Innovation is the key to sustainability(*)

(*) This article originally appeared on Quinta (in Portuguese)

This year of 2024 had an intense start. On the agenda, many conversations about sustainability, clean technologies, decarbonization of the industry, investments and financing for 'green' projects, carbon markets, opportunities for new businesses. These are themes that were strong at the end of 2023, when I participated in the 28th Conference of the Parties to the UNFCCC (COP28) in Dubai, and which are expected to gain momentum this year and beyond.

The interest in these themes arises in the context of a growing awareness among populations around the planet about the impacts of climate change on everyone's lives (such as the heatwaves in 2023, the drought in the Amazon, and the rains and floods in the South of Brazil). This interest is also due to advances in the commitments of countries expressed at COP28, to the greater prominence of the business world in decarbonization, and to the proliferation of business opportunities related to the theme. In the end, innovation is the key to sustainability.

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COP28 emitted important signals

Started under the sign of controversy, with debates and accusations about possible conflicts of interest between the climate agenda and the business interests of fossil fuel producers, COP28 proved to be a huge public success. More than that. Although the final Agreement signed by the countries may be less than what we need and should pursue, it is remarkable that it includes a call for all countries to contribute to the elimination of fossil fuel use.

It is estimated that the event held in Expo City Dubai attracted more than 170,000 participants for activities in the Blue Zone, controlled by the United Nations and dedicated to negotiations between countries, and in the Green Zone, open to the public and stage for exhibitions and a variety of events with government entities, multilateral banks, investors, companies, researchers, universities, and civil society. In addition, the city hosted numerous parallel events that occupied hotels, museums, and event centers.

COP28 represented a milestone in large-scale engagement, live and in color, of various segments of society in the global discussion about climate change and sustainability. This leads to two key issues. The first is that this immense event evidences a growing interest in issues related to climate and sustainability, especially in the business and corporate world. The second is that the size and complexity of COP28 make it difficult to comprehend the entirety of the events and to make sense of the numerous discussions and decisions.

This article is focused on the first of these aspects, but in the end, I dare to offer a 'still innovative' suggestion (I will explain why 'still') to increase our capacity to understand what happens at an event of this type. Let's then talk about the engagement of the business world with climate-related themes and the energy transition.

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The market is taking the driving seat in decarbonization

The Paris Agreement, signed in 2015, aims to reduce greenhouse gas emissions to keep global warming below 2°C by 2100 and, ideally, below 1.5°C relative to pre-industrial levels (before the industrial revolution). Globally, energy production (electricity, heat, and other forms of energy) accounts for 35% of emissions, followed by agriculture and land use (24%), industry (21%), transportation (14%), and construction (6%). Therefore, replacing fossil fuel energy sources with renewable energies is a priority.

In 2022, for the first time in history, with a total of 1.1 trillion dollars, the volume of investments in clean energy projects worldwide surpassed the amount allocated to fossil fuel energy projects. Expanding the movement, in the first half of 2023, $1.7 was invested in sustainable energy projects for every $1 applied to fossil projects – the IEA estimates that the ratio has remained the same in the second half. Meanwhile, the market for green and sustainable bonds reached annual emissions of about $1 trillion, a figure until recently unthinkable.

These are unequivocal signs that 'market solutions' are becoming increasingly common; that is, the business rationale is more present for sustainable investments. Despite this, the amounts invested are still well below what is necessary to zero net greenhouse gas emissions by 2025. Moreover, investments have been concentrated in advanced economies, in mature technologies, and in energy generation - there is a gap of trillions of dollars, especially for investments in developing countries, new technologies, and areas of application beyond energy projects.

To achieve 'net zero', we need to go beyond 'decarbonizing' energy. It will be necessary to decarbonize manufacturing, agriculture and land use, construction, transportation. This implies reducing the use of fossil fuels and also eliminating carbon waste in all types of human activities. Have you ever thought that greenhouse gas emissions are a direct result of carbon waste? That is, we are releasing into the atmosphere a resource that could be used to create new products and materials, using innovative technologies and business models. Moreover, we need to capture carbon from the atmosphere and also increase efficiency in the use of all and any resources – water, land, fertilizers, minerals, and materials of all kinds.

For this to happen, we need new products, processes, companies, supply chains, and sectors of the economy that 'waste' less carbon. With this in mind, companies are increasingly seeing sustainability more as an opportunity than a threat. The signs that sustainability is a great opportunity were evident at COP28.

Consultancies are increasingly demanded by companies and governments to develop and implement decarbonization plans; therefore, they had a massive presence at COP28 and held so many events with current and potential future clients and partners. Banks see growing demand for capital for clean energy and decarbonization projects, while knowing that future demand for such projects will be even greater; there is a race to develop new architectures and financial products that allow attracting more resources for sustainable projects. Entrepreneurs worldwide are bringing to the market innovative technologies and business models that reduce emissions and consumption of the planet's resources; COP28 was a great opportunity for them to exhibit their products and services and seek business.

The significant business participation in Dubai denotes a growing interest in sustainable solutions and businesses. This happens because the underlying problem is set, but above all, because the 'business case' for decarbonization and sustainable business provides good financial return.

The decarbonization of the world economy may be happening at a slower pace than necessary, but the good news is that it is gaining momentum. As this happens, increasingly, markets will drive change and lead us into the future. This reality will open new opportunities for entrepreneurs and investors. These movements are already underway.

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There are new opportunities for entrepreneurs

Entrepreneurs from different startups in which I have invested via Aventures or Seldor Capital participated in COP28 in Dubai. The cases of these companies provide excellent examples of how innovation and sustainability are increasingly connected. Let's look a little further into this.

The Brazil-based Energy Source is a world pioneer in solutions to repair, recover, reuse, and recycle lithium batteries. The company dissolves batteries and allows the reuse of materials (Cobalt, Nickel, Lithium...), which it sells on the market and, when refined, can even be used in the manufacture of new batteries.

Cemvita engineers the DNA of microorganisms designed to 'consume' methane or carbon dioxide and produce different output molecules. One of its projects is the transformation of CO2 into sustainable aviation fuel (SAF). Recently, United Airlines signed an offtake agreement in which it commits to buying up to 1 billion gallons of SAF from Cemvita over the next 20 years.

Finally, Interstellar Lab , a French-American startup, creates enclosed environments (biopods) for the production of food and also plants for the cosmetic and pharmaceutical industries. The system allows precise control of humidity, nutrients, ventilation, temperature, and light frequency, enabling efficient production of plant varieties with minimal use of resources, land, and water, and without pesticides. Biopods use 99% less water than traditional agriculture systems.

These startups are revolutionary in their fields of activity. Energy Source redefines the lifecycle of lithium batteries, Cemvita uses advanced biotechnology to produce polymers and fuels from greenhouse gases, and Interstellar Lab opens new paths for sustainable agriculture. Many of the business segments in which they operate are new and are being created at this moment. These startups and thousands of other companies and entrepreneurs participated in COP28 in search of new opportunities in the emerging sustainability economy. However, there is still much for governments to do.

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It is necessary to innovate in the public-private relationship

Markets alone will not be able to address the climate crisis. To advance the sustainability agenda with the necessary speed and scale, a combination of investments and initiatives from governments and the private sector will be required.

Financing the energy transition and sustainable projects is a considerable challenge. The current level of climate-related investments (mitigation and adaptation) falls short of what is necessary. Global investment in 2022 was about 1.3 trillion dollars, and in 2023, it reached 1.7 trillion dollars. However, it is estimated that the investment needed to achieve the global warming limit of 1.5°C should be between 5 and 11 trillion dollars per year . The gap is large. Where will the missing resources come from?

As we saw earlier, entrepreneurs and innovators are taking advantage of many of the opportunities for sustainable ventures that are emerging, but there are also opportunities for investors. In mid-2023, the President of BlackRock , the world's largest investment company , shared with investors the vision that there is an opportunity to reallocate capital that is currently 'parked' in short-term, low-risk securities to other types of assets, including and especially those focused on energy transition and sustainability.

In the distant 2021, Forbes published an article titled "The 100 Trillion Dollar Investment Opportunity in Climate Transformation ", based on the analysis of a report by the International Energy Agency (IEA) that outlined the path to achieving zero emissions by 2025. To realize this ambition, the report pointed to the need for investments in clean energies of 100 trillion dollars by 2050.

On one hand, governments do not have the necessary resources to invest in the energy transition and address climate challenges. On the other hand, there is a growing interest from investors, investment companies, and the global financial community in opportunities related to the energy transition and sustainability. It is natural, therefore, to consider mobilizing private investor resources to expand global investments in climate issues. So, how do we make this a reality in practice?

You, I, and all private investors, whether large or small, with billions of dollars in assets or just a few hundred reals in a savings account, seek two things: return on investments and low risks. Therefore, for more private resources to be directed towards energy transition and sustainable projects, it is essential that these offer attractive rates of return and acceptable risks. The public sector has a key role to play in making this happen.

Discussions about finance at COP28 focused especially on how public capital can mitigate risks and catalyze private investment in sustainable projects. For this to happen, banks and public institutions must, in the first place, focus on designing their instruments to attract private capital, not replace it (as economists say, the instruments should be designed to seek the 'crowd-in' of private capital); secondly, to associate in different ways with private investors, civil society organizations, and multilateral agencies. This requires new arrangements and, in many cases, new legal frameworks for public action, that is, institutional innovation.

As the Executive Director of the GFCC , I co-organized an "Innovation Arena " during COP28, a joint activity of the GFCC and the US Competitiveness Council . In this event, which included CEOs, directors of some of the world's leading research institutions, public managers, civil society leaders, and investors, I moderated a session in which the Head of the Delegation from Sierra Leone at COP28, Kandeh Yumkella , commented on the investment needs in his country. In that country, only 30% of the population has access to electricity, illustrating the urgency of expanding sustainable energy infrastructure to less developed regions. How to finance investments of this type?

The role of the public sector, development agencies, and international cooperation, as well as multilateral institutions such as the World Bank , the Inter-American Development Bank (IDB) , the Asian Development Bank (ADB) , and the African Development Bank (AfDB) , among others, is particularly critical in less developed countries. In these environments, needs are more pressing, there are fewer structured projects, risks are higher, capital availability is more limited. Meanwhile, advanced economies mobilize most of the climate-related investments – together, Western Europe, East Asia, and the Pacific region, Canada, and the USA represent 84% of the values invested worldwide .

The more complex the environment, the more innovative public-private arrangements need to be and the more important is the public and multilateral action (taking risks and/or guaranteeing returns, but also leading the design of innovative project and financing architectures) to attract private capital.

Beyond the issue of financing, public-private partnerships are fundamental in all other types of activities and initiatives that seek to promote the sustainability agenda. This ranges from the development of standards for measuring and reporting financial and sustainability data to the research and development of new technologies, as we highlighted in the GFCC's Call-to-Action 'Innovate the Sustainable Future' . Innovation in public-private arrangements is key, and this is a critical moment in which countries are called to review their institutional setups to be more effective in their climate-related actions.

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Are we making progress?

Regularly, the United Nations (UN) compiles data and prepares a series of reports on the climate and actions related to climate change on the planet . As part of the climate conferences (COPs) process, countries make commitments related to emission reductions and are called to develop and present 'climate plans' to achieve the goals they propose, as well as to report their progress.

In 2023, at COP28, the first structured stocktaking of initiatives implemented by countries was carried out. The analysis previously conducted by the UN climate agency revealed that the progress made is insufficient and urgent action is needed for the Paris Agreement goals to be achieved. The existence of an evaluation process over time, with moments of review of actions and results, is progress in itself.

A management maxim tells us that we cannot manage what we do not measure. So it is with everything related to climate change and sustainability, at the global level and the micro; that is, in specific companies and projects. It is in this context that, in recent decades, initiatives, standards, and approaches to ESG measurement and reporting have proliferated, such as the GHG Protocol , CDP , GRI , SASB , PCAF and TCFD . These various initiatives and standards reflect the complexity and the different needs of stakeholders, ranging from investors and regulators to society at large.

Representatives of all organizations involved in sustainability measurements participated in COP28. The finance discussions I attended in Dubai reinforced the importance of sustainability measurement at all levels, from global to project. But there is still much to do in this field, from harmonizing existing frameworks to developing digital tools that can reduce the friction of the process for companies and the associated costs . In this field, the Brazilian startup DEEP ESG (full disclaimer: I invested in this company through Aventures) is one of the pioneers and one of the most advanced players in the world.

In June 2023, the first international accounting standards were launched by the IFRS , establishing how companies should include sustainability-related information in their financial statements. In Brazil, the Securities and Exchange Commission (CVM) followed the development of these standards and evaluates their adoption in the Brazilian market . A heads-up to navigators: the IFRS is the main organization in the world responsible for defining the standards of financial statements to be used by companies. These standards are adopted by the regulatory bodies of the main and most of the economies in the world. Thus, I make a bet: in the not too distant future, they will be incorporated in Brazil. And I venture to say that, beyond domestic regulation, the adoption of these standards will be anticipated in practice by companies that access or seek to access markets and sources of capital abroad.

As concerns about the climate increase, the evaluation of projects and risk management from the perspective of climate and sustainability will become increasingly common in making private investments in all types of businesses and sectors of the economy. The interest of financial institutions, regulators, and investors in data and projections (such as this one carried out in Brazil by DEEP ESG for Banco BV ) on emissions and sustainability will grow, encompassing the economy, industrial sectors, investment portfolios, companies, and specific projects. Access to capital, both public and private, will increasingly depend on rigorous scrutiny of emissions. Companies, especially those listed on the stock exchange, will be required to report data on emissions and sustainability. Measuring emissions and sustainability will become the rule, not the exception. Having said that, there is a vast field to innovate not only in sustainability but in the measurement of sustainability.

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Looking beyond COP28... it is also possible to innovate in the process

COP28 in Dubai was a microcosm of the complexities, challenges, and opportunities that define the global scenario. I had access to a very small part of the universe of discussions and activities, but I left impacted and optimistic. But also with two certainties.

The first, a common thread that unites the sections of this article and that you certainly already know, is that innovation emerges as the critical link for sustainability, in all aspects and dimensions - in products, services, business models, financing architectures, public-private partnerships, institutional models, information systems for measuring sustainability, and much more. The second is that, in my eyes and legs (given the long distances traveled in Dubai), COP28 also suggests opportunities to innovate in the way we organize and process large-scale discussions on complex topics of global relevance.

There is enormous potential to use Artificial Intelligence (AI) to analyze, connect, synthesize, and help interpret the meaning of data, information, proposals, insights, and perceptions presented, discussed, and generated at conferences like COP28. Imagine that all activities and sessions were transcribed and summarized in real-time, that a visual representation was generated of how the themes of all the sessions connect, that algorithms could create a summary of all cases and learnings shared, that this content was accessible in real-time in any language to anyone in the world, that for each session the level of agreement with the ideas presented was assessed, that the interests and proposals of countries could be clustered, that all project ideas presented were visible to those interested, that it was possible for people around the world to express their support for specific projects and initiatives... all this and much more is already possible. But I saw none of this being done there or anywhere else.

Nothing replaces human interactions. However, we can accelerate our understanding, judgment, and action with the support of new technologies that are already available. Far beyond COP28, it is an open field for innovation. Who is up for that?

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