Professional Wealth Managementt

Home / Special Reports / Building the sustainable cities of the future

Michael Steingold, Russell Investments

Michael Steingold, Russell Investments

By Charlotte Moore

With the majority of the global population now living in urban areas, making cities more sustainable can be a key way to create impact 

In 2018, for the first time the population living in cities exceeded those living in rural areas, according to the United Nations. By 2050 our urban centres will be even more significant with the UN predicting 68 per cent of the world’s population living in conurbations. 

Urban environments are complex spaces to manage with population density making it harder to control, for example, air pollution, traffic congestion and waste. These issues will be further compounded by the need to make cities more sustainable as well as dealing with the impacts of climate change.

For those interested in using their capital to create positive change, investing in cities can be an important way to create impact as it will improve the lives of the majority of the global population.

Market participants have identified four key trends around sustainable cities and devised investment strategies to profit from them.

Sustainable buildings

Making the built environment of a city more sustainable is perhaps the biggest challenge facing local authorities, governments and investors, with legislation already making it clear buildings will have to be much more energy efficient.

Developers are realising constructing more carbon neutral buildings is not sufficient. These assets also need to be better managed, with the aid of latest technological innovations. “The advances in property and sensor technology can significantly improve a building’s efficiency,” says Michael Steingold, director of private markets at Russell Investments.

While new developments can be built to sustainable standards, existing residential and commercial space might need to be retrofitted, although this also brings challenges.

“Investors need to be thoughtful about the economic case for those retrofits and improvements especially when it comes to areas where there are high obsolescence rates, particularly for office and retail,” says Mr Steingold.

Retrofitting is by no means the answer to all of the demands presented by the sustainability agenda. “There are limits to how energy efficient you can make an old building,” says Paul Jayasingha, head of the real asset section of manager research at WTW.

Investment managers are increasingly devising a more structured approach to their portfolio management. “A life carbon assessment gives a framework which allows property managers to determine the most sustainable decision when deciding whether to re-purpose a building or replace it,” says Phil Ryan, director of city futures, global insights at JLL, the real estate advisory firm.

This life carbon assessment is now a requirement in some jurisdictions, so thinking in this way is likely to become more mainstream, he adds.

Some investment strategies buy existing office space and reworks to make them more energy efficient. WTW’s Mr Jayasingha says: “Many of these funds are, however, typically closed-ended, limited-life, funds which are illiquid and with a maturity of five to 10 years.”

Localised utilities

Cities currently rely on external sources for power, but over time utility provision is likely to become more fragmentated and localised. “It’s likely we will see both commercial and residential spaces start to produce more of their own power with rooftop solar panels,” says  Mr Jayasingha.

In addition to individual buildings producing their own energy, district heating is likely to become more popular for both residential and commercial buildings. “Continental European cities use these systems as a more efficient way to distribute energy within densely populated areas,” he says.

These types of localised utilities are already popular in the US, especially in large institutions such as hospitals, municipal campuses and universities. “Localised grids could include micro-grids as well as production and storage which happens locally,” says Russell Investment’s Mr Steingold. They will require a lot of capital. This is because there is a lot of variability with renewable sources of energy and difficulty balancing the power load, he adds.

As well as building local networks, infrastructure and technology which helps to balance the grid at peak times will help to stabilise cities’ utilities. 

But one single utility solution is an unlikely outcome. “Some neighbourhoods will move quickly to district heating, while others will rely more on solar and batteries, because they can park their cars, and some will still rely on natural gas and we will need to find ways to de-carbonise this,” says Robert Wall, head of private sustainable infrastructure at Lazard.

Building these new localised utility grids will require both hardware and infrastructure. WTW recommends investors look for strategies specialising in energy transition, such as those providing renewables and batteries which target community networks. “There are funds which specifically invest in urban infrastructure assets,” says Mr Wall.  

Greener transportation

Cities with well-established public transport systems are already more sustainable than smaller and rural towns which are much more reliant on cars. But these networks can be made even greener by getting rid of carbon-fuelled buses and trains.

While much of the focus of greening transportation is about replacing traditional combustion engines with electric vehicles, many cities have a more holistic view of how their city should function.

JLL’s Mr Ryan says: “Ensuring citizens can be mobile and have access to facilities is becoming a core focus when discussing how cities should be designed.” It is about bringing services closer to people, he adds.

“This can include the development of the 15-minute neighbourhood – ensuring most facilities are only a quarter of an hour from people’s homes.” Or for others it is about ensuring developments are sufficiently mixed use that there is an “18-hour environment”.

If people do not need to travel as much to go to work or access services, then this can reduce demand on public transportation systems. 

Investing in a green transport can be complex as much of transportation in cities is controlled by local authorities, funded by the public purse. Experience shows any public-private partnership initiatives are often complex.

“Investing in smart mobility can be difficult because there are many different stakeholders involved, including local authorities, land owners, utility companies and manufacturers,” says Harold d’Hauteville, head of infrastructure equity for Europe at DWS.

Investors can, however, focus on the areas where they are already invested and use them as a platform to develop smart solutions. “For example, [this can include] investing in bus electrification and charging infrastructure for public transport operations in the UK or the Benelux,” says Mr d’Hauteville.

Managing water

Increased population density within cities will exacerbate the impact of climate change on the challenges of effectively managing water resources, with periods of drought and flooding more likely to increase.

“Many cities were built along water trade routes which will make them vulnerable to floods,” says Peter Fox, senior vice-president for business development and client services at KBI Global Investors.

Ageing infrastructure means many utility companies battle leaky pipes, which compounds the problems of managing water resources. “Between 20 to 60 per cent of water is lost globally either because of leaks or using it in a way that does not generate revenue,” says Katerina Kosmopoulou, partner and head of ESG at J. Stern & Co.

Utility companies are investing in both upgrading their systems and installing digital management systems. “Better analytics allows water companies to predict where leaks are likely to develop because of stress in parts of the system,” which could generate “predictive maintenance”, says Ms Kosmopoulou.

In addition, smart meters help consumers to be more cognisant of their water usage, so they are better able to manage this resource, she adds.

Greater numbers of people living in cities will also increase demand for waste water treatment. “For developed cities, one of the biggest issues is trying to upgrade ageing water infrastructure,” with this requirement becoming more pronounced as urban populations build, says KBI’s Mr Fox.

In cities where water is becoming increasingly scarce, there will be increasingly pressure to recycle water more effectively. “In LA, there are plans to upgrade the local treatment facility in order to recycle the city’s waste water, rather than pumping it into the Pacific Ocean,” says Mr Fox. The pressure to do this in other cities also is likely only to increase in the coming decades, he adds.

Building cities of the future to ensure they can cope with a rising population, become more sustainable and cope with the impact of climate change will be a complex challenge. But private investors will clearly have an important role to play, alongside central government and local authorities. 

Global Private Banking Awards 2022