How Europe’s cities can lead the climate transition

Cities are on the frontlines of Europe’s climate transition. They are where decarbonisation, resilience, and social renewal intersect, shaping energy systems, mobility, housing, and local economies. Yet these urban centres face a paradox: they have the vision for climate action, but their current financing frameworks cannot deliver the scale or nature of the investments required.

Established in June 2024, the Climate City Capital Hub (Capital Hub), led by Bankers without Boundaries (BwB) as part of the NetZeroCities consortium and in close cooperation with the European Investment Bank, is supporting more than 100 European cities that are part of the EU’s 100 Climate-Neutral and Smart Cities by 2030 Mission with their climate objectives.

The decarbonisation funding gap

From fund structures in Leuven, Aachen, and The Hague, to emerging green bond frameworks in Lyon and Marseille, early progress is demonstrating what is possible when cities gain access to tailored support and the right tools to unlock capital.

Yet structural barriers persist, slowing the pace of activity across the continent. And the investment that is needed is immense: research by BwB estimates the funding gap for decarbonisation across 100 Mission Cities is €307bn.

Debt ceilings: when prudence becomes paralysis

Municipalities and utilities often face strict national or local borrowing limits that fail to distinguish between ordinary expenditure and transformative climate-positive investment. Capital for revenue-generating climate-centred projects, such as district heating upgrades or waste-to-energy systems that reduce long-term risk and operational costs, is treated the same as routine borrowing.

Policymakers must reconsider what counts as ‘good debt’. Climate expenditure is strategic investment, not optional spending. Easing or exempting climate projects from rigid debt ceilings is essential to unlock capital flows.

Grant dependence: a barrier to scale

Across Europe, grants remain the dominant instrument for urban climate action. While well-intentioned, grant funding rarely requires projects to demonstrate market viability or robust performance standards and often targets small, bespoke initiatives. While sometimes necessary in some sectors, to generate co-benefits or support projects at certain development stages, this creates a landscape of projects that depend on continued subsidy, lack a pathway to scale, and generally fall outside the interest and scope of private investors.

Private capital seeks size, predictability, and replicable outcomes. Without aggregation and risk mitigation, the incentive to invest remains limited. Public funders must pivot from being the sole source of finance to acting as catalysts: grants should de-risk and aggregate projects, creating pipelines suitable for private investors.

Cheap municipal loans: a hidden disincentive

Low-cost loans from regional or municipal banks are valuable, but they can unintentionally discourage innovation. When borrowing cheaply is easy, cities may avoid exploring blended finance, risk-sharing instruments, or more sophisticated market-based solutions. Europe’s transition demands partnerships where public institutions provide guarantees and concessional finance, with private institutions willing to invest in scalable projects when perceived risks are addressed.

Policy frameworks: old rules, new era

Even where financing pathways exist, regulatory and procurement frameworks can block innovation. Rules designed for traditional projects, with rigid expenditure requirements, unclear regulations for low-carbon infrastructure, and conservative procurement practices, limit flexibility. Procurement regimes are designed to reduce risk, not enable financial innovation.

Modernising fiscal and procurement rules is vital. Climate investments must be treated as strategic, with frameworks that support aggregation, risk-sharing, and blended finance. Without this shift, cities will remain constrained in their efforts to structure projects that attract private capital.

Political cycles: risk aversion by default

Local governments operate on short political timelines. As a result, predictable, low-risk investments are often prioritised over innovative projects that yield long-term benefits. Structured experimentation, peer learning, and technical support can mitigate this, but broader systemic solutions such as regulatory sandboxes, guarantees, and frameworks that reduce political risk are needed to encourage bold, climate-positive choices.

A systemic challenge: solving the puzzle

Europe possesses the capital, technology, and ambition to achieve its climate objectives, but must tackle these existing policy and financial ecosystem challenges if we are to accelerate progress towards greater resilience and a climate-neutral future.

One major piece of the puzzle is building stronger connections between the many moving parts, including translating ideas into bankable projects, increased coordination among stakeholders at national and sub-national levels, and early involvement of potential investors.

 This is key to inform and coordinate advocacy for:

• Reforming fiscal and borrowing rules to treat climate investment as strategic
• Modernising procurement frameworks to allow innovation and risk-sharing
• Supporting cities in their efforts to aggregate small projects into investible pipelines
• Expanding guarantees and risk-sharing instruments to mobilise private finance.

A more joined-up approach also requires cities to engage potential private sector capital providers at an early stage. Investors cannot assess projects without conducting early financial due diligence. Upstream engagement gives financiers the opportunity to provide feedback when refinements to project structures or performance objectives are still possible, rather than the limited downstream options of investing in a project as it stands or rejecting the opportunity outright. At the same time, investors that recognise cities as long-term, stable, investment-grade climate actors and that are willing to partner with municipalities and public institutions to co-design instruments such as green bonds and blended funds are already making swift progress.

Benefits of early engagement

The Capital Hub: An EU-level bridge and catalyst

Through our experience of working with cities and investors through the Capital Hub, we have developed a deep understanding of what is crucial for building robust, investable project pipelines. In addition to early engagement between cities and investors, other key ingredients include establishing clear financial fundamentals, access to structured project preparation support, taking a neutral approach to identifying the most appropriate sources of capital, focusing on replicable project approaches, and aligning with EU and national finance initiatives.

The Capital Hub serves as an EU-level bridge and integrator between Mission Cities and financing partners, helping to align preparation pathways so that the right projects connect with the right sources of capital. It also amplifies impact by drawing out insights from initiatives in individual cities and translating them into scalable, replicable models that other cities can adopt.

Cities are Europe’s laboratories and engines for climate resilience and social renewal, but their ability to act with impact depends on practical, holistic support to navigate the challenges and bridge the gaps

Successful examples of this work are already emerging across geographies and sectors, ranging from the development of retrofit guarantee structures and district heating special purpose vehicle models, to pooled project approaches and growing activity on municipal bond programmes and fund structures. These efforts are being facilitated by expert input from the Capital Hub Investor Panel, a neutral forum through which investors help cities shape innovative solutions for mobilising private capital and establish a clear route from early preparation to investment-ready projects.

Cities are Europe’s laboratories and engines for climate resilience and social renewal, but their ability to act with impact depends on practical, holistic support to navigate the challenges and bridge the gaps between climate goals and investment realities. The Capital Hub demonstrates that when cities are equipped with the right tools, guidance, and financial structures, they can move from climate ambition to climate action with confidence and success.

Bankers Without Boundaries (BwB), an innovator in finance, is a not-for-profit financial advisory and investment banking firm that applies capital markets and project finance expertise to drive environmental and social impact. BwB works with public and private institutions worldwide to design and implement financial mechanisms that accelerate the transition to a sustainable future.