Climate Risk Management and Innovative Finance

Companies across several sectors are taking the lead in the urgent action needed to reduce their carbon emissions and boost their resiliency to the inevitable impacts of global warming. 

Beyond gaining a deeper understanding of how they can reduce emissions of their operations and value chain while publicly reporting on their emissions and energy-usage data in a meaningful way, many firms are stepping up and partnering with municipalities and stakeholders through innovative financing tools present in the green economy. 

It’s worth pointing out that good reporting is crucial as investors are increasingly moving towards decarbonizing their investment portfolios. This has encouraged some companies to increase disclosure on their environmental impacts. On the other hand, many are still not incorporating clear climate-related metrics in their financial and annual reports, making it challenging for investors to effectively identify hidden climate investment opportunities.

In this article, the climate risk management experts at SINAI explore innovative finance and outline examples of innovative finance tools in action, including their positive impact on tackling climate change. 

What is innovative finance?

What comes to mind when you hear the term ‘innovative finance?’ Is it simply a fresh approach to raising money? Innovative finance goes further than offering a new way to raise funds, including fostering innovation-led communities and green pricing programs.

In other words, innovative financing refers to a range of non-traditional mechanisms that raise funds for the development and delivery of cutting-edge projects and ideas such as public/private partnerships, micro-contributions, tariffs, and taxes.

Let’s take a closer look at three innovative financial tools and mechanisms:

  1. Climate-aligned bonds
  2. Green angel investment funds 
  3. Green pricing 

Climate-aligned bonds

Green bonds are like regular bonds, except the money raised is explicitly ring-fenced to finance sustainable infrastructure and services, such as public transport and renewable energy. Green City Bonds are an effective source of low-cost capital for cities and municipalities to pay for low-carbon buildings, metro rail systems, renewable energy projects, and other projects that tackle climate change. These projects provide additional benefits, including a diversified and increased investor portfolio, better economic terms, and enhanced public engagement.


Source: Climate Bonds Initiative

There is strong investor demand for climate-aligned bonds, which are continuously oversubscribed. Leading the way when it comes to issuing green bonds include Region Stockholm, Transport for London, the City of Johannesburg, and the San Francisco Public Utilities Corporation.

Innovation-led communities 

How are financial tools used to enable a community-led culture of innovation within the green economy? Over the last decade, green angle investment funds have popped up, offering partnerships with those in the private sector that want to address climate change. Grants are distributed to early-stage localized projects to shape them into investor-friendly start-ups, providing the necessary early seed funding through angel equity stakes. Creating incubation capability to assist the start-up sector with not only funds but through other vital ways dramatically improves their chances of success. 

In the UK, for example, the Green Angel Syndicate is taking this fresh approach needed in the fight against climate change. The organization searches out, assesses, and selects innovations that will make a difference, and then invests in the projects and ideas to enable their further development. They believe that small inventions are necessary to make incremental changes on a global scale, helping build an entire system of change with the understanding that tiny inventions can have huge potential.

Green Pricing 

Lastly, large energy buyers are participating in green pricing programs - also known as green tariffs - to address climate change. Several unity companies in the United States offer these programs, allowing eligible customers to pay a premium through their electricity bill to receive energy from a renewable project directly operated by the firm or by issuing a renewable energy certificate (REC) from an existing renewable project. This allows energy companies to use sources such as biomass, geothermal, landfill gas, low-impact hydro, solar, and wind.

 

Some US states have already introduced legislation or rules mandating that utility companies offer green pricing options to their retail customers, including their residential, commercial, and industrial customers. In addition, an increasing number of utilities are deciding to provide programs in states without existing legislation. 13 states currently have a mandatory green pricing program offered by utility firms to their customers.

Long term carbon opportunities worth investing in


SINAI has built the world’s leading decarbonization platform that allows your firm to leverage its data in order to mitigate risk and emissions. Undertake vital scenario analyses so that you can identify which assets of your firm are most at risk and identify positive carbon opportunities worth investing in in the long term.


Future-proof your company by quickly identifying the risks your organization faces in your transition to a low-carbon economy. To see what the SINAI software solution can do for your firm when it comes to climate risk management, reach out for a demo today. We offer insights you can trust and accessible emissions reporting that investors can understand.

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