Better finance, better built environment

Cities are the engine of the world economy. Home to more than half the population, they represent 80% of global GDP. By 2050, close to 7 billion people will live in urban areas, much of which is still to be built. This translates into one of the biggest investment opportunities of the next decade.

However, the built environment also accounts for 40% of global greenhouse emissions. A combination of market and planning failures has led to a number of systemic problems: sprawl or poor use of urban space; a bias to make up-front construction costs as cheap as possible; and under-investment in lifecycle performance. A business-as-usual approach will only accelerate climate change and associated investor risk.

But there is a better vision of the built environment: one that better aligns the interests of developers, financiers, governments and end users for greater investment in livable, attractive, net-zero cities.

The prize is clear. Real estate is the biggest asset class on earth; buildings represent $6 trillion in investment each year. Estimates to transition the existing building stock to be greener and more efficient suggest a further $600 billion will be needed annually.

The broader financial system is already helping drive economy-wide shifts to net zero, especially in the energy and mobility sectors. But there are still barriers which lock in traditional models of capital allocation and prevent trillions of dollars from flowing into transitioning the built environment.

To unlock the investment opportunities inherent in a better built environment, every part of the urban system must be transformed. Through consultation with private finance institutions and city stakeholders, we identified nine critical transitions across three pillars of the urban system (design, build and operate) which can accelerate the transformation and unlock capital.

The good news is that many of the solutions underpinning these transitions are already emerging or in place. Yet progress is still too slow and investment falls far short of what is required. Central to the challenge are market, information and regulatory barriers to deploying capital at scale. In parallel, asset owners and end-users, governments, and developers struggle to access the investment needed to transition. Policymakers undeniably have a crucial role to play in creating the enabling environment for better urban systems. But waiting for perfect policies will leave money on the table and take too long to ensure cities are a part of the climate solution, not the problem.

To address these collective challenges, collective action is needed. By coming together, private finance institutions have the power to accelerate transformation of urban systems and unlock capital for a more resilient, net zero built environment that one organization cannot achieve alone.

This paper outlines a series of 9 high-impact opportunities for action. Many of these initiatives intentionally build on existing efforts. But to succeed at scale, city stakeholders from across the value chain must move beyond siloed approaches towards building lasting partnerships and aligning incentives to create a better built environment.

‘Better Finance, Better Built Environment’ was developed in partnership with NREP, an urban investment and development company that exists to create sustainable, inclusive and effective cities. It builds on the inaugural Leaders of the Urban Future event during New York Climate Week, 2022.