The fundamental challenge for small and medium-sized cities seeking to broaden the finance available for their climate projects and investment needs is prioritizing their projects and fulfilling the conditions of investors. These conditions request cities to formulate projects that are financially and technically sustainable, that integrate ESG criteria, that need a sufficient initial level of capital, and that are aligned with investors’ risk level tolerance.

Cities require professional capability and sufficient creditworthiness to secure investors’ confidence to mobilize their capital. However, many local governments, especially small and intermediary cities, both in developed and developing countries, do not have the professional skills to leverage external capital on their own, severely constricting their capacity to finance investments. Larger cities, mainly in developed economies such as Paris, London, and New York, seek ways to diversify their capital investment resources using off-balance sheet instruments.

To respond to these challenges, some local governments have developed or used existing territorial investment funds as local climate funds. These funds allow local governments to externalize mobilization and management of additional capital. They also allow them to pool both the resources and the green investment portfolios needed to contribute toward cities’ climate transition. The local climate funds can serve as an efficient instrument to operationalize the local government’s climate strategy (climate action plans, climate and green budgeting).

With their capacity to catalyze private capital and blended finance, and investment in
small and medium size projects, these local climate funds investment vehicles have the
potential to address the gap in green investment in developing and emerging markets. This factsheet aims to explore the typologies of these instruments and their legal, technical, and financial prerequisites that need to be put in place.