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  4. Episode 16: Investing in Green Construction and Sustainable Cities is Catching up in 2020

Guest speaker:
Alzbeta Klein - Director and GLobal Head, Climate Business at IFC International Finance Corporation

Investing in green construction and sustainable cities is catching up in 2020

Episode 16 | Duration: 20 minutes

Over $20 trillion is the expected cumulative investment opportunities for green cities in the emerging markets - and it’s just the beginning. It’s time for ESG and sustainable investors to jump on this opportunity, doing good for their portfolios and the world around them. What are other market implications and myths & truths around green infrastructure? Learn more in our interview with Alzbeta Klein, Director and Global Head of Climate Business at IFC.

  • Keesa Schreane [00:00:00] Welcome to the Refinitiv Sustainability Perspectives podcast. Today we're going to discuss the emergency of green infrastructures and green cities, the key implications for investors, as well as the latest developments in this space. Our guest is Alzbeta Klein, director and global head of climate business at International Finance Corporation, which is a part of the World Bank group.  

    Keesa Schreane [00:00:26] Make sure to send me an e-mail or tweet to let us know your thoughts on this topic and suggests the theme for the next episode or even tell us your own story to get a chance to be featured. You can find my email and Twitter handle in the episode description.  

    Keesa Schreane [00:00:41] So here's where we are. We're seeing significant growth in investments fueling sustainable construction and green cities. 

    Keesa Schreane [00:00:48] Here are a few examples. There is Google, who's spending nine hundred million dollars to build a new high tech neighborhood in Toronto, full of buildings, made out of wood...made out of wood- Abraham Lincoln would love that. Sarajevo is receiving thirty-five million euros in loans for greener public transport. And Britain is kicking off efforts for a fully electric bus town with the hope to have all-electric buses by 2025.  

    Keesa Schreane [00:01:17] Innovative thinking around how to structure or restructure a city seems to be a key driver. Just last week, Sidewalk Labs and Michael Green Architecture announced a plan to design the world's first all timber high rise neighborhood. And Hawaii's recently built 25 proposals focused on providing more energy-efficient insulation and lighting for the purpose of reducing their carbon footprint. Now, some critics say that these building requirements may make housing and even retail space out of reach because of the costs involved. Alzbeta, are costs of energy-efficient buildings going to be a stump stumbling block for society moving forward? 

    Alzbeta Klein [00:01:59] Keesa, this is a great question. Costs are such a myth in green buildings and I can say that they are not going to be an impediment when we start talking to investors about investing in green buildings in emerging markets. The first question is how much more is it going to cost me? And our research and practice had shown that the cost differential is less than 5% for most of the green buildings, and the cost of bringing these energy-efficient measures is not going to be a stumbling block.  

    Keesa Schreane [00:02:32] Well, let's talk about a bit about data. Do you think that there are data gaps in how energy efficiency is being tracked now and what we're understanding about it?  

    Alzbeta Klein [00:02:40] Energy efficiency is like a child that nobody cares about when it comes to data and when it comes to looking at opportunities. It's one of the cheapest ways to make our construction better and greener. And it's one of these things that people don't think about. They think about building new buildings. They don't think about saving energy through energy efficiency. And though there isn't enough data and we need to have more data, especially in emerging markets, because this is where growth will happen. And this is where data is going to be essential to show that you can build green either from scratch or on the retrofits. And is data is extremely relevant to builders and to investors.  

    Keesa Schreane [00:03:20] Okay. So with that being said, we have the myth of the cost involved here. We also have the knowledge that data is good, but it can be better and we need better data for this. How can investors approach this sort of project safe starting from the beginning? How should you approach a Green Cities / Green Buildings project?  

    Alzbeta Klein [00:03:40] So first and foremost, we need to ask the question of why? Why do we actually care about it and why it actually matters? And then we sort of can go to why. So there are 3 reasons why we should care. First of all, cities consume two thirds of the world's energy. So when you talked about energy efficiency, two-thirds is consumed in cities and we need to start thinking about it and make it more efficient. When you say cities, you mean actual cities. Nice. Cities globally. Yeah. So 70% of global carbon emissions come from there.  

    Alzbeta Klein [00:04:08] Secondly, with 90% of urban areas located near the coastlines, we need to start thinking about what this means for cities, what weather patterns and changes in weather patterns mean for cities, and how you need to build to create cities that are sustainable and adapted to the future.  

    Alzbeta Klein [00:04:30] And last but the least, and this is the most important one. 60% of cities in emerging markets are yet to be built. They're not built today. They're going to be built by 2030. So when you have an opportunity to change how we do things, this is your opportunity. Because, as I said, cities emit, cities are exposed to changing weather and cities are expanding.  

    Keesa Schreane [00:04:49] So a very interesting description of energy. Just, you know, something that no one's really dealing with right now. I think a great example is Heliogen, which is a cleaner energy startup. They recently made a pretty promising step toward addressing embodied carbon in cement still and other building materials. They announced that it can harness solar power to generate industrial heat above 1000 degrees Celsius using artificial intelligence. And get this a field of mirrors, which I thought was quite interesting.  

    Keesa Schreane [00:05:25] So Alzbeta, now that we understand the costs, are the costs myth, we understand the importance of data. But with this artificial intelligence and using these types of things. Talk to us about emerging technologies and how they will impact green cities and green buildings.  

    Alzbeta Klein [00:05:42] Absolutely. So first of all, your example was very timely because what this company is doing is reaching hard to decarbonised sectors. So those are sectors where there's a fair bit of innovation. But I would say not enough. And while this company is trying to do is decarbonize cement, decarbonize steel, or at least lower the carbon footprint. This is the cement embedded in buildings. So there are two buckets of innovation. One is the innovation in technologies and one is the innovation in finance. And we can maybe start with the technology innovation.  

    Alzbeta Klein [00:06:10] So we have a tool called Edge and that's a tool that is specifically designed for emerging markets green construction, anyone can access it online and anyone can put in basic characteristics of their building and start playing with various parameters. So as an example, you are in Mongolia. Mongolia is a country with huge differences between the temperature in the summer and in the winter. In a summer you've got temperature in the 90s and in winter you've got temperature in minus 30s Fahrenheit. How do you build a hotel in Mongolia? Well, you can play through our software, whether you pick it up with a single glazed window, a double glazed window or perhaps triple glazed window. And what that means in your cost structure and what it means in your carbon footprint of the building. And through those technologies, you can clearly see how you can build a building that is much more energy-efficient; Our architects are telling us that you can build a building that has a lot more natural ventilation so that you need less air conditioning in various markets. So there are technologies that are allowing you to do it. And I guess later on we can talk about innovation in finance.  

    Alzbeta Klein [00:07:15] Great, great. So, I mean, with that being said, just getting back to investors for one second, who is the ideal investor for Green Cities?  

    Alzbeta Klein [00:07:22] If we're looking at that as a market, all investors should be interested in green cities. And I'll tell you why. Because it's one of the biggest investment opportunities that we have in front of us in the next 10,15 years. We have done a study about cumulative investment opportunities in cities and that investment opportunity by 2030 is somewhere in a neighborhood of twenty-nine trillion dollars. When you talk about twenty-nine trillion dollars, this is what has to be built. This is what is going to be built. This is not about which investor. This is about how we bring the most investors into this sector and how we help them de-risk their investments so that they are comfortable coming into the emerging markets.  

    Keesa Schreane [00:08:02] Wow. It sounds like a huge investment opportunity. Now, let's take a quick clip from a podcast by IFC, where they take a deep dive into their latest findings around green buildings in emerging markets.  

    ClimateBizz Podcast [00:08:16] We're looking at about a fifteen point seven trillion dollar opportunity just for the residential sector, which is about 60 percent of the opportunity. And then you have another 9 trillion and commercial buildings. So offices, hospitals, retail, everything else that you might think of in that category. And so what you're seeing on the residential side is tied to basically rapidly expanding urbanization in emerging markets. You have high population growth in many countries. You have rapidly urbanizing cities and income levels. So, more construction, more need for housing in emerging markets, particularly in middle-income countries. 

    Keesa Schreane [00:08:55] This was very insightful. So what should be their path? How should they interact?  

    Alzbeta Klein [00:09:00] So there's a couple of things. First of all, we've got a number of cities in emerging markets that are already starting on a path of having an investment credit rating. And obviously, those cities are more creditworthy and investors are more willing to come in. But we have a number of initiatives at our sister organization, the World Bank, which works on the credit worthiness of cities. So helping cities to become creditworthy so that investors can come in and start investing. And then the next step is to look at the sectors where investors are coming in. So when you think when you look at things like bus rapid transit. It's something that investors know how to do in a municipal finance space in the United States and Canada, in Western Europe. They know how it looks. It's going to look pretty similar in emerging markets.  

    Alzbeta Klein [00:09:49] When you look at things like waste management or waste treatment, those are new areas not only in emerging markets but even in developed markets. And this is where you need to think about de-risking and blended finance where finance that needs perhaps slightly less return, come in and alleviate some of the risks so that commercial investors can come in and gain commercial returns. So it depends on the sector, it depends on the area, depends on where the city is  and on its credit-worthiness. But the goal is to create solutions that crowd in the maximum private finance into emerging market cities.  

    Keesa Schreane [00:10:26] Great. So you talk about sectors. We talk about de-risking. How can investors use ESG data to help them make these decisions?  

    Alzbeta Klein [00:10:35] So ESG data is it's a great question because ESG data until maybe four or five years ago was something that was collected on a sideline. It was something that investors that had a particular interest in it were looking at it, but it definitely wasn't mainstream in today's world. You can read mainstream financial press any day without finding an article about ESG investing, about climate risk, about climate resilience. And it really became mainstream. So we see financial press writing about it. And then we see investors starting to talk about it. So announcement announcements from BlackRock recently and elsewhere, from Goldman Sachs, announcements from several other investors, that totals something like 40 trillion dollars of assets under management. Talking about the need to look at is criteria when they invest and then invest accordingly is definitely bringing that topic to the forefront. But data is not perfect. There are several sources of data that we all use to assess that risk. But it became from nice to have to essential to have. And when you have something that is essential to have for your investment decision process, that means that there will be innovation in data. There'll be companies that are going to be crowding into that space and they'll be providers of this data. There will be tailoring to the needs of investors in that space.  

    Keesa Schreane [00:11:56] So it sounds like getting the best type of data is really the best decision that an investor can make here. I know that Refinitiv has ESG objective data, very rich history of data there.  

    Keesa Schreane [00:12:06] So that is definitely how an investor, one way an investor want to approach moving forward. How can we effectively measure the impact of the bottom line?  

    Alzbeta Klein [00:12:16] If we look at these types of investments, that's a great question because a lot of companies are thinking about it. I was just yesterday at the ad board of the Center for Sustainable Business at New York University, where I'm a member. And there's a new methodology called Rosy Return on Sustainable Investment. And there are a number of academicians and practitioners who are thinking about that. But even more importantly, it's about what is happening on the ground. And you can see it in how the cities are being built and what kind of financing they can attract. We have done work where the city of Ahmedabad in India, where we looked at them, that they they ask us to look at their lower carbon trajectory for the city development. So we help them design that. And as a result, they selected few pilot projects and they are on track to issue their first green bond.

    Alzbeta Klein [00:13:09] O it's not just what you are seeing in paperwork or in research. It's what kind of funding, what kind of finance the city can attract at the end of the day. And that's the proof that it actually worked because you've got investors who are interested to come in and invest in those projects. The other thing to mention is that a number of cities in emerging markets are hiring chief resilience officers, chief resilience officers, as well as officers. So those are the folks who are looking at the city and the city's ability to adapt to changes in weather and adapt to changing circumstances of the city. And in our report, we have insights from six chief business officers from Danang, Vietnam, from Mexico City, from Semarang in Indonesia, Porto Alegre in Brazil, and others who are looking at what specific requirements the city needs to be able to withstand the impact of weather. Population density, geography, and other considerations. And that in itself makes investments more sustainable. And that brings you more investors to invest in your city and then allows the city to issue a green bond or have a green loan and crowding the investments that you need to have to get the city to be sustainable and on a sustainable growth pathway.  

    Keesa Schreane [00:14:18] It really seems like all of this information really leads us back to the need to have really good data. Even with this new role that chief resilience officer, they are measuring and looking at how a city can be impacted, withstand weather, population, et cetera. They're getting that from data.  

    Alzbeta Klein [00:14:32] They need to get this from data and we need to get better data now. The good thing is that the data is becoming more available. We've got we are we, as I say, invested in a company called Pandit Labs, which are low orbit satellites that bring in data with pretty good accuracy. But it's not just the data, it's processing it into information that investors can use. And I think you had on your podcast colleagues who talk about TFC the disclosure of. Institutions about climate risks and SASB, which is also promoting disclosure and others who are bringing disclosure, disclosure gives you more data. Data allows investors to assess risks and that allows them in turn to invest. So it's a bit of a virtuous cycle that you have when you have good data, when you have good information that is processed into usable data by investors and that counts in investments into cities and going back to where the investment opportunity is and how large that investment opportunity is. I think it's something that we all need to think about, about how to crowd in investors pension funds, mutual funds, others into opportunities that we see in cities, in emerging markets.  

    Keesa Schreane [00:15:41] So with that being said, it sounds like that there are some gaps that we really need to manage better in terms of the information, the data that we receive. If you have a list of the top three ways that data can influence the future of green buildings, or green cities, or just, you know, how we can manage some of the gaps that exist with those top three things.  

    Alzbeta Klein [00:16:05] So I think, first of all, I think we need to go back to creditworthiness. So data on the ability of the city to borrow and to repay and that sort of financial data. So that's something that is not uncommon in developing markets, but it's still lacking in emerging markets. So just the financial data on what cities need to be creditworthy and to be able to go to capital markets and to be able to borrow.  

    Alzbeta Klein [00:16:29] The second one, I would say, is data on what the city needs, because that data allows you to create bankable projects. What are bankable projects? So that projects that you can invest in as an investor. And we need to have good data to be able to structure those.  

    Alzbeta Klein [00:16:46] And then last but not least, it will be data to narrow the financing gap in the city. So, again, it's a combination of, you know, data from the city on geography, on the needs, on population growth, on projected revenue growth, potential tax base, but also environmental and social data that you need. And That allows you to then structure financial instruments that would allow you to narrow the creditworthiness, narrow the gap; example would be, data for the base of issuance of green municipal bonds. Right. For every green bond that a city would issue, they need to have a data structure embedded in their city government, in the municipal government to be able to support that green bond with the green projects. It's data on land value capture, which is when you build a lot of public infrastructures, your land appreciates and the value of that land should be factored in. So again, data on everything that a city needs to narrow the financing gap would go a long way.  

    Keesa Schreane [00:17:51] Great. Finally, what is your big idea? What do you think is going to be happening in the green building space that's really going to take the market by surprise, say, over the next year or the next couple of years? What can we not expect but need to start expecting at this point?  

    Alzbeta Klein [00:18:08] So I think I think the biggest issue will be that you are going to see mainstream investors thinking about how to bring green buildings into emerging markets. That is going to be the likes of large hotel chains who are going to be building and contracting to build very differently because they know they can do it right the first time and they don't have to do the retrofits. And you're going to see investors that you never thought about being in that space, because with the announcements that we heard from BlackRock and all the others, it forces investors, it forces asset owners and it forces companies to think very differently. So we will go. The big idea is that we will go from nice to have to essential to have. And for that, you need data, you need finance and you need de-risking tools to make it happen.  

    Keesa Schreane [00:19:04] So from cost being a myth to the need to have the critical need to have good data to really understanding the way that these entities need to partner together, it sounds like the future is very right for green cities in green. 

    Alzbeta Klein [00:19:21] I would say very green. The opportunity is very green and I hope the future will be very green as well.  

    Keesa Schreane [00:19:25] Great, Alzbeta, thanks for joining us.  

    Alzbeta Klein [00:19:27] Thank you.  

    Keesa Schreane [00:19:28] Now a note to our listeners. Are there important insights about the green infrastructure that we missed or would you like to suggest a theme for the next episode? Please email me or reach out on Twitter using hashtag #RSPodcast. See the email and Twitter handle in the episode description.  

    Keesa Schreane [00:19:47] If you want to learn more about investing in green buildings and market opportunities in the emerging economies, check out the latest podcast episode by ClimateBiz and make sure to download their report. You can find both links in the episode description.