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Navigating a Changing Landscape: How Climate-Tech Solutions are Reshaping Financial Strategies in Emerging Markets

In the wake of 2023 and 2024’s extreme weather events, the costs of climate inaction are becoming painfully clear. Human, social, natural, and financial capitals are all bearing the brunt of these changes. The urgency to decarbonize economies has never been higher, with global agendas like the Paris Agreement and the UN Sustainable Development Goals (SDGs) advocating for rapid systemic and institutional changes. Simultaneously, capital providers and financial institutions (FIs) face escalating demands to analyse physical and transition risks, as climate risks increasingly translate into financial and credit risks.

In response to these challenges, innovative software and hardware technologies are emerging to decarbonize energy, mobility, and heavy industry. Climate tech, a burgeoning field, is developing technologies aimed at reducing greenhouse gas emissions or mitigating the impacts of global warming. The focus spans several areas, including renewable energy, energy-efficiency solutions, green hydrogen, carbon capture, utilization and storage (CCUS), and e-mobility. Technologies such as smart metering, carbon accounting, and trading carbon credits are leveraging artificial intelligence (AI), machine learning (ML), and Software-as-a-Service (SaaS) to drive these efforts.

Investments in the climate tech market are growing, with several reports indicating a 25% growth rate in the sector. However, a substantial financing gap remains. An estimated US $2 trillion is required to limit the negative impacts of climate change effectively. The International Energy Agency (IEA) estimates that 35% of the targeted emission reductions by 2050 will need to come from technologies currently under development and not yet commercially scaled.

Capital-intensive hard-tech solutions face significant challenges in achieving scalability. Many capital providers lack an understanding of sectoral risks or the expertise to invest in unproven technologies. Issues such as slow uptake, green premiums, and untested market fit also pose hurdles. In some cases, the perceived risks are justified. For instance, a study by the Institute for Energy Economics and Financial Analysis (IEEFA) found that many carbon capture and storage (CCUS) projects fail to meet their stated targets, raising concerns about their viability and bankability.

Alongside hard-tech, software tech plays a crucial role in designing effective instruments for assessing and managing climate-related risks. Estimates suggest that digital technologies could help reduce global carbon emissions by 17%. For financial institutions, it is vital to adopt and invest in solutions that integrate climate-related considerations into decision-making processes. This includes:

  • Assessing exposure to climate risks across various time horizons and identifying vulnerable sectors, particularly in analysing physical risks, where data accuracy and availability are significant gaps
  • Using granular, location-specific data to determine asset exposure to hazards
  • Measuring portfolio alignment with national and international transition agendas
  • Designing strategies to drive net-zero transitions

To bridge the climate tech funding gap, different players in the financial sector must collaborate and find innovative solutions to de-risk investments and increase financing flows. In 2022, Finance Ministers and Central Bank Governors endorsed the workplan on the Third Phase of the G20 Data Gaps Initiative (DGI-3), which includes recommendations to support the production of climate-related data, such as greenhouse gas emission accounts, national carbon footprints, energy accounts, and climate finance indicators.

International initiatives play a critical role in addressing these challenges. The International Monetary Fund (IMF), in collaboration with other organizations, has developed a Climate Change Dashboard to demonstrate the impact of economic activities on climate change and inform decision-making. The dashboard includes indicators such as greenhouse gas emissions, mitigation, adaptation, transition to a low-carbon economy, climate finance, and climate and weather data.

Similarly, the Open Government Partnership (OGP) promotes transparency in environmental information and advocates for progressive climate-related commitments at national and regional levels.

FIs need to adopt a dual approach: channel capital flows towards climate tech while also investing in software solutions to support lending decisions and align portfolios with Paris Agreement goals. This requires a collaborative effort across the ecosystem to drive viable solutions and bridge the climate tech funding gap.

This webinar aimed to foster collaboration between key stakeholders and explore innovative solutions to address these urgent challenges. The key takeaways from the webinar are as follows:

Given this background, auctusESG, along with Association of Development Financial Institutions in Asia and the Pacific (ADFIAP), Association of Development Financial Institutions of Malaysia (ADFIM) and Coalition of Disaster Resilient Infrastructure (CDRI), recently conducted a webinar aimed at decoding the climate-tech solutions for FIs in emerging markets The key takeaways from this discussion on climate-tech solutions, highlighting the crucial role of technology, data, and collaboration in navigating this evolving landscape are summarized below. 

Prioritizing climate risk assessments: A paradigm shift is underway, with financial institutions recognizing the urgency of incorporating climate risk assessments into core operations. This data-driven approach informs loan decisions and strengthens risk management strategies by considering the potential impacts of climate change on borrowers and lending portfolios.

Leveraging technological advancements: Technological advancements such as geospatial data, remote sensing, and the Internet of Things (IoT) are proving instrumental in gaining deeper insights into environmental impacts and climate risks. Real-time, accurate data empowers financial institutions to make informed decisions with greater confidence.

Bridging the data gap: Accurately estimating the financial consequences of climate-related events remains a challenge due to data limitations and the inherent uncertainty surrounding future climate scenarios. To address this, banks are increasingly turning to advanced modelling techniques and collaborating with third-party data providers to create more robust risk assessments.

Tailoring solutions and instruments: The need for climate-resilient financial solutions is driving the development of innovative products and instruments. Examples include loans with incentives for climate adaptation measures or collaborations with governments to offer adaptation grants.

Building community resilience: Public-private partnerships (PPPs) are emerging as critical tools for building community resilience against climate risks. These partnerships leverage public funding and private sector expertise to finance adaptation initiatives like infrastructure upgrades and early warning systems.

Financial literacy and climate education: Similar to the importance of financial literacy, there is a growing emphasis on educating borrowers about climate risks and available adaptation measures. Banks have the opportunity to play a dual role, providing financial products alongside educational resources on sustainable practices and resilience-building strategies.

Navigating the global-local dynamic: While global frameworks like the Task Force on Nature-related Financial Disclosures (TNFD) establish essential standards, successful implementation often requires localized approaches. Understanding the specific climate risks faced by individual regions is crucial for tailoring solutions and achieving effective risk management.

Continuous learning and collaboration: The field of climate risk management is constantly evolving. Maintaining a commitment to continuous learning, fostering collaboration across sectors, and staying abreast of technological advancements will be essential for financial institutions to navigate this changing landscape effectively.

By embracing these key takeaways, financial institutions in emerging markets can position themselves as leaders in climate-resilient finance. This collaborative and data-driven approach holds the potential to unlock innovative solutions, mitigate climate risks, and foster a more sustainable future.