President Biden recently signed into law the Inflation Reduction Act of 2022 (IRA). This law provides $362 billion for climate change mitigation and adaptation, the largest climate change spending bill in US history. Spending provisions include tax credits, rebates and direct investment through grants in renewable energy, carbon capture and energy efficiency. environmental justice is also addressed through a series of grants to address environmental injustice and insufficient access to cleaner energy and emissions reduction programs for poor and marginalized communities.
Although the increase in authorized permits for oil and natural gas drilling mitigates the positive impact of the bill, it is still expected to reduce emissions by 40% compared to 2005 levels. The bill invests directly in cities, with a focus on equity, in several ways. For example, the bill establishes a $27 billion greenhouse gas reduction fund for projects and may be made available for similar funds at the state and local levels (note that 60% of this fund must go to disadvantaged communities). Additionally, $3 billion is being made available for port climate actions and an additional $1 billion is available for a clean heavy-duty vehicle program (e.g., zero-emission buses and garbage trucks). States will also receive $4 billion to fund reimbursement programs for homeowners, and with 81% of the national population living in cities, a large portion of tax credits and personal rebates will go to urban areas. With such a large influx of funding, as well as previous unspent COVID funds – specifically 16% of $350 billion funds made available through the American Rescue Plan Act’s State and Local Fiscal Relief Fund – there is plenty of money available for cities and states to not only meet their climate adaptation needs, but also to mitigate their impact on climate change. More specifically, although cities represent more than 60% global greenhouse gas emissions but only 2% of the planet’s surface, according to UN Habitat.
So, we have cities at the epicenter of the climate crisis, we need to mitigate ongoing emissions that are mostly coming from cities, and there is added urgency to address adaptation and mitigation in an equitable way. Meanwhile, cities have access to funding that could truly be transformational.
But it would help if there was a standardized way to determine how best to deploy that money and measure its effectiveness.
This is where ESG could help. Already, major credit rating agencies (S&P, Fitch and Moody’s) have assessed, through their own unbiased methodologies, ESG-related risks for major cities, as well as states, major counties and other entities. of the public sector. Using Moody’s study of their city ratings as a proxy, only 18% of cities that received an ESG rating had a positive impact on their overall rating. In contrast, 35% of the cities in the study had ESG ratings that negatively impacted their overall ratings – these ratings include both “E” (environmental) and “S” (social) ratings. Based on a systematic scoring approach alone, there is significant opportunity to collectively improve cities in terms of environmental responsibility, climate adaptability and social equity.
In short, US cities are receiving billions of dollars in unspent ARP-A funding and upcoming IRA funding. Indirect data shows that less than 18% of them are in a situation where their environmental and social risk factors have a positive impact on their overall risk score. Cities play an important role in the overall goal of mitigating climate change. As a growing majority of Americans live in cities, the need for climate adaptation action will fall on cities in addition to the need to empower historically disadvantaged communities. These give cities the opportunity to influence real change, but a balance would need to be struck between empowering community voices while utilizing the data-driven risk assessments done through ESG.
On community empowerment, my colleague Mark Funkhouser recently provided examples of how cities can empower these community voices. In his newsletter, it focuses on the link between affordable housing and climate change and provides a Denver case study on how to effectively include the community in developing an affordable and energy-efficient housing plan in light of the rising energy costs. The case study shows that affected communities can be objective and help lead the way not only in the fight against inequality, but also in the fight against climate change.
Now add ESG. Although still nascent and not fully standardized or comprehensive – particularly as it relates to the proverbial “S” ratings – it could provide an unbiased and expert view of target areas where investments could provide optimum outcome. As ESG metrics develop and become comprehensive and universally accepted, they can serve as the proverbial dashboard to direct funding and attention to objectively determined areas of risk for cities, as opposed to areas more subjectively determined expenses.
The combination of these two elements could create a powerful tool to direct spending towards equitable solutions to climate change, environmental degradation and social injustice – like a proverbial compass. This would require a two-way street, where community leaders would need to assess macro-level goals and holistic ESG data while advocating for their specific needs at the local level. This balancing act would be mediated by civic leaders, responsible for decision-making for these funds provided by the federal government, resulting in optimal outcomes with equitable outcomes.