Rewiring finance through climate innovation

Channels: Corporate, Investors, Markets, People, Policy, Insurance

Companies: EIT Climate-Kic

People: Kirsten Dunlop

The financial system needs to be reshaped to trigger the investments needed to address climate change, says Kirsten Dunlop, CEO of EIT Climate-KIC, and innovation is crucial to bringing sustainable finance to the next level.

The need to catalyse investments required to meet climate and sustainable development goals is high up on the agenda in the EU and globally. The opportunity has recently been estimated as a $26 trillion boost for the global economy by 2030 if efforts to prevent the worst impacts of climate change are scaled up in time. But will current efforts to mainstream sustainable finance actually drive the changes needed and unlock this enormous opportunity?

Kirsten Dunlop, CEO of EIT Climate-KIC – the EU's largest public-private partnership addressing climate change through innovation – is hopeful that sustainable finance is about to enter a more ambitious phase. She explains one of the most exciting recent developments is the increasing concern and 'self-questioning' she is seeing among policy makers and financiers. "I'm extremely energised by what looks to me like a convergence of self-reflection and more determined intent," she says.

On a global level, Dunlop is starting to see "genuine self-questioning and concern" that emissions targets outlined in the Paris Agreement aren't being met and were inadequate in the first place.

At EU-level, she highlights last year's "visionary" Lamy Report, a major review of Horizon 2020, the EU's flagship research and innovation initiative. The review concluded that Europe's future R & I programmes should invest differently and more ambitiously to support transformation rather than incremental change. The report advocates for a systemic, mission-oriented approach to societal challenges, for example by integrating research, innovation and policy initiatives and by boosting impact through citizen involvement.

Also at the EU-level, the European Commission's Action Plan on Sustainable Finance published in 2018 is a major effort to align financial flows with climate goals. In the context of Paris targets, the High-Level Expert Group on Sustainable Finance – whose recommendations fed into the Action Plan – identified an annual investment gap in Europe of at least €180 billion through to 2030.

"We support this effort to rewire the financial system to achieve climate-compatible investments at the scale and speed needed", says Dunlop, "Closing this investment gap isn't about more of the same. It is about systemic changes in finance, infrastructure and innovation, and a new mission-oriented approach that aims for transformation rather than incremental change."

"To succeed, the Action Plan will need a much bigger push in that direction," she adds.

Dunlop points to the efforts of the Action Plan Technical Expert Group which is working on a green taxonomy, a European green bond standard and measures to align capital requirements and investment mandates with sustainability factors. "These are finance innovation experiments with global relevance," says Dunlop, "and we want to support them with experiments that help to shift these efforts towards systems-level transformation."

Developing investment-ready assets and solutions

Dunlop says the Climate-KIC innovation community is looking for opportunities to move beyond linear, sector-level interventions. "We are asking 'what are the leverage points for shifting whole systems towards exponential increases in decarbonization and resilience? How can we unlock this massive opportunity?'".

"A key part of this rewiring is figuring out where investors should be putting their money to make a real impact," says Dunlop.

To address this, EIT Climate-KIC has joined forces with Mission Innovation, a global initiative including the EU and 23 other countries, whose purpose is to significantly accelerate clean energy innovation. The partnership, which also includes the RI.SE (The Research Institutes of Sweden) and other partners, is developing an "avoided emissions" investor framework that aims to rapidly identify emissions-saving solutions needed to limit global warming to below 1.5 C and to scale them up by directing public and private capital into those solutions.

"Innovation across policy, finance, technology and governance will be needed to identify and develop 'investment-ready' assets and business models that are defined as green and sustainable under a future EU taxonomy," Dunlop says.

Climate-KIC's partnership with Mission Innovation will be launched at Climate Innovation Summit 2018: Mission Finance, taking place in Dublin on 6-8 November. The event will also launch the EU Hub of the UN's Financial Centres for Sustainability Network, which will be based in Dublin.

Changing investor mindsets to unlock climate innovation capital

There is no shortage of capital, says Dunlop, but capital providers and stewards are yet to truly make the connection between the material risks facing them and all of society if investments are not rapidly directed towards managing current transitional risks and reducing future physical risks.

When it comes to the availability of capital, Dunlop would know – she joined EIT Climate-KIC last year from Australian insurance and financial services giant Suncorp and before the global insurer Generali Group. "My experience working on innovation in financial services is that insurance and pension funds hold a huge bank of untapped capital for which there is an extraordinarily useful alignment of interest to release the liquidity to fund the kind of transformative innovation that will help us adapt to and mitigate climate change impacts," she says. "This would frankly be a better use of risk capital than having it locked up in long-term bonds."

To succeed in ramping up innovative investments, Dunlop wants to challenge the state-of-play on sustainable finance and the rules-of-the-game of the global financial system. Too much attention is focused on scaling of investments in individual or stand-alone technologies and solutions that are already well-understood and established. Meanwhile, too little time and capital is allocated to systems-level innovation that brings baskets of solutions together for climate-compatible investment, she adds.

An immediate barrier to unlocking capital for systemic change is investors saying that there are not enough "investment-ready" and innovative ideas, assets and business models available. Dunlop challenges that perception saying that they are there but reiterates that investors and capital holders are not taking the scale of climate risk, and opportunity, sufficiently into account in their investment mandates and strategies to change course.

EIT Climate-KIC is working to address this through its community of over 330 partners across Europe, and their networks, including cities, regions, industry, SMEs, start-ups, and universities. When asked for example of initiatives it has backed that are addressing challenging areas through systems innovation, Dunlop highlights Oasis, an open-source catastrophe loss modelling framework. Last year, it launched Oasis Hub, "a multi-sided marketplace for tools and services using risk modelling", through which information on the scale and impact of natural hazards like hurricanes, flooding and wildfires is made available to non-financial organisations. They can subsequently use this information to plan resilience responses. This is disruptive in the way that it lowers the barrier for the non-financial community to understand climate and environmental risks and helps shape demand for innovate risk transfer methods and partnerships with financial services players to manage the risks better in the first place, she says.

And the self-reflection seen in sustainable finance is also taking place within EIT Climate-KIC in order to keep improving, Dunlop says. "One of the journeys of self-questioning we've embarked on is to look at how we begin to walk our talk in our work with start-ups," she says. "We also want to take a portfolio approach, supporting start-ups and projects that can act as 'options' intervening at multiple points in a system – finance, agriculture and land use, urban transformation, materials – and begin to attract investors to portfolios of solutions across the value chain, rather than to a single start-up because they are looking for a unicorn."

Dunlop hope this is the type of thinking and self-reflection that will bring forward innovation at scale. "The world of sustainable finance is just nowhere near where it needs to be and the trajectory remains underwhelming – it's mediocre in its ambition and uninspiring in terms of the solutions it is currently focusing on," she says.

"Perhaps a dawning sense of panic combined with the desire to actually acknowledge and address the problems opens the door to the more ambitious path we need – a new era in which a rewired global financial system is the driving mechanism for climate innovation."

This article is part of an eight-part series by Climate-KIC and Environmental Finance discussing Mission Finance, the theme of the 2018 Climate Innovation Summit in Dublin on 6 – 8th November.  To see the series hub click here; it will be updated weekly prior to the conference.  To register for the conference please click here.