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Innovation is the key to solve our climate issues - part 1 - Introduction

Disclaimer: this blog is not directly associated to the financial services and Fintech sector, but as it forms an introduction to a 2nd and 3rd blog, which are indeed related to these sector, I have published this blog nonetheless also on the Finextra platform. My apologies to people considering that this blog is off-topic for this platform.

The Covid-19 crisis has pushed the "climate movement" to the background, but before the topic of global warming had been continuous in the news, due to the climate conferences, climate strikes, climate marches…​ Nonetheless what the Covid-19 and Global warming crises have in common is that they push people to be more conscious about their position in the world and the environment. As a result many people are starting to reduce their ecological footprint, by using less plastics, driving less with their car (or even selling their car completely), reducing their consumption of meat…​ Although these efforts are more than admirable, they are unfortunately only a drop in the ocean.

Such efforts definitely result in a reduction of someone’s ecological footprint (typically around 20 to 30%), but compared to all people not adapting their habits (research shows that only 9% of consumers feel it is their responsibility to take action), the immense growth of the world population and the massive increase in global wealth, these efforts are negligible on a global scale. This doesn’t mean however that we should stop doing these efforts, as they raise public awareness and put pressure on policy makers to make more radical changes.

This blog forms the first of a set of 3 blog articles. While this blog gives a general introduction, the 2nd and 3rd blog respectively explain what the Financial Services and IT/Tech industry (the two industries I am most acquainted with) can do to help, with a focus on accelerating technological innovation and the adoption of new cleaner technologies.

Ultimately we should transform the story of sacrificing economic growth for sustainability to a story of sustainability and economic growth. This is required as we cannot turn back the clock and the luxury we are acquainted with. Once people have enjoyed a certain lifestyle, it’s nearly impossible to make them take a step back. The only way to change people’s habits is by making the ecological alternative cheaper than the standard product or by providing an ecological alternative at the same price, same quality and same ease of use. The best example is the use of a car: public transport is indeed much more ecological, but it’s not that much cheaper and the level of experience (comfort, time from door-to-door…​) is in most cases worse than with your own car. As a result, very few people trade in their car for public transport.

So how do we allow economic growth and sustainability to come hand-in-hand? Here my absolute (maybe naive) believe in the ability of scientists and engineers to come up with innovative solutions, especially when there is a pressing need, allows me to be very optimistic for the future. Indeed, climate change is probably the biggest problem we’ve faced in generations, but we have never been more equipped to innovate through science and technology. As I mentioned in my blog on "Can financial service incumbents bridge the technology gap?" (https://www.linkedin.com/pulse/can-financial-service-incumbents-bridge-technology-gap-joris-lochy/), the evolutions in technology are accelerating exponentially, thanks to a number of social and technological evolutions. Especially as most solutions to tackle the challenges of climate change are already available but need further optimizations and scaling to bridge the required quality, usability and price gap. With the right economic incentives this gap can be bridged in a matter of few years.
It is important however that we all push for these innovations, i.e. convince the climate "sceptics" that something needs to be done, but also go away from the common belief that ecological is a synonym for renewable, small-scale, circular, sustainable, local…​ Such a thinking blocks innovation and blocks the possibility to come to a financially viable model (i.e. techniques that can be deployed on worldwide scale and can be profitable without extensive subsidies), which is required if we really want to make this shift.

Science and technology will also not come with ONE single magic bullet. Instead a number of innovations combined will allow to turn the wheel around. High level we can group these innovations into 2 categories, i.e. on the one hand reducing greenhouse gas emissions and on the other hand techniques to extract the existing emissions from our atmosphere or reduce global temperature in other ways:

Reducing greenhouse gas emissions: just like in any cost-cutting strategic exercise, we should look first at the sectors representing the largest emissions, as making a reduction of X% in these sectors will have a much larger gain than in other sectors. The main sectors to consider here are the sectors of power generation (around 25% of world’s emissions), transportation (around 20%), residential and commercial heating and cooling (around 15%), agriculture (around 10%) and the cement sector (around 5%). For each of these sectors, alternatives, which are both economically viable and sustainable exist already today, e.g.

  • Power generation:

    • Solar and wind: these form an interesting alternative, but only to a certain extend. Despite enormous investments in many countries, they only account for about 1% of global energy production today. Furthermore, the price and usability (i.e. a much less continuous electricity production than conventional generators, as the intensity of the sun and wind are variable) is currently not comparable to traditional generators.

    • Capturing the emissions of power plants and storing them or turning them into raw materials for another industry.

    • Biofuels from organic waste

    • Nuclear fusion, even if a major breakthrough in this technology has been announced for decades, it seems that the international cooperation in the Iter project will likely result in this breakthrough in the coming years. When this technology will be commercially available, this will not only give clean (almost no emissions and much lower radioactive waste as nuclear fission), safe, but also cheap energy. Cheap and clean electricity production is essential in the story for resolving global warming, as it will make many waste-reduction and recycling activities economically viable (which are often not viable today due to the high cost of electricity).

  • Transportation sector: of course the shift to electrical vehicles (not only cars, but also trucks, boats, planes…​), which is exponentially increasing year and year, should give a solution, assuming of course that the "Power generation" sector can come up with a solution for its emissions (otherwise we just shift the problem).

  • Residential and commercial heating and cooling: in this segment, we can also identify 2 groups of solutions, i.e. reduce emissions of heating and cooling installations and reducing the need for heating and cooling (e.g. today cooling systems account for 17% of electricity use worldwide).
    Again emissions of installations could almost be completely removed if converted to electrical installations, but unfortunately with current electricity prices this is very difficult to achieve. Hence again the need for clean and cheap electricity production.
    With regards to reducing the need for heating and cooling, there are already dozens of interesting solutions (such as new isolation materials, green roofs, "night-sky cooling"…​) available, which should be further promoted and scaled.

  • Agriculture: agriculture surprisingly results also in a large percentage of global emissions, especially due to the methane production by livestock. Fortunately, also in this sector, multiple initiatives are already being developed to reduce emissions and provide viable alternatives, e.g. lab-grown meat, meat substitutes (think about the success of a company like Beyond Meat), vertical farming, new types of animal food resulting in less methane gas production…​

  • Cement industry: a nice initiative in this sector in Carbicrete, which replaces the cement in concrete by steel slag (a byproduct of the steel-making process) and CO2 as the activator in the concrete. The result is a carbon-negative concrete, that reduces the amount of CO2 in the atmosphere.

Extracting existing emissions from our atmosphere or reduce global temperature in other ways: this list of initiatives we can also split in 2 categories, i.e. industrial extraction (also called Carbon Engineering) or using nature’s solutions (also called Geo Engineering):

  • Industrial extraction includes solutions like Direct Air Capture, where air passes through a giant filter, which catches and extracts the CO2 to sell to the industry (like food and beverage industry or plastic industry).

  • Geo-engineering, consists of solutions like boosting algi/plankton growth (algi/plankton absorb half of the CO2 emissions worldwide) in the sea (e.g. via "iron fertilization"), spraying sunlight-reflecting aerosols into the air (e.g. injecting sulphate particles to mimic the effects of a volcanic eruption), blocking the sun with giant space mirrors, creating low clouds over the ocean by spraying water droplets into the air from ships, grinding olivine into fine sand (allowing to boost its natural CO2 absorption), genetically modify plants/trees, allowing to absorb much more CO2, restoring forests…​

All those solutions are interesting, but will only give their positive results, when deployed at massive scale. For this to happen, the solutions need to be commercially viable for a company or in other words profitable. This profitability of a company’s product or service is determined by the different stakeholders of a company, i.e.

  • Customers: willingness of the customer to buy the product or service and at which price.

  • Employees: with the "War on Talent", ecological and sustainable corporate initiatives can be valuable initiatives to attract and retain talent. In this way, these solutions can indirectly lead to a higher profitability.

  • Investors: shareholders and other investors can also give a strong push towards sustainability, as they tend to promote sustainable investing (e.g. fund managers imposed by its fund investors) or because they simplify believe that sustainable companies provide better returns on the long term (which has also been proven based on past results)

  • Government: the government can support profitability of sustainable products and services strongly via regulation, subsidies, tax incentives (e.g. lower VAT percentage for ecological products) and via pre-paid money which can only be used by its beneficiaries for ecological products (like eco-voucher in Belgium).

When all 4 stakeholders take limited steps, overall, the business case of ecological investments can change fundamentally. It will therefore be important to change human behavior via education but also by more sophisticated "Behavioral economics" techniques.

While this change is everyone’s responsibility, there are 4 industries, which are by themselves not very strongly linked with the global warming issue, but are best positioned to put this pressure and accommodate this faster adoption, i.e.

  • Financial services sector: different actions taken (and considered) by this industry are described in the next blog (in this series of 3 blogs)

  • IT/Tech sector: different actions taken (and considered) by this industry are described in last blog of this series.

  • Media sector: this sector can change the habits and thinking of people considerably. With digital media (cfr. Tech sector) becoming more and more influential, there are also more options to facilitate a change in behavior, as ads and content can be targeted much more individually.

  • Government: a government needs to set the context via regulation and financial incentives, as indicated above.

I hope this blog can convince you that the technologies to solve the Global Warming problem are within reach, but that a faster adoptionby companies and consumers is essential.
In order to do so, the different stakeholders in companies (employees, investors, customers and government) need to put pressure, but for that they first need to change their thinking. The Financial Services and IT/Tech sector are perfectly positioned to facilitate this change, as we will describe in detail in the 2 next blogs (coming out in coming 2 weeks).

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