This article first appeared in Forum, The Edge Malaysia Weekly on November 1, 2021 - November 7, 2021
As the United Nations Climate Change Conference (COP26) begins in November, countries accounting for almost 70% of global emissions have either committed to or are considering net zero commitments. That said, the path to achieving net zero is far from obvious.
Technological innovation is going to be critical. Boston Consulting Group (BCG) estimates that existing technologies can eliminate about 25% of current emissions, and technologies in early adoption can address another 40%. This means new technologies will need to be developed to address the remaining 35% of current annual emissions.
Financing this innovation will be key. The world is currently short of between US$90 billion (RM373 billion) and US$210 billion a year in annual investment in climate-altering technology needed to achieve net zero, according to analysis by BCG and the Global Financial Markets Association (GFMA) on global climate finance requirements.
Governments can play a key role to support innovation through targeted investments that progress both the innovation agenda and positively contribute to economic growth. In our latest research, “Governments that invest in climate innovation invest in growth”, we highlight the imperative and success factors for governments to invest in innovation and unlock new opportunities for economic growth.
The innovation investment gap
There is already a significant shift underway when it comes to climate-related technology investment. Venture capital and private equity investments in climate innovation have been growing about 14% a year since 2016, with most of the funding going into mobility, renewables and waste.
Investment totalled about US$30 billion in 2019 and US$37 billion in 2020. But this is not nearly enough. Our analysis indicates this is as much as US$210 billion short of the yearly investments needed in climate-altering technology to reach net zero.
Governments as catalysts
Ultimately, public funding will be required to meet these vital targets, acting as a catalyst to overcome private investment hesitancy triggered by barriers such as uncertain returns, lack of track record and payback time frames.
There will be long-term economic paybacks for governments that are willing to invest in climate innovation. Climate innovation is a huge opportunity to create value, new jobs and sources of growth. There is clear evidence that countries can build a sustainable competitive advantage, as China and South Korea did in the last decade with photovoltaic (PV) cells and batteries respectively.
Public funding via co-investment and matching mechanisms can help lower risk perception and mobilise increasing venture capital and private equity investments in climate innovation, providing a self-generating benefit for the national economy. Patient, long-term capital can help close current funding gaps by compensating for the impatience of private capital for extended payback cycles and lengthy public funding processes.
The growing importance of climate innovation funds
Climate innovation funds can be a powerful tool in this journey, and one which has seen growing global adoption over recent years. Governments like Japan, Germany and the US have announced capital commitments for climate innovation funds that will support the next generation of climate-focused start-ups. The EU has also launched a €10 billion (RM48 billion) climate fund to commercialise innovative low-carbon technologies.
Malaysia has made progressive moves to invest in innovation. Despite the challenges of 2020, an additional 479 green technology projects with a value of RM2.23 billion was approved by September last year. These investments are framed by a relatively supportive green investment environment, with incentives such as the Green Investment Tax Allowance, Green Income Tax Exemption and Green Technology Financing Scheme.
Green investment and innovation will also play a prominent role in achieving the ambitions of the 12th Malaysia Plan, announced in September. Within it, the government pledged to eliminate the building of coal-fired power stations as part of wider efforts to reduce greenhouse gas emissions intensity by 45% of GDP by 2030. Green innovation will be an important contributor to achieving Malaysia’s green transformation and delivering on the prime minister’s announced goal of Malaysia becoming carbon neutral in 2050.
Setting up public sector climate innovation funding for success
Designing the right climate innovation focus and funding mechanism for a particular country should take into account the ecosystem capabilities of the domestic environment, access to capital and maturity of the ecosystem, and the current carbon intensity of the economy. Countries should adopt a mission-driven approach, focusing on efforts that build on a country’s natural advantages.
We have identified six key success factors in delivering an effective climate innovation fund:
1. Set a clear investment focus that concentrates investment in select areas.
2. Carve out a complementary market role that focuses investments on underserved segments to mobilise private capital and avoid direct competition with private investments.
3. Coordinate fund activities and public policy to provide the required demand-side stimulus via policies and regulations.
4. Build an experienced team with a demonstrable track record and a strong partner network.
5. Provide transparency by reporting impact, with highly visible communication and engagement efforts that create convincing proof points.
6. Establish a strong and recognisable brand that signals commitment to climate innovation and to being an attractive co-investor for private sector funds.
The time is now
There is wider recognition that the severity and pace of climate impact may be underestimated and we are running out of time to course-correct. Many of the solutions are known and need to be implemented quickly and at scale. There are also solutions yet to be discovered, and there is an urgent need to innovate and to ensure that these innovations are well funded. Governments that want to make an impact must target funds accordingly and, in doing so, unlock the economic benefits of a more climate-resistant and climate-competitive country.
Boston Consulting Group is the consultancy partner for the 2021 UN Climate Conference. Dave Sivaprasad is managing director, partner and Southeast Asia leader for climate and sustainability at BCG. Anis Mohd Nor is a project leader at BCG.
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