#SRI — 22.06.2023

Why Connected Cities are Key to a Sustainable Future

Eleonore Dachicourt, Head of Sustainable & Responsible Investments for Asia at BNP Paribas Wealth Management

Energy-efficiency technologies are turning a vision of sustainable cities from science fiction into reality.

smart cities

Cities today are turning to technology to reduce energy use and improve their environmental impact. This growing focus on sustainability is both a long-term trend and an opportunity for investors who are looking to combine positive impact with the potential for attractive returns.  

Concentration risk

The United Nations estimates[1] that while today’s cities represent 3% of the world’s land area, they house 55% of its population. Furthermore, by 2050, 68% of humans will live in urban centres. This kind of concentration means cities have an outsized impact on the planet, through the energy and resources they consume as well as the waste and pollution they produce.

Currently, our cities are responsible[2] for 80% of energy consumption and more than 70% of carbon emissions and global waste. This concentration of people also concentrates risk, including impacts from increasingly intense weather events and rising sea levels.

Leveraging new technologies to improve the efficiency and sustainability of urban systems and services can therefore produce a significant impact on the urgent quest to mitigate and adapt to global warming.

As well as reducing their ecological impact, smart city technologies also aim to promote long-term liveability and improve citizens’ quality of life.

Starting with energy

One of the main ways smart cities promote sustainability is by harnessing renewable energy sources, such as solar, wind, and geothermal power. Digital monitoring and management of the grid can smooth the peaks and troughs created by renewable energy sources, while battery systems store surplus power to be released at times of peak demand.

The building blocks of smart cities include energy-efficient buildings, featuring passive heating and cooling systems, green roofs, and advanced insulation, cutting energy consumption and reducing the city’s carbon footprint. These buildings also deliver social benefits by providing green spaces, natural light, and improved health outcomes.

Asia leads the way

Asia’s cities are at the forefront of smart development. Singapore, for example, has implemented a range of technology initiatives to improve sustainability, mobility, and quality of life, including a traffic management system that uses sensors and data analytics to optimise traffic flow, reduce congestion, and lower emissions.

Seoul in South Korea has introduced a range of smart projects, including smart streetlights and a waste management system using data analytics to optimise waste collection services. Tokyo uses smart grid technology to manage energy distribution, and a smart water management system that reduces waste, while in China, Shenzhen has deployed electric buses that can be charged wirelessly using induction charging technology.

Smart cities can be a driver of change – and returns

With so much activity devoted to delivering smart-city projects, global investment in associated businesses and initiatives is expected[3] to grow at a compound annual growth rate of 20.51% from 2021 to 2025, reaching US$2.51 trillion in 2025. Wealthy individuals or families wishing to align their investments with this global trend can invest in smart city projects in a number of ways.

Direct investment in projects is one obvious option. This could include the construction of a new smart building, the installation of smart streetlights, or even the deployment of a new public transportation system. Public-private partnerships (PPPs), which bring together private investors and municipal agencies, are often the most appropriate vehicles.

Real estate investors may choose to invest in smart buildings or other developments that incorporate smart technology – or to seek specialist green property funds that draw on the insights of sector experts.

Alternatively, investors may choose to support innovative technology companies that are contributing to sustainable urban initiatives. Depending on risk appetite, this could involve allocations to venture capital firms that support early-stage start-ups in the sector, or equity investments in more established, listed companies. Specialist infrastructure funds provide another alternative entry point.

Sustainable capital

The breadth of sustainable investment instruments is allowing asset managers to respond to growing interest in the theme of urban transformation. BNP Paribas Asset Management last year launched its Sustainable Asian Cities Bond [4] fund, which focuses on Asia ex-Japan bonds to offer exposure to the region’s continued urban development.  

The fund seeks companies that have a strong track record of developing and commercialising technologies that can help cities reduce their carbon footprint and improve the quality of life for their residents.

Sustainability-focused investors will find much to interest them in the sphere of smart city development. While the challenges of urbanisation are well known, the growth of smart technology allows us to consider how cities could be transformed into drivers of sustainable change.  

[1] https://www.un.org/development/desa/en/news/population/2018-revision-of-world-urbanization-prospects.html

[2] https://ec.europa.eu/commission/presscorner/detail/en/IP_22_2591

[3] https://www.businesswire.com/news/home/20210723005405/en/Global-Smart-City-Market-2021-to-2025---Insights-Forecast-with-Potential-Impact-of-COVID-19---ResearchAndMarkets.com#:~:text=The%20global%20smart%20city%20market,spanning%20from%202021%20to%202025.&text=In%202020%2C%20the%20largest%20share,China%20%26%20Japan).

[4] https://mediaroom-en.bnpparibas-am.com/news/bnp-paribas-asset-management-launches-first-sustainable-thematic-asian-fixed-income-fund-046c-0fb7a.html