As environmental pressures and infrastructure needs mount, high-tech solutions can enable urban sustainability and foster growth.
Frédérique Carrier Managing Director, Head of Investment StrategyRBC Europe Limited
With urbanization rates climbing, and world governments setting ambitious targets to reduce carbon dioxide emissions, pressure is mounting to make cities more efficient while limiting their impact on the environment.
Cities account for more than two-thirds of global CO2 emissions. Some have picked up the gauntlet and are using technology to help manage the challenges of urban sustainability. More efficiently run cities can improve productivity, reduce costs and foster economic growth.
This trend toward smart, sustainable cities is being driven by necessity, government support and technological innovation. The companies that provide solutions should enjoy tailwinds of secular growth.
Smart Cities use technology to improve urban management, making everyday life easier and better for the people that live and work there. They optimize the use of natural resources to minimize their environmental footprint.
More specifically, sensors collect data from across the urban landscape: traffic, transportation systems, air quality, waste management, hospitals, law enforcement, and others. The data is stored, analyzed, and used to respond to challenges in real-time.
“With a municipal network of 500 km of optical fiber, free WiFi routed via street lighting, and sensors to monitor air quality, parking spaces, and even waste bins, Barcelona has been at the cutting edge of testing the internet of things,” trumpets the Financial Times. Barcelona is one of Europe’s Smart Cities.
Smart City solutions span a wide array of uses and services. They can offer more effective transport networks, better calibrated and less wasteful water supply, just-in-time waste management, efficient lighting and heating of buildings and safer public spaces. This all may sound futuristic, but many cities we live in have already implemented some smart solutions, such as ride-hailing, municipal water leakage detection, intelligent traffic signals, telemedicine and emergency response optimization.
Rising urbanization rates, and the many challenges they create, are pushing city planners and authorities to increasingly adopt smart systems. Cities gobble up more than 60 percent of the world’s energy and generate some 70 percent of global CO2 emissions. With most governments pledging to reduce national emissions, lowering the footprint of large cities is key. Deteriorating air quality is also a factor—causing health problems and lack of access to fresh water. Overwhelmed waste management and perennial congestion have long been critical issues and are becoming ever more pressing.
Global urbanization rates are expected to reach 70 percent by 2050, up from 56.2 percent in 2021, according to the World Economic Forum.
India and China alone are expected to take in an additional 300 million and 400 million city dwellers by then, respectively. Urbanization in North America, already high at 83.6 percent, is anticipated to inch higher still.
Despite having many old cities with legacy infrastructure systems, Europe has long led the way in terms of Smart City projects, with its early adoption of a sustainable, environmentally friendly agenda and focus on public transport and urban infrastructure. A 2018 McKinsey report pointed out how intermodality—combining different modes of public transport in a seamless travel experience—has been a focus of European transport strategy. Electronic services such as ticketing systems have also been driven by rapid technological development.
A feature of Smart Cities in the West is that development is mainly bottom-up, with the private sector and citizens actively engaging in designing projects to improve the quality of life, drive economic growth and safeguard the environment. For instance, in 2018 the Canadian federal government encouraged some 200 communities across the country to participate in a competition in which quality of life improvements could be leveraged through the use of technology. The Intelligent Cities program hosted resident workshops to pinpoint needs and provide city officials with a roadmap to develop future traffic and public transit infrastructure.
Beyond the input and involvement of city dwellers, there also needs to be a cultural shift in the way cities are governed and operated. And citywide technology platforms need to be more open and not housed in unconnected “silos” incapable of collaboration. When Los Angeles Mayor Eric Garcetti looked into implementing Smart City solutions, he found more than 40 city departments running on various disconnected technology platforms. GeoHub was created in 2016 to assemble more than 500 datasets from the city’s departments, as well as county, state, and federal governments. GeoHub unearthed insights into Los Angeles’ public safety and infrastructure needs that allowed the city to manage resources and make better decisions.
In Barcelona, several silo-type models were dissolved: those where networks didn’t communicate, where consumers were tied to inflexible contracts, or where the provision of services was outsourced to large operators with no government oversight of how resident data was collected or used. The responsibility for such data has since been transferred to the government to ensure privacy. Procurement of services was also made transparent, with a focus on small local companies.
Meanwhile, Smart City projects have proliferated in recent years in Asia. In countries with a strong central government, such as China or Singapore, Smart City development is usually top-down with the authorities formulating policies and providing funding. The focus tends to be on building up infrastructure and improving urban governance capability.
In places where the public sector owns many of the services, Smart Cities are highly developed with services, such as transport, power, telecoms, water, and waste management, all communicating with each other and collaborating. This seamless flow of data and technology is a key requirement of a fully fledged Smart City.
It may take several years for large legacy Western cities to reach such an advanced stage of Smart City development. But the impetus for improvement is there and we’re likely to see more smart solutions, both in the East and the West.
At the core of Smart Cities is 5G technology. 5G is a leap forward from its predecessor: its speed is up to 10 times faster than 4G; has low latency, meaning there’s only a minuscule delay of 1 to 1,000 milliseconds before a transfer of data begins following an instruction for its transfer; and it allows millions of devices and sensors to be connected in a one-kilometer square area—4G only allows a limited number of connections.
A number of technologies linked to 5G are needed to achieve advanced Smart City status. For example, a city installs a large number of IoT sensors in order to detect traffic conditions. Once collected, the data are transferred through the 5G network. Blockchain technology can provide secure data transmission during this process. Traffic authorities then leverage edge computing analytics to analyze data in real-time, and AI can efficiently sift through large quantities of Big Data to predict traffic flows and find practical solutions to congestion such as diverting traffic or altering traffic light sequences. The dataset is then stored on a secured cloud for future reference and analysis.
There are a number of players and aspects involved in bringing Smart Cities into reality:
While the allure of technology might be powerful, there are serious challenges to achieving Smart City status. Legacy cities have significant hurdles because it’s easier to start from a relatively blank slate, as opposed to upgrading antiquated infrastructures. Newer cities in the Middle East and Asia are at a distinct advantage in this regard.
Very large populations are another burden and can make the adoption of some smart solutions more cumbersome. Smaller cities such as Helsinki (1.3 million people) or Zurich (400,000 people) can be more agile in the adoption of new technology. Globally, they ranked second and third, respectively, in the IMD Smart City Index in 2020.
We believe the recent embrace of the green economy by several governments and prospective new public investments in infrastructure make this an opportune time for cities to invest in their future. It’s also an opportunity for city planners to respond to the ongoing challenges of urbanization. Large Western legacy cities such as New York and London are under pressure to upgrade their often creaking infrastructure and are moving in that direction.
Yet given the many challenges that remain, we’re likely to see sporadic implementations of smart solutions in the West. Western cities will likely become “smarter,” as opposed to becoming outright Smart Cities.
Smart Cities have the potential to enable us to live and work in a safer, faster, more convenient way. We believe the industries and companies that can deliver Smart City solutions will benefit from long-term, secular growth.
This article is part of our SusTech series, which explores the confluence of sustainability and technology and why this concept matters as an investment theme.
Read more from the series:
With contributions from Jasmine Duan, Investment Strategist, RBC Investment Services (Asia) Limited, in Hong Kong, and Tasneem Azim-Khan, U.S. Equities Portfolio Advisor, RBC Wealth Management Portfolio Advisory Group, RBC Dominion Securities Inc., in Toronto.
RBC Wealth Management, a division of RBC Capital Markets, LLC, registered investment adviser and Member NYSE/FINRA/SIPC.
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