NCFAs innovation and funding ecosystem

The Steps to Designing a more sustainable and digital economy

Linkedin | Bjorn-Soren Gigler, PhD | May 20, 2021

designing a more sustainable digital economy - The Steps to Designing a more sustainable and digital economyThe Paris Agreement (2016) is explicit in highlighting the importance of climate technologies for a sustainable future, stating in Article 10, that: “Parties share a long-term vision on the importance of fully realizing technology development and transfer in order to improve resilience to climate change and to reduce greenhouse gas emissions. Providing its full-hearted support, it makes a strong case for further action: “Accelerating, encouraging and enabling innovation is critical for an effective, long-term global response to climate change and promoting economic growth and sustainable development.”

Outlined below are seven suggested steps towards achieving this goal:

1) Recognizing that the digital and green transitions are closely intertwined

Given that, digital innovations are increasingly indispensable as key enablers for the economy’s green transition, while the greening of digital technologies is a critical success factor for digital transformation. Therefore, investments need to keep up the pace with the transition to a digital and green economy.

2) Addressing the investment gap for green tech

The investment trends in clean climate technologies have been lagging.  In fact, US venture capital funding for climate technologies, after experiencing strong growth in the early aughts, has declined since 2011. Astonishingly, Silicon Valley has become green tech’s Death Valley, as almost all of the 150 renewable energy startups founded there, over the past decade, have shut down. In fact, a mere 2.5% - 6% of US venture capital funding goes into the financing of climate technologies (UNFCC Report, 2018).

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The main reason for the tepid investment is that there is limited commercial profitability and lukewarm demand from investors to finance these highly innovative climate-tech start-ups in need of long-term patient capital. Clean tech companies’ positive externalities are not rewarded by the market, as investors prefer mature technologies to early-stage ones. The market failure in financing climate technology companies can be attributed to five prevalent factors, including green tech’s: (i) high-risk profile; (ii) capital intensive nature; (iii) patient capital demand; (iv) lack of collateral (intellectual property intensive); and (v) high-opportunity costs attributed to the high-profitability and shorter returns of competing technology investments. Based on these factors, there exists a counter-cyclical trend of underinvestment in green tech, which represents a key barrier for highly innovative green tech startups and SMEs to incubate and scale-up their businesses.  Therefore, it is critical to reverse this under-investment promoting innovations that foster both a digital and green transition.

3) Getting innovations out of the lab into the market

Besides the critical financing gap facing green tech companies, another significant challenge lies in getting these innovations out of the lab and into the market. A greater concerted effort is needed to provide just-in-time technical advice to improve the commercialization of green startups. Too often, it takes too long for key technological innovations to not only reach high levels of maturity in terms of their technology development  (a.k.a. high technology readiness levels), but also their optimal market and investment readiness.

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Innovators often require hands-on support in terms of venture building, business planning, finance, marketing, and commercializationMany times, highly innovative technologies do not reach markets—not because of technology bottlenecks—but due to the significant challenges that innovators face in terms of building a successful venture. Therefore, it is critical to enhance the required support to innovators through dedicated startup accelerator and venture building programs.

Key remaining issues to move forward the twin transition to a green and digital transformation

In climate change, a key and oft-overlooked factor, is the need to develop and adopt digital innovations that enable collective action among the different stakeholders, including industry, small business owners, startups, local governments and citizens. The decentralized nature of blockchain technologies, lend themselves to being adopted and appropriated by people and institutions, flexibly and suitably fitting their specific needs.

In fact, the nature of blockchain technology takes us back to the origin of the Internet, which was intended to be a highly democratic, decentralized and open system that empowered citizens to not only consume information, knowledge and data, but to produce, own and share their individual localized content. The local appropriation of Blockchain technology remains to be fully unleashed and holds great potential in this regard.

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Following, are the key remaining issues to simultaneously move forward a green and digital transformation:

  • How can digital innovations be leveraged to overcome the tragedy of the commons and provide incentives to all stakeholders to reduce their carbon footprint and consider the overall societal impact of their actions?
  • What policy and financial instruments need to be leveraged and/or developed to better support breakthrough innovations (at incubation and scale-up) that stand at the intersection of the digital and green transition?
  • How can we overcome the dilemma posed by the most game changing innovations, which are unable to raise the necessary finance due to being considered too risky, too innovative, too uncertain, or too complex for investors?
  • How can we better leverage green digital finance through the adoption of fintech innovations (i.e. green bonds and alternative finance mechanisms)?
  • How can UN agencies, the European Commission, national governments and the private sector further strengthen their collaboration to support a green innovation ecosystem and improve financing for green technology startups and SMEs?

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NCFA Jan 2018 resize - The Steps to Designing a more sustainable and digital economy The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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