe and Latin America and limited changes in the Middle East, north Africa and Turkey, Asean, Greater China, Greater India and Africa. The larger changes most debated will be in the countries with less than 10% of global population. This is not the ‘death of cities’, but rather a new system of places. The pandemic has already started to shape the next phase of global urbanisation, but it has certainly not reversed it.

Despite the risk and threats, we should view the pandemic as an opportunity to make our cities better and improve the experience they offer. Actions to make cities healthy in terms of ‘safe proximity’, air quality, urban design, public space and transport systems must build citizen confidence. Just as our offices are being reinvented as places of creative collaboration, shared learning, client confidence and corporate identity-building, so our cities are shifting away from how to simply service mass commuters, simple consumption and corporate locations towards how they become liveable and sustainable, evolve to better host innovation and creative endeavour, and stage the unique experiences and events that only work in the four dimensions of real life.

The net-zero city

How can the post-pandemic hybrid cities can be shaped to tackle the climate emergency? Decarbonisation needs action at the city level. Sector strategies are essential but not sufficient to eliminate carbon.

Cities and metropolitan areas are the places where population concentrations come together with the dynamic systems (energy, water, waste, transport) and physical assets (buildings, homes, ports, airports) that need decarbonisation. Cities connect sectors and systems with one another, and they can motivate and accelerate behaviour change by shaping citizen choices in terms of services, utilities and consumption, and by promoting experiments and innovations in local initiatives for land use, transport, logistics, time sequencing and much more.

Leveraging the post-pandemic city to achieve the net-zero city is the big opportunity for the next decade. As cities reconceive space and place post-pandemic, the adjustments required are harnessed to drive out carbon and generate green jobs, healthier travel, financial savings and a more liveable urban environment.

Cities can optimise demand for sustainable finance. But there is one very significant catalyst that all of this depends upon: capital.

Reforming our cities in the ways described above requires an exceptional cycle of investment. That investment into decarbonised urban utilities, infrastructure, logistics, real estate and amenities is the primary target for much of the ‘great wall’ of sustainable finance that is now building up. Indeed, without effective demand from cities for sustainable finance, the capital now being accumulated will be hard to deploy, and could even be under-used due to insufficient effective demand.

This risk highlights the critical point that there is a clear mismatch between our expectations of what cities can contribute to decarbonisation and how well they are equipped to do so. Relative to their importance to the future of our planet, economy and civilisation, cities are strikingly under-powered.

We are all aware of the achievements of the ‘high-powered cities’ such as Singapore, Shenzhen, Shanghai, Vienna, Dubai or Seoul, but most people actually live in under-powered cities, with limited access to new revenue streams, capital assets or balance sheet strength.

Sustainable investment

A wide spectrum of different kinds of financial powers exist across the cities of the world, and the vast majority of cities maintain consistent investment deficits. We get bad urbanisation because we under-invest in cities, and the institutional arrangements in cities have not caught up with the mandates we place upon them. Good urbanisation requires better institutions and greater investment, not just smart technologies.  

Solving the problem of the low investment/low return equilibrium in our cities is not simply about municipal finance, important though that is. Bankers, investors and issuers should optimise four complementary ways to finance the net-zero urban transition.

First is the need to drive the capacity of city governments to absorb more capital expenditure by generating new revenues and finance capability, and this requires reforms to be agreed by national and state governments. The second is the growth of financial flows between the higher tiers and the local tiers, often supported by green transition finance through bonds or development finance institutions.

Third, there is an essential role for sustainable finance to be deployed with corporates that provide urban systems and services across energy, transport, real estate, utilities and amenities. Many of these are now larger multinational corporations. This is where the majority of investment-ready opportunities now exist. Fourth, a new generation of project finance and blended finance solutions is emerging, such as next-generation public-private partnerships, joint ventures and specialist funds. The work of these is greatly enhanced by efforts to standardise rubrics and increase transparency through ideas, such as the Climate Policy Initiative’s FAST-Infra, that reduce the risks and costs of investment in the critical transitions and build more confident market appetite.         

Sustainable finance is the way forward to fuel the transition to net-zero through our cities. For that to succeed, we must generate effective demand. Covid-19 has unleashed a new cycle of flows, reforms and adjustments towards a post-pandemic system of cities. These post-pandemic reforms, coupled with evolving sustainable finance regimes, can together magnetise the investment required.

Greg Clark is group advisor, future cities and new industries at HSBC.

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