England & Wales, Global, Scotland Climate action and sustainable development, Finance, Housing and planning

Net zero neighbourhoods: Innovative investment at the local level to transform urban living


Unsplash+ In collaboration with Sumaid pal Singh Bakshi

We chatted with Rufus Grantham, the visionary behind net-zero neighbourhoods and Global Head of Retrofit and Built Environment at Bankers without Boundaries – aiming to revolutionise 100 European cities by 2030. Transitioning from finance to sustainability, Rufus innovated a model blending private finance with urban retrofitting and suggests that community-wide approaches led by local government are key to sustainable transformation and reaching net zero goals.

Tell us about how you developed this idea of net zero neighbourhoods.

I worked in finance for 20-odd years, and got made redundant by Royal Bank Canada in 2019, which was one of those moments where you think maybe it was the right time. I had coffee with an ex-colleague who said, “I’m running this small, not-for-profit called Bankers without Boundaries. Do you fancy volunteering?”

I wanted to do something more meaningful. And so I got dropped into this project that was just kicking off a European-funded project called Healthy, Clean Cities (which has evolved into what is now Net Zero Cities), which is this big EU cities mission to take 100 European cities to net zero by 2030. The precursor project was 15 cities, one of which was Edinburgh, and the rest were all in Europe: Madrid, Milan, Amsterdam, Copenhagen, Vienna and others. It was a group of slightly esoteric consultancies who’d been put together with these 15 city authorities to try and think about how to innovate around the more difficult parts of net zero. And we were there as the finance people. I had no background in housing. I just understood valuations, investment and stuff.

There was just this immediate realisation for me that local government finance, unsurprisingly, is entirely geared towards spending a fixed budget. It’s all about prioritisation of the fixed budget. There’s no investment mindset. When you bring in net zero, the cost of getting there is way beyond any municipal budget. And therefore, there is a need to blend in private finance. But if you’re not thinking about returns, you can’t bring in private funds.

In a lot of big cities, one of the core problems was that 30/40% of emissions came from the built environment. Council homes account for under 10% of that built environment, and so governments have limited agency over the other 90%. In all of the cases, whichever country you looked at, there was not a huge amount of evidence that national policy was making any difference to the process. And then you throw in a cost of living crisis and Covid and it’s kind of like the perfect storm for both new build and existing buildings.

I ended up diving into the economics of retrofit. I did some work with the other project partners and the Politecnico di Milano in Milan about retrofit costs and impact on energy bills and found a very obvious return on investment. You spend money on the retrofit and you get a lower energy bill.

Nearly all of the efforts to accelerate retrofit were focused around individual lending – there’s a lot of discussion about green mortgages. It was all about finding a way through carrots and sticks to force people who owned properties they either lived in or rented out to do the work of retrofitting. But when you looked at the economics, as a financial investment it just didn’t make any sense. You’d have to sit and receive that saving for tens, if not hundreds, of years to get your money back.

It also struck me that when you look at different house values and income levels in different geographies, the cost of retrofit per square foot or square metre is roughly the same everywhere. But the house value and household income are very different. So, even if you could successfully get people to do the retrofit on an individual basis, it would become massively regressive. It’s like a flat tax, essentially.

That led me to the conclusion that this couldn’t be left up to individuals. From a financial perspective, the net zero goal needs long term patient capital.

I spent most of my career in finance talking to pension funds. It occurred to me that if you had a 40-year, low-risk, high impact debt product, that would probably be quite attractive to pension funds.

I spoke to some ex-clients and ran that concept by them. They said, if you could do this across Europe, this is trillions of pounds of investment. It’s perfect. But how do you aggregate it? If you’re a pension fund manager running £50bn of pension money, you can’t do due diligence on a £40,000 retrofit. So you need to aggregate them somehow. The most obvious way is to aggregate a whole street or number of streets together. That’s where the neighbourhood idea originally came in. If you could aggregate enough properties together, and if you could create a mechanism to capture the energy saving from the residents and use that to create a single income stream, you could get a pension fund to invest the long term capital needed.

I wrote a blog article over Christmas 2020 proposing this financial structure and spent the rest of the year messaging people—banks, pension companies, people in the industry, housing associations, local government, central government, developers—and getting feedback. I refined the concept through people poking holes in it.

The learnings in the beginning

A few things came out of the initial concept of the neighbourhood beyond just the aggregation of finance.

One is that if you’re retrofitting 1000 homes, you can achieve economies of scale. There’s been very little research on how much those benefits can be. One heat pump manufacturer told us they spent eight people hours making each heat pump and 28 people hours selling and installing it. So you could potentially take a lot of that cost down through aggregation—sell a whole neighbourhood on the concept in one fell swoop.

The second thing was that, if you get a neighbourhood on board for the net zero retrofit, you can build other infrastructure at the same time. You can add some green space. You can build EV charging stations. You can build bike storage. At this point, you’re proposing a narrative to that community that it’s not about the individual but about the collective.

A third thing is that there’s also a narrative piece. You have to get people onside. If people won’t let you in to do the retrofit work, it ain’t happening. There needs to be a perception of benefit for the people who live in that place. Neighbourhoods can be great vehicles for that.

In local government, there is a natural and understandable scepticism about public-private financial structures. There’s a long history of profit extraction for private sector. But that’s sitting alongside the knowledge that there isn’t enough public money to deal with problems of the scale of climate change. So you gotta fix it one way or the other, right?

The main challenge for this concept is that it is really complicated. We’re at the point now that writing more reports is not going to help anything. We actually need to do it in places and learn by failing and iterating.

There’s an organisation called 3Ci set up by London and the Core Cities (11 other big UK cities). They put out a tender in 2021 looking for consultants to take the climate action plans that sat underneath those 12 cities and put a cost to deliver them. As a second question, they asked for suggestions for investment structures to deliver that capital in five different investment classes. Alongside another consultancy, Eunomia, we said, “A, you’ve missed green infrastructure as a sixth asset class, and B, we don’t think you should be thinking about investment by asset class.” We think you should be thinking about investment structures by place incorporating all the asset classes. We won that piece of work and wrote a report for them called the City Investment Report, promoting a place-based model. That report, in draft form, was put in front of the local net zero team at BEIS, who asked us to come in and talk to them about it on the basis that it could be a delivery mechanism.

Local government in the UK has gone through years of austerity. It has no money. So you need a fund and a business case for it. We were commissioned alongside Eunomia again and Arup, the engineering firm, to write a 250-page green book business case for the program. And that spread a greater sort of awareness of the concepts.

We have been contracted by various UK local authorities. We’re now involved in discussions about a number of business cases for demonstrators in places like the West Midlands, Manchester, Bristol and, and several local councils in London, led by Hounslow.

What is really needed now is funding to continue, and in that regard, we’re in a much better position than we were 18 months ago. The challenge with this has been that there’s a lot more capital available than good projects to fund. But there are not enough officers in local government to come up with the projects to ask for the money.

The naysayers will always say nice in theory, but how are you actually going to land it? How are you actually going to get enough people to sign off on it? The narrative in one place isn’t going to be the same as the narrative in another place. That’s a really important component of this. This is as much about enabling a community to decide what they want as it is about, you know, turning up and saying we’re going to retrofit your houses.

As a nonpartisan organisation, have you found this concept cuts through all sides of the spectrum?

We are non-political, though I can see that you could argue a socialist angle to the idea: it’s about community ownership of assets and energy systems. But being apolitical about it, you can take exactly the same project and write in three different narratives. One is very much about the carbon reduction. One is about social benefit from better housing for everybody. And one is about productivity. One of the most pressing economic issues that we have as a country in the UK is flatlined productivity for the last 15 years. Well, people being broke and people living in bad housing don’t help drive increases in productivity.

There’s also a huge number of jobs that would be created through doing this. You’re putting money back in the pocket of communities that will then be recycled in the local economy rather than extracted through energy companies. And so there is a whole kind of financial economic case that you can make as well. You could characterise it politically, but I don’t think you have to. It can be all things, actually.

The UK government has legally bound the country to get to net zero. To do that, you clearly have to reinvent the energy system and energy efficiency in housing. That’s going to require an enormous spend of capital. The costs are probably underestimated. People throw around the number £300 bn for the UK to fix housing – that number comes from one report and is taken out of context. The real number, in my view, is threefold that at least: more like a trillion pounds. The way you solve for that number is going to be fundamentally different. So if we’re going to have to do this, why don’t we do it in a way that is going to be cheaper? Why don’t we do it in a way that allows us to spread it out and do it kind of place by place? And why don’t we do it in a way that maximises the benefit value of doing that beyond just the carbon piece? It kind of seems fairly logical to do that.

The counterargument is to return to neoliberal orthodoxy and argue that if you create the right policy levers, eventually you’ll come up with the right combination that encourages 28 million households to do it on their own, and each spends £40 grand on retrofits. Personally, I don’t think it’s going to work.

There tends to be tension between the way advocates of sustainability and affordability talk about housing. Sustainability people talk about retrofits, while affordability advocates talk about needing new supply. Is there a side of this that’s actually about new housing construction, or is it just about retrofits?

We tend to think about big developments when we think about new housing construction. But if you think place by place, there’s probably quite a lot of infill-type stuff or conversion that you could do as part of it. So there might be some room for new building. On the other hand, there was an article in the Guardian a few weeks ago where someone was arguing that the number of properties per capita in the UK isn’t low relative to other countries. The big picture, though, is that we don’t have the carbon budget for the embodied carbon in the new build. If we were to hit the government’s new build target of 300,000 a year, we would run out of carbon budget fairly quickly. The focus needs to be on making the existing housing stock livable, sustainable, and affordable.

The scale of change can seem daunting, but massive transformations have been done before—there’s still a generation of Brits alive today who remember a time before indoor plumbing, and now everyone has indoor toilets. Are there reasons to be optimistic?

Absolutely. In the mid-60s, most houses in the UK were heated from town gas. Over the course of 7 or 8 years, 15 or 18 million properties were taken off town gas and connected to natural gas. We can totally do this. And you know, the answer to that wasn’t that people went out individually and dug holes in the road in front of the house. The thing that is missing most at the moment is funding the project design and development.

How do you see this getting off the ground?

Getting funding for this sort of innovation has tended to work on a competition basis. Suddenly, there’s a new government website and local authorities have ten weeks to fill in a complex form while competing with the council down the road. It’s easy to envisage a slightly more scientific approach. I think it ultimately comes down to local government and central government agreeing to test these models out at scale.

I think the direction of travel in government, in the civil service, is in the right direction. Obviously it’s going to be hugely dependent on funding, timing and results of the election and whoever wins – having a stable government means you’re more likely to get longer term planning.

What role could devolution play? Is it a matter of giving more agency to local government, or is it also a way of indirectly building capacity at more local levels by increasing funding and staffing levels?

I think it’s a couple things. It’s definitely about capacity. At a lot of councils, it’s one person trying to do all this along with another job! It’s also about funding. Existing funding is quite siloed. It can be quite difficult to join the different pots of funding together in a holistic project like this. One of the by-products of devolution is that all the funding gets put in a pot, and you can do what you want with it. And so it allows a slightly more holistic approach. In a way it’s a step on the journey towards giving more autonomy to individual communities regarding their own energy systems and their own assets. The importance of local government is essential so that this doesn’t look like it’s happening by government diktat. The trust and knowledge of local government and communities working together is really critical.

Find out more about Rufus and their work at Bankers without Boundaries here

Check out LGIU’s collection of resources on local government’s critical role in environmental governance


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