Q&A: Can Innovative Finance Help Build a Greener Future?

With the UAE’s Year of Sustainability extended into 2024, and with climatetech funding on the rise in MENAT and initiatives like the Dubai Future District Fund’s (DFDF) $54 million climatetech fund bringing green funding to the forefront, sustainable investments have become a key area of focus in the GCC.  

“We need to create instruments that are financially palatable and make sure that the labels are correct so we can separate the wheat from the chaff. If you can do that, you can set clear indicators and KPIs that measure what is a genuinely green investment,” associate professor of accounting at London Business School in London, Aytekin Ertan, tells Inc. Arabia.

An academic, an engineer, and a banker, one of Ertan's main areas of study is innovative finance for sustainable growth in energy. We speak to Ertan about how innovative financial instruments can pave the way for the green transition.  

An edited transcript of our conversation follows.  

Inc. Arabia: How can financial strategies contribute to the sustainable growth of energy industries? 

Aytekin Ertan: I’m a firm believer in incentives. One way to contribute to the sustainable growth of energy is by offering higher returns or limiting current risk. There is some evidence that people are willing to give up on certain returns if they’re investing in something green, but nobody wants to lose money.  

We can mitigate risk by creating regulations to protect green investments. We can introduce innovative and qualitative solutions that add smart nudges or KPIs to certain kinds of investments. This includes making cash flow considerations, offering tax advantages to certain financing instruments, and utilizing crowdfunding and green bonds.  

When it comes to returns, regulators can introduce clear metrics to measure what is green and make certain investments tax-free.  

Aytekin Ertan, Associate Professor of Accounting at London Business School in the UK. 

IA: What financial instruments can support sustainable energy projects? 

AE: Green bonds and green loans, especially if they’re linked to specific projects. As an energy company, I can issue a bond to finance a company with green KPIs and milestones that can be measured. Many banks already do this.  

Those KPIs can include energy, operations, and output. They should reward teams and executives based on the KPIs rather than financial performance. Tying KPIs to executive compensation is always good because it helps them set realistic targets.  

KPIs could be based on environmental impact for larger companies with deep pockets. For smaller companies, they could focus on impact, progress, or milestone achievements. For companies working with banks, loans can be dispersed as KPIs are met.  

KPIs cannot be bespoke. They need to translate between companies and projects. I think investor associations can play a role in coming up with best practices that translate into KPIs.  

On the government level, you can introduce green tax credits.  

IA: How can startups in greentech achieve financial returns so they stay in business long enough to reap the rewards of their work?  

AE: This goes back to the quality of greenness and not just the label. If I can show investors that I have a better product that has cleared certain metrics, it will help me raise funds. The main challenge here is proprietary costs, so in this case, startups need patient investors.  

I think the private equity asset class has the right mindset because it has a long-term vision. It’s not looking at the quarterly performance of a portfolio company, which gives it a longer runway.  

I think a similar model could help greentech startups, but this would have to come from investors.

IA: How can carbon credits help with achieving sustainable finance in energy?  

AE: I’m cautiously positive about carbon credits, but overall, I think they’re a good start. 

Carbon credits give companies some breathing room, and this can be an advantage or a disadvantage. You don’t want to alienate non-green players, but you must strike a balance between giving them breathing room and greenwashing. 

IA: How do you change investors’ mindset so that they reflect the climate impact of an investment?  

AE: The biggest challenge in this field is identifying and defining green and deciding who measures it because the definition changes over time.  

There are efforts from regulators to come up with clear definitions and environmental impact balance sheets, but the reality is we need the equivalent of a credit rating agency for environmental impact.  

This leaves a lot of unanswered questions, like should this be a private organization or a publicly-held one? Is it going to be global or national? And how different are the stipulations across borders?

One thing is certain, we need a body to certify this and score it correctly to help you assess whether you’ve reached your green allocation.  

We don’t have that system in place yet, but once we start developing it, we’ll have a playing field.