Highly regulated, risk-averse culture, conservative business practices, customer satisfaction issues, advanced technologies that can enable or disrupt, aging infrastructure, business model skepticism, new unexpected competitors, public scrutiny, workforce shortage. At the macro level, these factors characterize which industry:
🅐 financial services,
🅒 neither A or B
🅓 both A and B
The correct answer is 🅓. Both industries face similar challenges. Furthermore, banking, wealth management and insurance have been going through a related innovation cycle since the early 2000s that the energy/ utility industry is now facing. For some of us, long before anyone called it “insurtech,” we were operating in large financial institutions sourcing investment opportunities and technologies to change the trajectory of property and casualty insurance. Likewise, before there were smart phones, we were trying to figure out how to move money on feature phones.
Today, climate now brings a massive convergence of energy, finance (fintech) and insurance (insurtech). Climate data, climate risk, climate modeling (ClimateTech) are essential, and in some instances regulatorily required (SFDR, SEC), to underwrite a financing and to insure a property. If you have climate risk, you simultaneously have financial and insurance risk. This is explicitly evident in the SEC’s proposed rule mandating climate risk disclosure for public companies. ClimateTech is also used in catastrophe planning, claims mitigation and rating among many other insurance functions. Additionally, securitizations and equities portfolios are directly reliant on climate.
Analogously, utility companies utilize ClimateTech for critical operations including peak/ load planning, field operations management, pipeline design and maintenance, vegetation control, customer and workforce safety, sustainability programs and environmental impact assessments. Climate insights derived from satellites, drones, stationary sensors, aerial reviews and a myriad of IoT devices are ingested by utilities, banks, trading firms and insurance companies alike. Climate risk is persistent across energy, insurance and banking. If the climate is important, then climate data/ ClimateTech is crucial. This urgency is further compounded as we witness extreme weather events more regularly which is stressing the infrastructure of both industries..
Numerous other risk variables are consistent in financial services and the energy sector including: cybersecurity, regulatory compliance, data integrity, disaster resource planning and workforce. Moreover, several technologies are persistent in both industries: IoT, machine learning, artificial intelligence, SaaS, process automation, quantum computing, blockchain and mobile/ edge computing.
Furthermore, as new sources of “green” molecules (hydrogen, RNG, differentiated NG, syngas, low CI fuels) and other renewable energy sources are deployed, new finance and insurance products are needed. The innovation coming forward in the energy sector will require new financing and insurance options that are yet to be developed. Energy Capital Ventures anticipates the following opportunities will be the most effective:
Mitigating climate risk in the utility industry and the broader energy sector through insurance/ reinsurance arrangements and finance instruments is a fertile source of innovation. In particular, performance warranties and equipment breakdown insurance will be needed for the next generation of renewables, gas heat pumps and green molecule energy sources.
ESG incentivized payment cards and point of sale mechanisms are gaining scale with consumers. Carbon offset markets and decarbonization exchanges can leverage underwriting models and incentives from the financial services sector.
Financing the deployment and scaling of new energy technologies will require novel debt and equity structures, including green bonds and sustainability-linked loans. This is true across the commercial, residential and industrial customer use cases.
However, as we have seen in financial services, it is imperative to understand the value to the ultimate customer of any given ClimateTech solution and climate data. These technologies will face similar adoption challenges that were seen in financial services. EG: Does the innovation provide the necessary incremental value to the customer over the existing solutions? Can the technology command a meaningful license fee to support the requisite growth rates and margin profile for a venture backed business? Does the solution provide actionable insights that lead to overwhelming business impact or is it a nice to have option? What is the accuracy and signal to noise ratio? How are you going to shorten sales cycles? What are the necessary systems integrations for each industry? Who are the optimal channel and distribution partners? Many of the answers to these questions are quite nuanced and require decades of experience to get correct.
The importance of ClimateTech to the energy sector and financial services industry can not be understated. The enormity of the challenge in creating a category defining solution in ClimateTech for banking, insurance, utilities and energy is equally as daunting. This is the type of opportunity where entrepreneurs, innovators and forward thinking companies thrive and can solve some of society's most critical problems.
With our multiple decades of fintech and insurtech experience complemented by even more extensive experience in energy transactions and a deep strategic energy industry network, ECV is uniquely equipped to support entrepreneurs and co-investors as they build companies at this convergence. We believe in the convergence of energy, fintech and insurtech. If you do too, please reach out!