As a new year opens up, Lauren Carter, Director of Climate Finance Initiatives at BEYA Capital and Co-Founder of Finance the Future looks at how new technologies and financing techniques might change the way that action on climate action is funded.
Today, new digital technologies and related tools have the potential to transform the future of climate finance. Using blockchain, artificial intelligence, crowdfunding and cryptocurrencies:
- an investor can create a customized portfolio divested of fossil fuels and invested in clean energy that learns her preferences and proposes tailored investment suggestions, much like Netflix;
- a development finance institution can trace its impact to individual trees in a reforestation project; and
- signatories to global compacts like UN Principles of Responsible Investment (PRI) can be held accountable for their pledges and automatically rewarded for reducing carbon emissions with incentives like tax credits.
While many of the applications, platforms and companies working to implement these solutions are in their infancy, the above scenarios are all within the realm of possibility. This article explores the innovative and practical applications of digital technologies for climate finance and the global transition to a more transparent, greener and decentralised economy.
In Marrakech, efforts are underway by Beya Capital to launch a GreenTech incubator programme to support youth entrepreneurs interested in addressing Morocco’s social and environmental challenges by leveraging the latest technological innovations including AI, blockchain, virtual and augmented reality, internet of things (IoT) and robotics. The programme is designed to support entrepreneurs interested in building businesses related to clean energy, resource efficiency, smart cities, circular economy, ocean and land use, food and water, and education and health.
Blockchain, the underlying technology that supports bitcoin and other cryptocurrencies, offers wide-ranging applications for climate finance. Essentially, a blockchain is a decentralised, public database that keeps track of transactions chronologically in a way that makes it almost impossible (most people will say completely impossible but let’s avoid calling the Titanic unsinkable) to manipulate or alter. Blockchain’s structure ensures the reliability, security and auditability of transactions, thus replacing the role for financial intermediation (matching borrowers with lenders by a trusted third party) traditionally provided by banks and governments. However, blockchain’s applications far go beyond financial transactions and can be used to track anything from carbon emissions to land titles.
In India, distortion to land markets hinders growth and accounts for a 1.3% loss of GDP growth annually as investors are less likely to develop projects on property with uncertain land titles, according to a report by the McKinsey Global Institute. To combat the risk of fraud and litigation surrounding land ownership, countries around the world including India, Ghana, Sweden and Georgia are experimenting with blockchain technology to transparently track land titles. Recording land titles and real estate transactions on a blockchain can de-risk investment in renewable energy projects, which is especially useful for catalysing investment in the developing countries most in need of energy access.
Brooklyn Microgrid, owned by LO3 Energy, enables households and businesses to sell excess energy generated from rooftop solar systems to their neighbours via a peer-to-peer blockchain-based system. Localised energy systems like the Brooklyn Microgrid reduce the energy lost in transportation over long distances while simultaneously incentivising the development of solar energy infrastructure by enabling producers to seamlessly sell their excess energy.
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Blockchain can also be used to increase accountability and incentives surrounding environmental treaties, such as the Paris Agreement, or sustainability commitments, such as UN PRI. Today, governments and corporations, including UN PRI signatories, are responsible for voluntarily reporting their environmental progress, which can be costly to track and subject to fraud and greenwashing. However, blockchain can track compliance with treaties and automatically release incentives, such as tax credits, once certain targets are met, using smart contracts. Smart contracts, an integral part of the cryptocurrency ether, are contracts encoded in a blockchain that allow all parties to verify or enforce the adherence to certain terms without including the services of middlemen, like a lawyer or notary.
Supported by blockchain technology, cryptocurrencies are a tool that can be used to incentivise the development of climate-smart projects and support the transition to clean energy. Two existing coins, Solar Coin and Ven, demonstrate how cryptocurrencies can be used to encourage climate-smart development.
Solar Coin is a cryptocurrency designed to encourage the production of solar electricity by rewarding the generators of solar electricity, including both households and commercial producers, with coins each representing 1 MW of verified solar energy generation. Solar Coin is different from Bitcoin and most other cryptocurrencies where value is derived solely from mining, a computationally intensive process used to verify transactions on a blockchain. Currently functional in 51 countries, Solar Coin aims to reduce the payback time for solar installations, leading to an uptake for solar equipment and helping create jobs in the renewable energy sector.
Ven, a digital currency designed by Hub Culture, is based on mix of hard currencies, commodities and carbon futures. By incorporating carbon futures, Ven is able to support environmental protection, with over 25,000 acres of Amazon rainforest protected already.
In 2015, Goldman Sachs called crowdfunding “potentially the most disruptive of all the new models of finance”, while the World Bank estimates that crowdfunding could grow to a $96 billion annual market in developing countries by 2025. Combined with other digital technologies such as blockchain, crowdfunding is a powerful tool that can be leveraged to raise both donor and investor capital for climate projects and relief efforts.
For example, in 2010 when a devastating earthquake struck Haiti, millions rushed to donate almost half a billion dollars to the American Red Cross’ relief efforts. However, in a 2015 report where ProPublica investigated how the Red Cross spent nearly $500 million in donations, they found “a string of poorly managed projects, questionable spending and dubious claims of success….The Red Cross says it has provided homes to more than 130,000 people, but the number of permanent homes the charity has built is six.”
The results of the investigation into the mismanagement of funding by the American Red Cross eroded donor confidence. However, if NGOs were to crowdfund their disaster relief efforts on a blockchain-based platform, donors would be able to track their donations and monitor impact. South Africa-based IXO Foundation is developing a blockchain-based “proof of impact” protocol that can be used to verify things like school attendance, children vaccinated or trees planted, thus enabling funders to ensure the impact of their donations. Integrating a “proof of impact” protocol into a crowdfunding platform would create a transparent track record of results that the most efficient and effective NGOs could use to incentivise additional aid.
Artificial Intelligence (AI)
In addition to blockchain, cryptocurrencies and crowdfunding platforms, AI is another digital technology being used to encourage sustainable and climate-smart investment.
Firms such as One Pebble are using AI to empower investors to choose funds or stocks that are more aligned with their values by screening portfolios against different sustainability/human rights metrics and then using machine learning to suggest similar investments tailored to the preferences of individual investors. While machine learning is only as good as the data it uses, it can be more effective than humans at analysing large data sets and anticipating consumer trends, such as coal divestment, which it can then integrate into its investment suggestions.
AI can also be used to manage and save energy costs. Elum Energy, a Moroccan based company, has developed software that uses AI to manage renewable energy costs for solar production coupled with storage. Elum uses learning algorithms to store and manage solar power which lowers energy costs, ensures a reliable supply of renewable energy and increases grid stability.
Despite the revolutionary potential of these digital technologies to streamline climate finance, increase transparency and incentivise green investment, they are not without flaws. The computing power supporting the bitcoin network currently uses more energy than Ireland and may be slowing down the renewable energy transition. While digital ledgers offer many advantages, we need to conscientiously ensure that future iterations of these digital technologies reduce their energy consumption, increase their efficiency and become more dependent on renewable energy networks so that they don’t erode the promise of progress that they offer.
Lauren Carter is the Director of Climate Finance Initiatives at Beya Capital, a climate finance advisory and investment firm based in Morocco. She works with governments, development finance institutions and private investors to create and fund climate-smart projects around the world by leveraging innovative financial models and new technologies, with a particular focus on applications for AI, blockchain and cryptocurrencies.
Lauren is also a Co-Founder of Finance the Future (FTF) is a diverse consortium of investors, innovators, lawyers and technology experts with a shared mission to transform financial markets for the betterment of people and the planet. FTF supports the development of investment vehicles capable of moving billions and trillions of dollars from fossil fuels toward a profitable and resilient global economy through Network Mapping and Gap Analysis and Model Portfolio Development.
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