The decisive role of innovation in curbing global warming was one of the great consensuses of the last United Nations Conference on Climate Change, and at COP27, it gained new momentum. The IDB Group has been working consistently for years to turn innovation into an engine of development that improves lives in Latin America and the Caribbean with the IDB, its public sector arm, IDB Invest, the institution's private arm, and IDB Lab, its innovation laboratory.

However, climate innovation has specificities determined by significant market failures that slow its development, adoption, and scale-up. As with any early-stage innovation, private actors find it difficult to perceive the benefits of innovation, the costs of generating new ideas are onerous, and incipient discoveries can benefit other market players, who take advantage of the inclusive nature of the knowledge created. As with most new technologies, the risks are high and often represent insurmountable barriers for early innovation companies. However, the benefits of researching and developing climate innovation are multiplying for society, making the economic value of climate technologies much greater than the expected returns in a sector still underserved by private investment.

When they operate in a healthy and interconnected innovation ecosystem, entrepreneurs and startups can overcome many difficulties and take technological and market risks, including climate innovation. But in Latin America and the Caribbean, entrepreneurs in environmental solutions find an embryonic and prolonged financing environment.

Given this panorama, it is crucial to support entrepreneurship more decisively from private and public initiatives. We must promote an interconnected innovation ecosystem that encourages entrepreneurs and industry to be prepared to assume the risks they face and can adapt to market fluctuations.

IDB Lab, pioneer of climate innovation

As an innovation laboratory, IDB Lab has tested innovative climate solutions before they are fully ready to be financed by the private sector or integrated into public policies. The projects undertaken by IDB Lab in recent years demonstrate that innovative technological solutions to combat climate change work. For example, in Colombia, IDB Lab financed the first Habitat Bank in the region by investing in Terrassos, a company specializing in climate finance with a model designed for companies to compensate for the environmental damage they generate. This high-risk investment experiment proved viable in the Meta region, one of the most ecologically important in the country, and has been scaled to other parts of the region.

IDB Lab has also pioneered the development and deployment of credit lines to finance energy efficiency and climate adaptation in Central America and the Caribbean with the Ecomicro program. The program now has 29 financial institutions in 19 countries and was responsible for the first generation of climate finance products and services offered to households and businesses through financial intermediaries.

And in another example of financial innovation, in 2017, IDB Lab supported the creation of a Natural Asset Company (NAC), a company that generates value through the development and preservation of natural assets, such as land or marine areas. Although this project of creating the first NAC in Latin America and the Caribbean in the central nature reserve of Suriname was not scaled or progressed, it paved the way for several potential NACs in our region, including one already underway in Costa Rica.

Boosting climate technology 

Investments in climate technology are primarily risky and capital-intensive, with an uncertain long-term horizon and dependent on technology. Still, they generate an accumulation of benefits for society and a great potential for impact that is worth evaluating. Last year, nearly $40 billion in climate technology was deployed globally in key sectors such as mobility, energy, food, and water, with the United States, India, and China as major investors.

The first IDB Lab grants for these technological solutions date back to 2011, with Acciona Microenergia in Peru, a project based on the use of solar energy in rural areas that has been scaled and currently reaches more than 24,000 families in the country. In 2015, IDB Lab founded a similar project, Kingo, which today reaches more than 300,000 families. And more recently, it has financed the Mexican company Iluméxico, providing renewable energy to more than 25,000 homes.

IDB Lab's portfolio in climate technology continues to grow, investing, for example, in the production of renewable energies with venture capital funds, such as the Sustainable Energy Fund II, which finances renewable energy projects with high potential for social impact, and the Sustainable Energy Fund in the Caribbean (CABEF) that promotes renewable energy in that area. IDB Lab has also experimented with new ways to reduce carbon dioxide emissions in transportation. To this end, it has promoted a green hydrogen development project in Costa Rica and an autonomous vehicle project in Chile and has supported companies such as CargoX, which reduces carbon emissions by optimizing transport routes.

Latin America and the Caribbean must ensure sustainable, inclusive growth that advances in achieving the major goals of climate agreements. Innovation and climate technologies can become allies to progress in this regard. The determined support of the entrepreneurial ecosystem will allow them to play a crucial role in improving people's lives and helping to achieve the world we aspire to for all.