Building Climate and Financial Resilience in Cities: A Dual Imperative

Cities worldwide are grappling with the profound challenges posed by climate change. Rising sea levels, extreme weather events, wildfires, and drought are not only threatening public health but also damaging infrastructure, stranding assets and exacerbating social inequities. One critical, often overlooked aspect is how climate change is challenging the financial resilience and stability of municipalities.

Climate change is straining public budgets unprepared for the impacts of climate change. For example, New York City faces an estimated $10 billion in potential losses from sea-level rise and flooding over the next decade due to recovery costs, business interruptions and property devaluations. And the 2018 Camp Fire in California resulted in over $16.5 billion in damages, significantly impacting local governments.

Moreover, the financial impact of extreme weather events driven by climate change is set to increase dramatically. Between 2011 and 2020, global losses from such events totaled approximately $2.5 trillion, marking a nearly 50 percent increase from the previous decade. 

Further, the municipal bond market is increasingly recognizing the importance of climate-related disclosures. S&P Global expects issuance of green, social, sustainability, and sustainability-linked bonds to approach $1 trillion in 2024. Credit rating agencies like Moody’s are now assessing debt issuer’s credit exposure to environmental risks.  

Speaking at the 2023 National Association of Bond Lawyers' conference, David Sanchez, the director of the United States Securities and Exchange Commission Office of Municipal Securities, highlighted the need for municipal issuers to disclose climate-related risks to investors.

“When there is a weather event and damage to a city, people are saying, 'What did the issuer say before?’" Sanchez said. "There’s very public information about flood risks, sea level rising that affect specific areas ... you can’t stick your head in the sand.” 

In response to climate change, cities are developing proactive plans to combat climate risks, as seen through the proliferation of municipal-level Climate Action Plans and international initiatives like the United Nation’s Race to Resilience and Race to Zero. However, there is a significant gap between planning and execution. Securing the necessary capital for implementation remains a persistent challenge. In 2023 alone, U.S. cities reported a need for over $51 billion to support climate-related projects.

Climate resilience and financial resilience are inextricably linked. Effective climate strategies protect communities from climate change impacts and safeguard their economic health. By proactively investing in climate resilience, cities can reduce disaster recovery costs, lower insurance premiums and attract long-term investments. This dual focus ensures that cities are better equipped to handle the economic shocks of climate change to continue providing essential services.

How cities are grappling with the dual challenge

Evidence suggests that climate projects are good investments. Every $1 invested in climate adaptation can save up to $13 through avoided future expenditures or increased cost savings. Energy efficiency and renewable energy projects can lower operating costs and lock in competitive energy prices. Investment in climate resilience can increase investor confidence, lowering municipal bond financing costs. Cities at the forefront of climate action are highlighting this financial bonus when pursuing sustainable infrastructure projects. 

Take Atlanta, for example. The city set ambitious climate goals including achieving 100 percent clean energy use by 2030. Chandra Farley, chief sustainability officer for Atlanta, knows that strategic fiscal planning will be imperative to achieve their goals while mitigating future financial risks.

“As residents rates go up, the city’s rates go up," Farley said during an Atlanta City Council Utilities Committee meeting. "We saw that in the budget presentation, an about 4 to 5 percent increase on our utility [bills]. Investing in energy efficiency with shorter paybacks now for the city [and] procuring more renewable energy continues to be critically important.”  

To meet these targets, the Atlanta's Mayor's Office of Sustainability and Resilience collaborates closely with the Department of Finance to explore innovative financing models. The partnership includes Sustainable Capital Advisors (SCA) involvement in developing the city's federal sustainable infrastructure funding and financing strategy. This includes conducting a landscape analysis of funding opportunities, and leveraging tax incentives to realize cost savings from sustainable investments. By adopting a comprehensive approach, Atlanta is positioning itself to advance critical projects in a resource-constrained environment, benefiting the city’s financial resilience.

Historic levels of grant funding present unprecedented opportunities for cities to secure the capital needed for essential climate action projects without overburdening their budgets through programs like the Greenhouse Gas Reduction Fund, Infrastructure Investment and Jobs Act and Inflation Reduction Act.

A notable example of leveraging this funding is SCA’s ongoing partnership with the Philadelphia Green Capital Corp., the green bank affiliate of the Philadelphia Energy Authority. SCA recently supported the organizations as a coalition member for Pennsylvania’s state application for the Solar for All competition, successfully securing $156 million to expand equitable green energy development across Pennsylvania.

Emily Schapira, president and CEO of the Philadelphia Energy Authority, recognizes the importance of tapping into this historic moment.

“[The Philadelphia Energy Authority] is experiencing rapid participation growth across our clean energy programs," Schapira said in the organization's annual progress report. "With limited resources, we are truly leveraging every available dollar — including once-in-a-generation federal funding and a growing wave of private investment. Our reliance on city funding represents only a relatively small share of our programs’ overall budget, delivering $132 in benefits for every $1 invested by the city." 

By bringing together multiple stakeholders, exploring grants, innovative financing and public-private partnerships, the authority is able to stretch financial resources to achieve goals and advance regional resilience.

The climate financial risk and resiliency toolkit

Examples like these illustrate a path forward. Cities can achieve both climate and financial resilience by following a structured approach. SCA developed a three-step framework based on the analysis of over 300 municipal climate action plans, case study research of best practices, and over a decade of strategic consulting and financial advisory services. It's designed to support municipalities in proactively managing climate-related financial risks and seizing opportunities for sustainable growth during this historic moment in climate funding. 

1. Develop a robust understanding of climate-related financial risks

The late Peter Drucker, a leader in management consulting, famously said, “What gets measured gets managed.” Climate-related financial risks are no exception. In a landmark 2017 study, the Government Accountability Office recommended the federal government to use available information on the potential economic impacts of climate change to identify significant risks and craft appropriate responses, including guiding federal investments to enhance resilience against future disasters. State and local authorities should follow this recommendation to identify, prioritize and address significant risks. 

The first step for cities is to comprehensively assess the financial impacts of climate change within their remit. This involves evaluating potential physical and transition-related risks associated with various climate scenarios, and their impact on economic indicators, potential expenditures and revenue loss.

For example, flood-prone communities could examine potential property tax revenue loss due to the devaluation of chronically flooded homes. Cities susceptible to climate-driven natural disasters should analyze historical recovery costs and project future expenditures. Municipalities dependent on fossil fuel industries could evaluate potential employment changes due to the clean energy transition.

Importantly, cities must consider how these risks may exacerbate existing inequities, particularly for low-income and marginalized populations. Each municipality must define the most critical factors to assess based on their unique physical, social and economic context.

By quantifying these risks, cities can prioritize investments and interventions that mitigate potential financial losses and enhance overall community resilience. This process builds a compelling business case for investing in climate resilience, aligns financial and sustainability teams towards common objectives, demonstrates proactive risk management to future investors, and establishes a baseline to evaluate progress.

2. Leverage diverse funding sources for urgently needed priority projects

With a nuanced understanding of climate-related financial risks, cities should develop a strategic roadmap to efficiently deploy capital towards priority projects that enhance climate and financial resilience. This roadmap should integrate diverse funding sources — including federal grants, budget allocations, public-private partnerships and municipal bond financing — connecting them directly to specific climate-related projects.

Initiatives could include upgrading infrastructure for resilience against extreme weather events, implementing sustainable energy solutions, enhancing water management systems, or constructing climate-resilient affordable housing.

Identifying clear funding pathways clarifies the requirements to secure capital. By determining which projects are grant-eligible, cities can proactively assemble collaborative teams and reference successful proposals from past winners, allowing them to seize funding opportunities swiftly.

Projects eligible for novel financial structures — such as direct-pay rebates, Power Purchase Agreements or energy efficiency upgrades — can be prioritized and savings earmarked for reinvestment. Larger projects requiring bond financing can be flagged for additional support from financial teams. By mapping projects to potential funding sources early on, municipalities can create project specific strategies that ease barriers to implementation.

3. Align long-term investments with climate goals

Finally, cities must integrate climate considerations into their long-term financial planning processes. This entails collaboration across municipal departments, guided by budgeting offices, to ensure that financial resources are efficiently allocated towards resilience-building initiatives.

Establishing budget guidelines that prioritize investments in resilience, emission reduction, and climate-smart policies supports long-term fiscal health. By embedding climate resilience objectives into budgetary frameworks, cities can enhance their capacity to adapt to climate impacts as they evolve while promoting sustainable growth and development.

Implementation support

Climate resilience is financial resilience. By implementing this strategic framework, cities can proactively manage climate-related financial risks, leverage diverse funding sources for priority projects, and align long-term investments with climate goals. Embracing these principles positions cities to thrive amidst an ever-evolving regulatory landscape and growing climate challenges, while contributing to a sustainable future.