7 steps enabling the twin transition to a sustainable and digital economy

The 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

Digital innovations are a powerful leverage that can be channeled in support of actions against climate change. Disruptive technologies, which have traditionally contributed a substantial share of greenhouse gases, when adapted to sector-specific challenges in energy, urban, transport or housing can be transformational in terms of reaching climate change goals. However, a fundamental rethinking and retooling is necessary. Supporting the economic and societal digital transformation should not be dealt separately from reaching a sustainable model. 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). 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. Innovators often require hands-on support in terms of venture building, business planning, finance, marketing, and commercialization.

Many 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.

4) Overcoming the "Tragedy of the Commons" by publicly recognizing green tech’s valuable contribution

Innovative start-ups can substantially contribute to climate action and to the overall public good. From a societal perspective, the opportunity-cost of not funding them is dire and may be earth-shattering, confirming the disastrous climate-change scenarios, and missing out on important potentially mitigating solutions. At the COP-21 in 2015, twenty-four nations and the European Commission made a “mission innovation commitment” to double research and development investments in climate technologies to USD $30 billion by 2020. Overall, this broad agreement confirms both the importance of green tech, and the opportunities that it provides to tackle climate change.

However, as the data shows,  green tech startups are suffering from continuous and substantial underinvestment and the public at large is missing out on potentially earth-saving solutions. To address this important challenge, a concerted public effort is needed in better leveraging digital innovations, such as artificial intelligence, IoT or blockchain technologies. Overall, greater public awareness needs to be drawn to green tech’s significant potential and yet, largely untapped positive societal impact.

6) Leveraging the power of digital innovation for climate action

A practical case study demonstrating that digital innovations can positively impact climate change has been illustrated by the adoption of blockchain-based solutions for the better measurement and tracking of greenhouse gas emission along the entire value chain. The highly disruptive, open and decentralized nature of blockchain technologies can play a critical role in enhancing the traceability of greenhouse gas emissions, including indirect emissions (i.e. through the import of goods and services.)

Challenges in addressing climate change lie not only in measuring the reduction of CO2 emissions, but also in assessing and attributing their reduction through a system-wide approach that empowers citizens to better monitor and trace CO2 emissions across entire value-chains (i.e. a global green score-card reflecting sectors and actors).

Blockchain is a powerful tool that can serve to significantly improve the transparency, accountability, and traceability of greenhouse gas emissions. It supports companies to provide more accurate, reliable, standardized, and readily available data on CO2. Given that blockchain works as a decentralized network of independent nodes that provide instant authentication, verification of real-time data, immutable data records and efficiency and timeliness. It can be catalyzed through smart contracts to better calculate, track and report on the reduction of carbon footprint across the entire value chain.

Importantly, blockchain technologies can transform the individual efforts of companies into a concerted networked effort, while clearly pinpointing the contributions that individual actors make toward the societal goal of reducing the carbon footprint. It is a propitious convergence, whereby the spirit of competition and carbon market-based incentives dovetail into a win-win situation. Clean technology startups play a critical role in this process, by developing blockchain-enabled platforms that bring together the different stakeholders, including companies, governments and citizens.

7) Adapting digital innovation to local socio-economic and cultural contexts

Digital innovations need to be adapted to the specific local and socio-economic context, and not only to meeting the particular objectives of climate change programs. Too often, digital transformation projects run into implementation problems due to social, economic or cultural factors that are conceptualized as independent from the technology solutions themselves. However, the key to a successful implementation of green digitalisation programs lies in how well-adapted these technologies are to a user community’s socio-economic and cultural context.

In climate change, a key and often 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.

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

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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