Addressing challenges in sustainable tech adoption

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The buildings, construction, and transportation sectors are pivotal in the global race to reduce CO₂ emissions. Currently, buildings account for 26% of global energy-related emissions and transportation accounts for around 23% of emissions, so to meet the IEA Net Zero Scenario by 2050, these sectors must transform.

Alongside this there is a growing demand for energy-intensive technologies like Generative AI. AI is powered by massive data centres, creating a new wave of energy demand, with the carbon footprint of a single GenAI model used in corporate business generating almost five times the carbon emissions of an average US car over its entire lifetime. Microsoft is tackling this issue by securing nuclear-produced power for its data centres to reduce carbon emissions.

To meet the rising energy needs, while aligning with sustainability goals, businesses clearly need to adapt. Banks, asset finance companies, equipment finance providers, and private credit firms could play a crucial role in facilitating this transition. However, they face several challenges in supporting the adoption of sustainable technologies.

There are a number of challenges businesses face when adopting sustainable technologies. Currently the adoption of green equipment remains sluggish, with businesses hesitant to make large investments due to high upfront costs. Allocating this capital can be challenging, meaning firms need to assess the long-term risks associated with new technologies and balance them against any potential returns.

One company that is addressing these challenges is JCB, which has implemented several measures to reduce carbon emissions from its manufacturing facilities. This includes investing in energy-efficient pumps and lighting, which contribute to lowering their overall environmental impact. Additionally, JCB has a robust waste recycling strategy that minimizes resource wastage and tracks resource use globally. Its focus on efficient coating processes also helps to reduce paint waste and air pollution.

But it’s certainly not simple. With regulations varying by region, businesses must adhere to ESG mandates while integrating climate risks into their investment strategies. Additionally, there is a need to stimulate demand for green investments among business leaders and other stakeholders. This requires educating clients about the benefits of sustainable technologies and the financing options available.

Another consideration is how to get the customer narrative right on the sales and marketing side. To answer this, finance providers need to offer innovative financial solutions which put the customer first.

Flexible financing models that spread out the costs over time help to align with the operational realities of small to medium sized enterprises (SMEs). For example, pay-per-use models or lease agreements tailored to cash flow cycles can reduce the financial strain on businesses. This helps de-risk investments for SMEs, making it easier for them to access capital for sustainable projects. Innovative financial products like green loans, sustainability-linked loans (SLLs), and transition bonds can make financing more attractive for SMEs looking to adopt sustainable technologies.

Additionally, financial institutions should look to collaborate with sector experts and technology vendors to help provide comprehensive solutions that include not only financing but also technical support and expertise. At the same time, they can encourage SMEs to adopt greener practices by providing incentives for meeting sustainability targets.

By embracing financial innovation, lenders can offer more personalised borrowing options to meet the evolving needs of their customers. This can be achieved by developing partnerships with asset managers, insurance companies, and technology vendors which create new financing opportunities and expand the range of services offered to clients.

For example, DLL collaborates with partners to purchase high-quality carbon reduction units (CRUs) that compensate for emissions from assets in its portfolio. This partnership approach not only supports climate action but also aligns with DLL's focus on increasing the circularity of materials in the assets they finance.

Adopting open-architecture models can also allow financial institutions to collaborate across the value chain, enhancing their ability to offer diverse financing solutions tailored to specific client needs. Additionally, leveraging technology can help to improve risk assessment, streamline operations, and enhance customer engagement, boosting efficiency and scalability in offering sustainable finance solutions.

Another innovative solution would be to combine public and private investment which can de-risk projects for private investors, making sustainable technologies more accessible to SMEs, while offering financing terms that are linked to sustainability outcomes can incentivize companies to achieve specific environmental targets.

There are a number of benefits to innovation. Incorporating climate risk into traditional risk models will be essential for accurately pricing capital and managing investment portfolios, while utilizing data analytics to assess sustainability performance and inform investment decisions will be crucial for aligning with net zero goals. This will also allow for a customer-centric approach, meaning financial institutions can provide tailored solutions that support sustainability goals while ensuring financial viability.

While the adoption of green equipment remains slow, finance providers can play a crucial role in accelerating their adoption through innovative new technologies. Close collaboration between financiers and equipment manufacturers can ensure businesses can access both the capital and services needed to make the transition to green equipment, while also meeting regulatory requirements and benefiting from longer-term savings through green technologies.

Notes:

1. IEA, Building and Energy Systems
2. IEA, Net Zero Roadmap: A Global Pathway to Keep the 1.5 °C Goal in Reach
3. Forbes (28/3/24) ‘GenAI's Carbon Footprint: A New Challenge For Corporations