As global temperatures keep rising and many climate indicators reach record-breaking levels, the targets established by the Paris agreement are at stake: the net-zero transition requires urgent and substantial acceleration (IPCC, 2023; WMO, 2024; Copernicus Climate Change Service, 2024; UNEP, 2024). This challenge goes beyond technical and infrastructural change: it requires a deep socio-economic transformation. The need of socio-technical systems to transition towards a more sustainable paradigm has been addressed in literature for over 20 years (Kemp et al., 2007; Geels, 2002), leading to the development of the branch of literature dealing with transition theory (Geels and Schot, 2007) and specifically with sustainability transitions (Geels, 2011; Loorbach et al., 2017; Markard et al., 2012) and transition management (Rotmans et al., 2001; Smith et al., 2010; Loorbach et al., 2011). These transitions represent long-term, system-level changes toward more resource-efficient, low-emission and inclusive ways of living (Geels, 2018; Silva and Stocker, 2018). Furthermore, the concept of transformation is gaining momentum both in academic literature and in policy discourses (Hölscher et al., 2018), introducing a wider understanding of system change which includes power dynamics and focuses on larger scale changes compared to the notion of transition (Hölscher et al., 2018).

Cities¹ are at the heart of this transformative change. Despite occupying only around 3% of the Earth’s surface, they are responsible for over 70% of global CO₂ emissions (Joint Research Centre, n.d.). Moreover, projections show that they will host more than 70% of the global population by 2050, strengthening their key role as nodes of production, consumption, innovation and cultural exchange (World Bank, n.d.; UN DESA, 2019). The unique complexity of urban environments makes them a vulnerable target to climate impacts, but also a powerful engine of climate action and innovation (Wolfram, 2016; Nagorny-Koring and Nochta, 2018; Fuhr et al., 2018). Thus, the notion of urban transformation is becoming central in local policies (Tozer and Klenk, 2019) and has been described as a new “norm” in cities (Dixon et al., 2023). Relatedly, international literature on urban climate governance (Luque-Ayala et al., 2018; Romero-Lankao et al., 2018) has grown extensively and has fed the social and policy debates about the potential and limits of low carbon urbanism.

Recognizing this dual role of cities, the European Union (EU) has positioned urban areas at the center of its climate strategy. Under the Green Deal (European Commission, 2019) umbrella, it has launched the EU Mission for Climate-Neutral and Smart Cities, supporting 112 cities (hereinafter, the Mission Cities) in their commitment to reach climate-neutrality by 2030 (European Commission, n.d.). The Mission provides cities with technical and financial assistance, tools, and funding support to develop and carry out their climate strategies through the Horizon Europe-funded NetZeroCities project (NetZeroCities, n.d.). As part of the Mission, cities are required to co-develop and sign a Climate City Contract (CCC)—which outlines transformative actions that the city commits to carry out—and related 2030 Climate Neutrality Investment Plan (IP) which defines how they will be financed. Between 2022 and 2024, 53 cities were awarded the EU Mission Label, and in 2025, 39 more received it, bringing the total up to 92 cities as of the writing of this paper (European Commission, 2025).

Nonetheless, the ambitious goal set by Mission Cities faces a major constraint: the lack of adequate funding (Ulpiani et al., 2023; Kaufmann et al., 2024). According to the OECD (2020), the current volume of climate finance is insufficient to meet the scale of investment required, particularly in urban contexts. Urban mitigation finance needs are estimated to be USD 4.3 trillion annually from now until 2030, and over USD 6 trillion per year from 2031 to 2050 (CCFLA, 2024). An analysis by Bankers without Boundaries (BwB, 2025) of the Climate Neutrality Investment Plans developed by Mission Cities estimated that EUR 307 billion is required for cities to reach climate neutrality by 2030, which in turn will generate total benefits of EUR 394 billion. Yet public and concessional finance is increasingly constrained, as fiscal pressures and competing priorities limit the growth of grant-based and low-cost financing (OECD, 2023c; IMF, 2023). Moreover, cities often lack both financial resources and institutional capacity to plan and implement climate-neutral infrastructure at scale (Giacomelli et al., 2025). In light of different structural and fiscal constraints, they must look beyond traditional public funding to mobilize the scale of investment required for climate transitions. Innovative financing instruments (IFIs) are increasingly being promoted as crucial tools to mobilize private capital and diversify urban climate finance portfolios (OECD, 2022b; UN-Habitat, 2021).

Building on earlier definitions in the literature, this paper considers innovative climate finance to include non-traditional sources, mechanisms and instruments specifically designed to mobilize additional resources for climate action, particularly those that engage private-sector actors (Sandor et al., 2009; UNDP, 2012; UN DESA, 2022; Carter and Boukerche, 2020; Gouett et al., 2023). These include financing instruments—financing mechanisms, funding sources and fiscal tools—that go beyond standard public financing approaches, such as blended finance, green bonds, and risk-sharing instruments. As such, the emphasis is not just on novelty, but on effectiveness, and the ability to address existing financing gaps. In contrast, traditional sources of finance typically include concessional loans, grants, intergovernmental fiscal transfers, municipal budget allocations, and other forms of public expenditure. The concept of innovative finance is fluid and context-dependent: what is considered innovative in one city at one point in time may become mainstream in another, and it might depend on the institutional and financial capacity of the specific municipality and the access to resources. Accordingly, we look at IFIs as a broader class of tools and approaches that could leverage new or underutilized sources of capital and enable a more strategic use of public funds to unlock additional finance for urban climate transitions.

Initiatives involving private actors in the implementation of public policies—particularly through blended finance and Public-Private Partnerships (PPPs)—are increasingly recognized as promising, though not without important risks. Previous research has highlighted critical challenges linked to the use of private finance initiatives (PFIs) in PPPs. For example, PFIs can generate affordability problems for the public sector, as the costs of repaying private finance with interest may place a significant burden on public resources, potentially diverting funding from essential services and resulting in budget constraints and cuts (Hellowell and Pollock, 2007). Empirical analyses have further documented that PPP-based procurement often entails higher costs than traditional public procurement methods (Bing et al., 2005). In addition, extensive literature suggests that PFIs may undermine transparency and democratic accountability in public service provision (Hodge and Greve, 2007). It is also reported that many public authorities have encountered challenges in managing the complexity of PFI contracts due to experience gaps leading to unfavorable contract terms and difficulties in sustaining effective partnerships with private actors (Matti, 2015). On the other hand, beyond numerous international policy reports (World Bank, 2024; CPI, 2025; GGGI, 2023; OECD, 2023b), a growing body of scientific literature emphasizes the crucial role of PPPs and PFIs in supporting climate action at multiple levels (Casady et al., 2024; Vassileva, 2022; Fuglsang, 2014; Adhikari and Chalkasra, 2023). Innovative climate finance mechanisms—including PPPs, blended finance, and catalytic instruments—have shown potential to mobilize substantial additional resources for climate adaptation and mitigation, particularly within the accelerated trajectory towards net zero (Omukuti et al., 2024). These financial instruments require careful design, governance and monitoring to ensure their effectiveness and to mitigate the documented risks.

However, despite growing political and institutional interest in these instruments, their actual use by cities remains limited. A recent survey of Mission Cities found that over 75% had no experience with innovative financing mechanisms, even though most expressed a strong interest in using them (Ulpiani et al., 2023). This points out a persistent gap between interest and implementation, highlighting deeper governance, institutional, and market barriers that hinder uptake. Literature has so far provided valuable insights into the local governance of climate policy (Betsill and Bulkeley, 2003; Wolfram, 2016; Nagorny-Koring and Nochta, 2018; Mukhtar-Landgren et al., 2019), and specifically into the governance dimensions of climate finance (e.g., Bracking and Leffel, 2021; Browne, 2022; Richardson, 2009), as well as into the role of policy capacities in allocating climate funding at central government level (Raudla et al., 2025). However, it has yet to fully address the specific challenges posed by the deployment of innovative financing solutions at different levels of governance. So far mainly international reports dealt with the implementation of innovative finance in cities (e.g., OECD, CCFLA, UN-Habitat, Eurocities, NetZeroCities), thus, arguing for further academic research. This article aims to contribute to filling this gap, trying to understand how Mission Cities can unlock and scale finance for their net-zero urban transition. To do so, the paper builds on the governance implications of sustainability transitions and experience of local climate governance in designing and implementing ambitious climate policies and develops a categorization of barriers and enablers to investigate in detail the governance enablers and barriers that Mission Cities face in deploying IFIs. This is the first exploratory study of its kind, and we do not aim for extensive literature review on the enablers and challenges, but to provide extensive empirical insights of an area that has not yet been studied before. Specifically, we analyzed the Investment Plans developed by a sample of Mission Cities and complemented the analysis with qualitative in-depth interviews with city officials and practitioners involved in the IPs elaboration. Our aim is to provide insights into how cities are approaching climate finance innovation in practice, and to identify related key lessons for improving the governance and effectiveness of urban climate transitions. With this, we also provide additional research avenues at the end of this paper.

To address all relevant aspects of the empirical study, the paper is structured as follows. First, it reviews the relevant literature and introduces the analytical framework used to assess barriers and enablers to the uptake of IFIs. Second, it describes the materials and methods. Third, results and empirical findings of the IP analysis and interviews are presented. Fourth, the findings are discussed together with the main contribution of this study, namely the identification of enablers to address key barriers, drawn from both city practices and author recommendations. The paper concludes by synthesizing key insights and outlining limitations and areas for further research.

Currently, the effective use and uptake of IFIs remains uneven (NetZeroCities/JRC, 2023; Eurocities, 2024). The literature on urban environmental governance demonstrates that indeed, many challenges are impeding the implementation of ambitious climate policies (Granqvist and Mäntysalo, 2020; Correa do Lago et al., 2023) including also design and implementation of IFIs. We claim that several obstacles that local governments experience are inherent to the complexity of sustainability transitions, stemming from the multidimensional, directional, disruptive, and uncertain nature of these processes (Geels, 2011; Markard et al., 2012; Loorbach et al., 2017), which make the governance of change particularly complex (Hölscher et al., 2018; Papin and Fortier, 2024), and this also at the local level. Furthermore, these studies emphasize the need to mobilize a broad base of actors of change, promote action and knowledge sharing across different social-networks (Bulkeley and Castán Broto, 2013; Wolfram, 2016; Papin and Fortier, 2024), sectors and governance levels. They argue for policy mixes, experimentation, creativity, feedback systems and learning (Frantzeskaki et al., 2018; NetZeroCities/JRC, 2023; Tõnurist et al., 2019; Späth and Rohracher, 2012). Next, the key implications from local climate governance and how they are related to the broader governance implications of sustainability transitions are presented.

First, different social, cultural and behavioral factors are essential, e.g., as a broader challenge, the insufficient engagement of stakeholders for effective climate action has been widely discussed (Bulkeley and Betsill, 2013; OECD, 2022a,b; Montfort et al., 2025). Accordingly, the lack of involvement may result from a general unwillingness to participate, often linked to the additional costs associated with sustainable or innovative practices (Nurse and Fulton, 2017; Averchenkova et al., 2021; Huovila et al., 2022; Ohene et al., 2022), or from a lack of awareness on climate issues (Papin and Fortier, 2024). As transitions involve winners and losers (sustainable innovation versus the engagement of incumbents and potential losers), it specifically argues for a polycentric governance model that needs to involve flexible and self-organized activities carried out by non-state actors (EEA, 2019).

Second, institutional factors within local governments also play a critical role. The persistence of siloed organizational structures (Averchenkova et al., 2021; Nurse and Fulton, 2017; Frantzeskaki et al., 2018) often leads to fragmented policy implementation, limits the exchange of knowledge among municipal departments, and hinders the necessary interconnections between urban systems (Correa do Lago et al., 2023; Quitzau et al., 2022). As transitions are accompanied by surprises and unintended consequences, they argue for monitoring, reflexivity and adaptive governance to ensure directional flexibility and addressing side-effects (EEA, 2019). Relatedly, a key issue emphasized frequently by many scholars is the lack of long-term planning. As transitions are open-ended and uncertain, they demand portfolio approaches, project-based learning and experimentation, especially with radical innovations (social, technical, business models) in early transition phases (Loorbach et al., 2017). However, urban climate governance often remains project-based and program-driven, resulting in fragmented efforts rather than coherent, long-term, and integrated strategies (Wolfram et al., 2019; Eurocities, 2024; CCFLA, 2024; Huovila et al., 2022; Correa do Lago et al., 2023). This has led to the proliferation of pilot projects (Papin and Fortier, 2024) without the development of enduring strategies capable of inducing systemic change (Nagorny-Koring and Nochta, 2018).

Third, legislative and jurisdictional constraints represent another important category of barriers and enablers (Bracking and Leffel, 2021; Averchenkova et al., 2021; Casady et al., 2024; UNECE, 2023) as local governments frequently operate under limited legal authority, restricting their capacity to effectively address major sources of greenhouse gas emissions (Ohene et al., 2022; Linton et al., 2020; Laine et al., 2020; Correa do Lago et al., 2023). As transitions are characterized by goal-oriented directionality and urgency, they need indications about the general direction of action (e.g., through financial incentives, regulation and broad goals, target and visions), and more specific indications about innovations and alternative pathways (e.g., through roadmaps and foresight exercises), as well as require stronger innovation and diffusion policies, the phase-out and exnovation of policies through bans or stronger environmental regulations (EEA, 2019), which is challenging due to legislative and jurisdictional constraints (OECD, 2022a,b; NetZeroCities/JRC, 2023).

Fourth, well-known technological and institutional lock-ins that have been long studied within the transition theory literature (Geels and Schot, 2007; Hölscher et al., 2018; Seto et al., 2016; Foxon, 2002; Eitan and Hekkert, 2023) are also hindering the uptake of ambitious climate policies locally (Hölscher and Frantzeskaki, 2020). Institutional and regulatory factors (Arthur, 1994; North, 1990; Unruh, 2002), economic rules and contracts, as well as social conventions and codes of behavior feed and increase carbon lock-in (Unruh, 2000, 2002). These formal and informal institutional constraints create drivers and barriers for social change over time and influence economic performance (North, 1990).

The previously described interlink set of implications from local climate governance and sustainability transitions governance span legal, fiscal, behavioral, and institutional domains (Alexander et al., 2019; CCFLA, 2015) and stem both from internal limitations (e.g., capacities to develop bankable projects) or external constraints (e.g., national regulations or coordination across government levels). Drawing upon the existing literature, we propose a framework of six main barriers’ and enablers’ categories as the analytical ground for the empirical study conducted.

First, institutional and capacity aspects, including all factors related to phenomena such as learning effects for organizations that arise because of the opportunities provided by the institutional framework, as well co-ordination effects (Frantzeskaki et al., 2018; Fairbairn, 2022; NetZeroCities/JRC, 2023) and adaptive expectations, occurring because the increased presence of contracting based on a specific institutional framework reduces uncertainty about the continuation of that framework (Arthur, 1994; Pierson, 2000; Dicks and Fulghieri, 2023). Limited capacity (Frantzeskaki et al., 2018; Fairbairn, 2022; NetZeroCities/JRC, 2023) and expertise are also a limitation to leveraging alternative financial streams, slowing down the development of investor ready and “bankable” project proposals (Ulpiani et al., 2023). Closely related to the first one, the second category refers to behavioral and cultural barriers and enablers. As investigated in the “co-evolutionary” approaches (Rip and Kemp, 1998; Kemp et al., 2007; Geels, 2002) to understanding technological change, the development of technologies both influences and is influenced by social, economic and cultural settings in which they develop (Rip and Kemp, 1998; Kemp, 2000; Fritsch et al., 2019). Within this point of view, also informal constraints and drivers such as social conventions and codes of behavior have a direct influence on the uptake of climate mitigation technologies among communities (technological lock-in effect) and on the uptake of IFIs among employees of the local administration of the Mission Cities (institutional lock-in effect) (Foxon, 2002; Seto et al., 2016). The third category deals with legal and regulatory factors (Bracking and Leffel, 2021; UNECE, 2023; Casady et al., 2024). These stem from the national level overarching taxation and climate-related policies that can either drive or inhibit urban transition, as in the case of the latter they may not support or cater to the specific needs of Mission Cities. These could create a situation of regulatory uncertainty, which limits both local administration in undertaking innovative financing initiatives and private-sector investors to take up risks associated with political uncertainty (NetZeroCities, 2024). The fourth key category is fiscal and financial aspects (NetZeroCities/JRC, 2023; Ulpiani et al., 2023; Casady et al., 2024). As national regulations may limit the powers of municipalities to raise funds, increase taxes or borrow money, cities are left with limited sources of finance to subsidize the net-zero transition, calling for a pressuring need to further involve private investors in climate-related investments as long stressed out by international organizations (Betsill and Bulkeley, 2003; Rosenzweig et al., 2018; OECD, 2023c). On the other hand, clear legal mandates and supportive regulatory frameworks allow for the implementation of innovative solutions (Heinrichs et al., 2013; Averchenkova et al., 2021; Montfort et al., 2025) The fifth category is political and macroeconomic factors (Eurocities, 2024; NetZeroCities/JRC, 2023), which account for the national and international geopolitical phenomena that can drive or inhibit local financial choices. Market instability, including currency fluctuations, inflation, and unpredictable regulatory changes, introduces risks that increase financing costs or deter private investment (Carter and Boukerche, 2020). Policy uncertainty, particularly regarding tax incentives or climate-related subsidies, further exacerbates investor hesitation. As a final category, we consider technological and market factors that can act as both barriers and enablers (CCFLA, 2024; UNECE, 2023; Castán Broto and Sudmant, 2022). Barriers include all technological lock-ins such as path dependency, positive feedbacks and network economies, that constitute a persisting barrier to the implementation and uptake of financing innovations (David, 1985; Arthur, 1994; Seto et al., 2016).

Besides the aforementioned factors, the crucial role of cities in developing innovative governance instruments through the process of “urban experimentation” deserves special attention as a governance approach that supports the development and testing of novel solutions to urban challenges, particularly those related to climate resilience and sustainability (Mukhtar-Landgren et al., 2019; Bulkeley et al., 2013; Frantzeskaki et al., 2018; Papin and Fortier, 2024; NetZeroCities/JRC, 2023; Eurocities, 2024). Through pilot initiatives, cities serve as living laboratories where innovations—technical, social, or financial—can be evaluated and adapted for broader implementation. Among these innovations, financial instruments and institutional arrangements have emerged as critical enablers. Cities are particularly well positioned to drive financial innovation (Castán Broto and Sudmant, 2022; UNECE, 2023) through their ability to establish collaborative platforms, engage in “learning-by-doing” processes, and coordinate diverse stakeholders in testing and scaling new financial models (Ulpiani et al., 2023). One example is the development of green bonds in cities, which have been proven effective in mobilizing capital for climate-related infrastructure and environmental projects (Thioye, 2021). Local governments can influence the growth of green finance by aligning public policies with sustainable investment goals, creating enabling environments for private sector participation, and designing incentives for inclusive financial instruments. In this context, diversification of the investor base—including the mobilization of local and retail investors (NetZeroCities/JRC, 2023; Eurocities, 2024)—emerges as another critical enabler (OECD, 2020). Ultimately, the transition to innovative finance systems (Bhatnagar and Sharma, 2022; Frantzeskaki et al., 2018) also relies on inclusive governance and active public engagement, which can be steered by cities. As such, fostering local participation, whether through public consultation, participatory budgeting, or community-based investment platforms, can significantly enhance the social legitimacy and responsiveness of financial innovation (Bhatnagar and Sharma, 2022).

To gain an in-depth understanding of the barriers faced by the city administrations in deploying IFIs, and the potential enablers which supported it, we employed a qualitative methodology approach.

First, we reviewed the IPs of all 53 Mission Cities that were labeled in Window 1 and Window 2² of the NetZeroCities Mission. While the Action Plans are publicly accessible on the NetZeroCities platform, the accompanying IPs, which detail the financial strategies and resources required to implement the Action Plans, are confidential and available only to NetZeroCities finance partners and the European Commission. The CCC has three main documents: the Investment Plan, the Action Plan, and the Commitments document. The actions of cities to reach net-zero by 2030 are described in the Action Plans, whilst the actions described are calculated and financially analyzed in the IPs. For our analysis, we focus on the IP as this contains information on IFIs and related barriers and enablers (if documented by the city partners). The IP structure template helps cities craft detailed, actionable financial strategies for achieving climate neutrality by 2030. It is structured in three main parts: Part A maps the current climate investment landscape, including past funding, strategic finance evaluation, and barriers to capital deployment; Part B focuses on defining the investment pathways needed to deliver on climate goals, through cost scenarios, capital planning, and financial indicators for monitoring progress; and Part C outlines the enabling conditions for successful implementation, such as supportive policies, risk management frameworks, and capacity building through stakeholder engagement. Together, these sections ensure cities can identify needs, attract funding, and operationalize their climate plans.

The preliminary analysis encompassed all submitted IPs available at the time, namely the cities that were awarded the Mission label in Window 1 and Window 2 (53). Cities were categorized according to their mention of IFIs in their IPs. This classification is based on a qualitative review of the investment plans and municipal documentation, focusing on whether references to IFIs were explicit and clear, or if the city did not clearly mention their interest in or use of IFIs. Investment plans were not analyzed in-depth; instead, we used a keyword-based analysis, specifically making sure that the city made explicit mention of “green bonds” “innovative financing” “innovative finance” and “PPPs” or “public-private partnerships.” Based on this, cities were grouped into two categories, cities that mentioned these IFIs versus cities that did not explicitly mention them. Almost all cities (49) mentioned IFIs in some capacity, showing clear interest in the topic among cities. Following this preliminary categorization, cities were shortlisted for qualitative interviews. It should be clear that cities that mentioned IFIs do not necessarily use them today; the mentions could refer to their interest in exploring the use of IFIs or the city’s reasoning why they do not use IFIs.

Once we established cities’ engagement and intentions regarding IFIs, the selection of a representative sample aimed to capture a diverse range of urban scales. City size, measured by both population and physical area, was used as a proxy for variations in municipal capacity, governance complexity, and financing needs. The selection process prioritized a balance of geographic distribution, city size, and differing levels of experience and ambition related to IFIs. To ensure this balance, cities were categorized according to established typologies based on both population and area size. For population, we apply the OECD classification, defining small cities as those with fewer than 250,000 inhabitants, medium-sized cities as those with 250,000–500,000 inhabitants, and large cities as those with more than 500,000 inhabitants (Dijkstra et al., 2019). For city area, we classified cities with less than 100 km² as small, those with 100–250 km² as medium, and those over 250 km² as large. Based on these criteria, we developed a list of 15 cities to be contacted. We also ensured to include cities that: (1) either signaled some level of past experience, and, or showed broad intentions to apply multiple instruments in the future, categorizing them as “high”; (2) cities that referred to IFIs with some clarity and showed moderate future intentions, but without clear indication of past experience, we categorized them as “medium”; and last (3) cities that only vaguely mentioned IFIs, with no clear evidence of past experience, we categorized them as “low.”

As per availability of direct contacts out of these shortlisted cities, we contacted 10 city authority representatives for approval for analyzing their IPs and asked for their availability for the interviews. Out of the ten cities (see Figure 1), six cities agreed with sharing their IP for analysis and conducting the interview, whilst one could not share its IP due to non-disclosure agreement, one approved but was not available for the interview within the timeframe of this study, and three did not respond to our e-mails. The six cities to be analyzed and interviewed were Barcelona (Spain), Münster (Germany), Parma (Italy), Pécs (Hungary), The Hague (Netherlands) and Thessaloniki (Greece).

It is important to acknowledge that the selection of cities included in this analysis is subject to several layers of selection bias. First, all cities in our sample are part of the EU Cities Mission after voluntary application, which already indicates a predisposition towards innovation, climate action, and participation in EU-led initiatives. Second, given the high number of applications, a selection process was conducted to identify the 112 cities that were ultimately chosen to participate in the NetZeroCities programme. Third, within this already selective group, our analysis focused on those cities that had completed and submitted their Climate City Contracts (CCCs), including the IPs, and had received the Mission Label, signaling that their proposals met specific quality criteria set by the European Commission. As a result, the findings of this study are based on a subset of cities that are not representative of all European municipalities, but rather of those at the forefront of the climate neutrality agenda, with higher-than-average institutional capacity and political will.

As a final step under the IP analysis, we conducted an in-depth analysis of IPs of these six cities. Our analysis focused on the financing instruments distinguishing between those that have already been implemented and used, and those the municipality explicitly intends to use, further categorizing according to traditional or innovative. Additionally, we explored barriers and enablers mentioned in the IPs.

Second, to clarify, deepen and triangulate the understanding gained from the IP analysis of selected cities, we conducted in-depth interviews with officials from relevant cities’ administrations. The interviewees were selected based on their primary role or involvement in the development of the Investment Plan itself or having a role as a key financing expert of the municipality (i.e., Director of the Environmental Department or Energy Department of the city, Vice Mayor and similar). See the Annex to find more information about interview dates and city representatives present. While the interviews were designed and structured based on the content of the IPs, they also served as a means to verify, contextualize, and, where necessary, correct or complement the information presented in the IPs. In cases where discrepancies arose between the IP and the information provided by city representatives, we prioritized the interview data as the most up-to-date and context-specific source. This approach reflects our assumption that the interviewees, being directly involved in implementation or financing decisions, could provide more accurate and current insights into the status and rationale of the investments. To deepen the insights reported in the IPs, we developed a questionnaire to investigate further the barriers and enablers that challenged or enabled the cities to use IFIs. The questionnaire is divided into four subsections, that can be summarized as follows:

The online interviews were conducted from May to August 2025. The interviews were recorded and transcribed, and the transcriptions were manually analyzed in Excel, where several tables summarizing the main findings were developed. The results of the interviews contributed to a clear overview of the experience of different cities with the use of IFIs, allowing us to trace trends and relevant patterns in their adoption—with a focus on governance—and identify instruments and sources that have not been mentioned by the IP.

Furthermore, for analyzing the interview data, we combined the Excel tables on the information collected using AI (ChatGPT 4o) into a master database, cross-checking the output manually for accuracy and completeness. We listed and categorized all financial instruments mentioned in the IPs and interviews into common categories (such as municipal funds, soft loans, municipal budget) to identify key themes and unique sources among cities. We then separated instruments according to whether they were innovative or traditional. We also collected information on the instruments whether they were (1) “implemented,” i.e., already used (currently or in the past), thus the city has experience with them; (2) “planned” to be implemented, in cases where the city signaled strong intention of implementing certain instruments; in mixed cases (3) “implemented and planned,” indicating that the instrument is currently in use or the city has experience with it, but also foreseen for continued or expanded application in the future; and “conceptual,” in cases when a city indicated an instrument it may use when several conditions are fulfilled in the municipality (governance, capacity and, or regulatory changes, etc.) for implementation. To differentiate between planned and conceptual stages, we applied a subjective interpretation based on the available data: instruments marked as “planned” reflect a clearer municipal commitment or preparatory steps toward implementation, whereas those marked as “conceptual” indicate early-stage interest that is currently hindered by governance barriers. This categorization was necessary as cities did not consistently indicate the status of each instrument, and in some cases, judgments were made based on the context provided in interviews and investment plans.

Similarly, for the barriers and enablers analysis, we categorized those mentioned by both IPs and the interviews according to the 6 categories identified in the Analytical framework section: (1) behavioral and cultural, (2) fiscal and financial, (3) institutional and capacity, (4) legal and regulatory, (5) political and macroeconomic and (6) technological and market. To identify trends, similarities and outliers in barriers, we subcategorized barriers highlighted by city partners. The barriers and enablers identified in the analysis are based on what cities explicitly stated or clearly indicated in their investment plans and interviews. The findings reflect the challenges as reported or acknowledged by municipal representatives and may not capture all underlying or structural barriers unless they were directly mentioned or implied by city officials. Whilst the discussions mainly focused on barriers, we also collected specific enablers highlighted by cities in their investment plans and during the interviews.

Using the keyword based qualitative review, we found that 49 of these cities explicitly referenced IFIs, whilst only 4 omitted them, or referred to them only vaguely. Based on the case selection criteria outlined in the previous section, we conducted an in-depth analysis and interviews with six cities. The selected cities reflect a diverse range of engagement with IFIs and urban scales, capturing variation in both population size and geographic characteristics.

This paper provides one of the first exploratory comparative assessments of barriers and enablers to the use of IFIs for urban climate action drawing directly from Mission Cities’ investment plans and city interviews. Focusing on six cities, Barcelona, Münster, Parma, Pécs, The Hague, and Thessaloniki, we identified recurring patterns of IFI uptake, a set of structural and inter-dependent constraints, and enabling conditions that explain why many instruments remain conceptual or small-scale despite widespread interest.

This paper employed investment plans’ detailed analysis and open-ended interviews with six Mission Cities to offer a novel, empirically grounded view of how IFIs are actually considered, adapted, or sidelined in municipal climate finance. Our study aimed at analyzing in-depth, using multiple methods and sources, the local climate governance barriers to the implementation of ambitious climate policies, focusing in particular on the limits—and potential enablers—in the use of Innovative Financing Instruments. Therefore, we managed to bridge overarching multi-level local climate governance barriers in the adoption of ambitious climate policies with local scale, finance-related barriers that municipalities are confronted with in the implementation of such policies, with specific reference to the Green Deal Programme’s NetZeroCities. The empirical approach adopted allowed us to obtain a granular reporting of barriers and enablers to the use of IFIs, internationally acknowledged as key tools to leverage additional climate finance, with consideration of the associated risks (OECD, World Bank, UN).

We show that IFIs uptake is shaped by a configuration of fiscal, legal, institutional, behavioral, political, and market conditions that influence local climate governance as an interdependent system. This adds nuance to existing work on urban climate finance by explaining why many cities remain stuck in grant-dependent, project-to-project modes even when they express strong interest in “innovative” tools. Beyond the detailed reporting and comparison between cities’ results, the identification of 6 overarching barriers and enablers’ categories represents the academic contribution of our study. This grouping can shape further empirical studies of this sort, and guide action-oriented policies aimed at specifically addressing the barriers identified. Moreover, the great quantity and detail of qualitative information analyzed and processed offers very detailed insights into municipalities’ real hands-on problems, providing a great reference to support other cities facing similar barriers in the implementation of specific IFIs.

Our findings suggest that the core constraint is not a lack of ideas or financial innovation per se, but limited institutional readiness and constrained fiscal space within restrictive national frameworks. Where municipalities have room to borrow, stable and predictable rules, and access to technical support, they are more likely to pilot and then normalize instruments such as EPCs, PPPs, green bonds or green/thematic municipal funds. Prior experience creates reinforcing dynamics of learning, standardization, and growing confidence, underscoring the importance of early experimentation and learning-by-doing. Conversely, when budgets are pre-committed to mandatory services, tax powers are centralized and regulations are unstable or restrictive, it is rational for cities to fall back on grants and concessional loans, even when more sophisticated instruments are formally available.

The difficulty of financing private building retrofits in our cases (Pécs, Parma, Thessaloniki) illustrates this broader pattern. Retrofitting is central to net-zero plans and technically compatible with several IFIs, yet high upfront costs, fragmented ownership, low household purchasing power and climate awareness, along long payback periods and regulatory ambiguity converge to undermine bankability. Similar constellations of legal, behavioral, and market barriers appear in other sectors.

At the same time, cities are not merely constrained recipients of higher-level decisions. They are actively experimenting with pilots, cultivating internal “climate champions,” building cross-functional teams, creating new funds and collaborative platforms, and partnering with utilities, development banks and private financial institutions. Yet their efforts remain bounded by the broader governance environment. We therefore argue that municipal innovation will not be sufficient without parallel reforms that: (i) strengthen local institutional and fiscal capacities; (ii) improve citizen understanding and acceptance of climate investments and related instruments; (iii) align national legal and regulatory frameworks with cities’ climate mandates; and (iv) reorient European funding and technical assistance to deliberately build, rather than substitute for, local IFI capabilities and private finance mobilization. Thus the paper further frames debate on scaling private finance: the key challenge is to create governance arrangements under which cities can move beyond grant dependency toward more strategic, blended, and resilient urban climate finance portfolios that include private capital, while safeguarding public value, transparency and equity, rather than by simply multiplying IFI types.

As a further academic contribution, the findings show that the adoption of IFIs in the cities analysed is constrained by broader barriers already identified in governance research, including insufficient stakeholder engagement, siloed organisational structures leading to fragmented policy implementation, limited legal authority and thus restricted administrative capacity, and technological and institutional lock-ins that hinder the uptake of ambitious local climate policies. Nevertheless, the empirical approach employed in this study provides concrete examples and possible pathways to overcome these barriers in both the design and implementation of climate policies. By focusing on the implementation of climate policies employing IFIs, rather than on their formal adoption alone, the analysis yields practical insights that help bridge theory and practice.

The implementation of blended-finance instruments, such as EPCs for public lighting or public building retrofitting, requires close cooperation between municipalities and the companies delivering the interventions. In the cases analysed, these IFIs proved to be effective tools for stakeholder engagement, and interviewees reported an intention to replicate and institutionalize such pilots as standard practice, providing a valuable example of goal-oriented, practice-based engagement.

In some smaller municipalities, limited collaboration and capacities were partly compensated by the presence of “climate champions” who, precisely because of the small size of the administration, were able to overcome siloed organisational structures. These examples illustrate how individual leadership, targeted training of key officers, and local organisational autonomy can enable the establishment of cross-functional climate offices, green funds, and other cross-departmental financial–policy tools, despite existing municipal structures.

Legislative and jurisdictional constraints emerged as a persistent barrier both to the adoption and implementation of ambitious policies and innovative practices. This reinforces the need for coordinated, multi-level transition governance that facilitates knowledge-sharing and experimentation, supports frontrunner cities, and accelerates the diffusion of effective climate action at national scale.

Finally, all case studies revealed technological and institutional lock-ins (e.g., behavioral barriers to private building retrofitting, mistrust towards PPPs due to previous negative experiences). The empirical cases, however, highlight not only these limitations but also successful instances of overcoming them. The granularity of the present study provides an initial basis for tailoring interventions to persistent lock-ins, while further research could confirm recurring patterns and thereby inform more precise recommendations for targeted policy design.

While our analysis offers valuable empirical insights, it is limited by the relatively small sample size of six cities. The findings should therefore be interpreted as indicative rather than representative, and future studies are needed to test their relevance and enrich our conclusions by widening the scope to a more diverse and representative sample of Mission Cities and cities beyond the Mission. Furthermore, our study also points to several relevant areas for further research explained in more detail below.

The academic literature on the topic of innovative finance is limited; thus further research is encouraged. Specifically, future studies could address a systematic literature review focused on barriers and enablers to the deployment of innovative financing instruments in cities. This is a conceptual and empirical limitation of the study and points to the need for further research that explicitly investigates the factors and institutional arrangements that facilitate the effective use and scaling of IFIs in Mission Cities. Second, the enablers we identify are largely derived deductively from cities’ responses to the barriers they face and their proposed enablers in the Investment Plans, rather than from a dedicated analysis of mature, successful IFI ecosystems. Third, our review of IPs was conducted on a qualitative, high-level basis using keyword-based content analysis. Future research could complement this with more detailed, systematic evaluations across a wider group of cities, to better capture the depth of engagement with IFIs. Fourth, future assessments could go further to analyze in-depth engagement of innovative financing instruments coupled with in-depth analysis of broader regulatory, political, and macroeconomic contexts. Alternatively, monitoring the progress of the analyzed cities over time in the implementation and scaling of IFIs would also offer valuable longitudinal insights. Finally, EU funding has a central role in the climate finance landscape of Mission Cities, particularly how it influences or interacts with the uptake of innovative instruments. While EU funds have been catalytic in piloting IFIs, we found that overreliance may discourage experimentation with private-sector-led models. More research is needed to understand how EU support and financing mechanisms could better enable long-term financial diversification.