Key questions we need to tackle to get the enabling environment right

One of the key themes coming out of Innovation Zero 2023 is the need to create the right enabling environment to be able to deliver innovation at scale. This process needs to involve both the government and the consumer sides.

Governments can take more steps by focusing on initiatives such as becoming early purchasers of new technology and thus allowing companies to scale up. On the other hand, as the cost-of-living crisis continues to bite, it needs to become radically easier for consumers to adopt new technologies and make sustainable changes. One such example is home retrofits –government assistance could make a significant difference in making them successful, as currently they are perceived by many as “expensive extras”, given current market realities.

The second piece of the puzzle lies in persuading corporates and consumers to adopt new technology brought to market – otherwise inventions risk staying on the shelf forever.There is a substantial behavioural component to this, and one of the key questions that needs to be asked to help shift the consumer mindset is – “who the biggest ambassadors to our technology could be”. It then becomes about understanding where the consumers get their knowledge and advice from and securing ambassadors of new tech in those places. Taking heat pumps as an example, it is important to ask the following questions – how can we get the engineers and plumbers making home visits become the early adopters and advocates for heat pumps, thus spreading social awareness and shifting the norms? How can we redesign the entire customer experience in a way that speaks to customers and solves their pain points, making them more likely to adopt at scale? It is also important to find ways to deliver the right incentives in the right way.

Sustainable finance is key with more to do to deliver capital to the right projects

Innovation requires investment and activity in the sustainable finance space has been picking up substantially over the past 5 years with banking institutions starting to shift their mindsetto view the market not simply as a risk to be managed but as an opportunity to be grasped. That said, significant sectoral and geographical gaps exist and both public and private investment remain subdued in most developing countries with scaling up currently limited to energy transition in developed countries and China, according to the Financing of Sustainable Development UN Report 2023 (1).

Approximately $50 trillion in incremental investment is required to transition the global economy to net zero by 2050. Much of the abatement pre 2030 will be driven by existing technologies whereas post 2030 we will be relying on new technologies in hard to abate sectors, such as energy efficiency, hydrogen-based fuels, bioenergy, and carbon capture / utilization / storage solutions (2). This means that different approaches to raising capital at different stages of the net zero journey will be required.

Conversations at Innovation Zero centered around three major factors required to be able to mobilize the capital needed to deliver net zero by 2050:

• The right policy

• Clear strategy at the government level

• Risk takers willing to invest in new technology 

Various corporates are making inroads into the sustainable investment space, and many are doing so as part of their commitments to becoming carbon neutral and helpingindustries they operate in transition into carbon neutral status. Notable examples include Microsoft who launched the Climate Innovation Fund (3) and Arcelor Mittal launching the XCarb Innovation Fund Accelerator Programme, aimed at supporting breakthrough technology start-ups with potential to accelerate the decarbonization of the steel industry (4). Sainsbury’s is an example of a company within the retail segment launching an investment fund aimed at investing in those start-ups that are able to support its commitment to achieve net zero emissions by 2035 (5).

As part of the broader investment strategy, public and private capital need to work together and there need to be channels and frameworks developed to allow for a robust blended finance model to function efficiently. Work in this space is already underway. For example, the United Kingdom has published a commitment as part of its 2023 Green Finance Strategy (6) to work with the Green Finance Institute to explore how blended finance models can be utilized strategically, in addition to its £30 million seed capital investment into the Big Nature Impact Fund leveraging private sector investment in a range of nature projects in England. 

The key question remains – do banking institutions see sustainable finance as being at the core of their business? It seems that different companies are at different points in their sustainability journey and making this mindset shift is one of the key priorities on the table.

Data question remains big on the agenda 

Data forms an important part of the equation on the road to net zero both as part of the risk management process as well as in underpinning credit underwriting processes broadly and sustainable finance decision making specifically. Conversations at Innovation Zero placed a significant focus on data presenting a number of challenges needing to be tackled when speaking about meeting ESG goals and business model re-design. Some of the issues cited most often included scarcity and lack of data reliability – in part due to the absence of cohesive regulatory and reporting frameworks across the globe as well as the absence of historical data necessary for building robust risk assessment models. 

The most recent report by the Network of Central Banks and Supervisors for Greening the Financial System (7) has indeed confirmed that three key challenges in obtaining the right climate-related data lie in the (1) availability (2) comparability and (3) reliability of data. The report outlines several policy recommendations, including fostering convergence towards a common set of disclosure standards and taxonomies and sustainable finance classifications. Other actions suggested include the development of well-defined methodology and action driven metrics alongside increasing the ability to better leverage available data sources and tools (8).

The challenge has been well described and the question remains as to what the steps forward are and whether these are being tackled with a roadmap in place. It appears that governments and private institutions are attempting to tackle this challenge and some of the most recent developments in this space have included ECB publishing new climate-related statistical indicators aimed at narrowing the climate data gap in early 2023 (9). These indicators help analyse climate-related risks in the financial sector and monitor green transition. Other initiatives include Climate Data Steering Committee outlining next steps on its plans for the Net-Zero Data Public Utility (NZDPU)(10). That said, much remains to be done to get the ecosystem right.

Place larger focus on developing the demand side

Ramping up sustainable technology capacity is currently in focus. At the same time, it is important to remember the significance of developing the demand market, such as – in addition to increasing renewable energy capacity – it is imperative to create the market and infrastructure to make uptake of this renewable capacity as easy as possible to avoid the risk of new tech uptake failures. A number of aspects need to be taken into consideration here, from ensuring that demand-side policy developments keep pace with technological advancements to the right environment and incentives being put in place for companies and consumers to switch to the sustainable alternatives. 

All in all, it appears that these past several years have started to bring about the change in mindset where decarbonization is being more actively built into business models with incentives and the government policies being put in place to support the transition innovation. Bringing coherence into individual components and initiatives of this ecosystem – the supply side, the demand side and the enabling environment – is the next big challenge ahead. It is when the system moves as an aligned organism that innovation can happen at scale with both investor and consumer confidence present to support the transition.