What is Climate Fintech?
Climate fintech refers to the use of financial technology (fintech) to address and adapt to climate change. This can include a range of technologies, such as digital platforms, applications, and services, that facilitate the understanding and financing of climate-related projects, such as renewable energy, energy efficiency, and carbon offsetting. Climate fintech can also involve the use of data analytics and machine learning to inform investment decisions and assess the environmental impact of different projects. The goal of climate fintech is to enable the financial sector to play a more active role in addressing climate change and supporting the transition to a more sustainable future.
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What Does Climate Fintech Include?
What Does Climate Fintech Include?
Climate Fintech can include the use of digital platforms, data analytics, and other innovative technologies to facilitate the transition to a low-carbon economy, enhance the resilience of communities and ecosystems to the impacts of climate change, and support the achievement of the United Nations Sustainable Development Goals.
Examples of Climate Fintech:
- Carbon Trading Platforms: These allow companies and governments to buy and sell carbon credits, which represent the right to emit a certain amount of greenhouse gases. By creating a market for carbon, these platforms can help to reduce emissions and encourage the adoption of low-carbon technologies.
- Renewable Energy Financing: There are a number of fintech companies that specialize in financing renewable energy projects, such as solar or wind farms. These companies can use innovative financing mechanisms, such as crowdfunding or peer-to-peer lending, to raise capital for these projects and accelerate the transition to clean energy.
- Climate Risk Assessment and Management: Fintech can also be used to assess and manage climate risks, such as the potential impacts of extreme weather events or long-term changes in temperature and precipitation. This can include the use of data analytics and machine learning to better understand and predict these risks, as well as the development of financial products and services to help businesses and communities manage and mitigate these risks.
Overall, Climate Fintech has the potential to play a significant role in addressing climate change and promoting sustainable development by providing innovative solutions to the challenges posed by a changing climate and by supporting the adaptation to a changed climate.
Fintech As We Know It
In general, we all know that climate change has continued to ravage the planet in 2022 and is one of those problems that the world hasn’t solved just yet. Many companies or industries are seeking to lessen their carbon footprints in their respective market segments. Environmental, social, and governance (ESG) themes are no longer just buzzwords. Consumers have come to expect more sustainability from products, including when it comes to financial services.
Financial technology, or fintech, is one of those industries that is conducive to adaptation. Climate fintech is where climate, finance, and digital technology meet, bringing the world closer to its climate goals.
Fintech is no stranger to disruption. Online money apps have revolutionized the financial services industry, from peer-to-peer payments to early direct deposit and more. Fintech has paved the way for the unbanked and the underbanked to access financial services, including lending and borrowing, that they would otherwise be excluded from in the legacy financial markets.
That’s why it’s not too surprising to see fintech entrepreneurs in the driver’s seat to create a greener planet through decarbonization. Climate fintech can be described as an ecosystem in which fintech market players harness embedded climate in their innovations, keeping the earth in mind as they build.
In some ways, climate finance is still being defined. However, this is common to fintech as other sectors of the economy, including traditional finance, are grappling with how to classify their ESG endeavors.
Nevertheless, it is safe to say that climate fintech views the world through an environmental lens, seeking to help the planet in how products and services are created for money management and investment.
Innovations such as machine learning (ML), artificial intelligence (AI), and the blockchain have already become more common, accelerating the pace and personalization of financial services. Climate fintech seeks to apply these innovations in a way that works toward adaptation and resiliency.
Climate fintech use cases include payments, insurance, lending, investing, and saving. The efforts to incorporate climate decision tools create a more sustainable financial services industry for users, investors, and future generations.
The reality is that the more climate-conscious consumers become, the more climate adaptation efforts will make their way into products across sectors of the economy, including fintech. However, the fintech industry has a head start.
Niches like digital payments are already less carbon-intensive vs. traditional financial services. Innovations like paperless statements have contributed toward offsetting deforestation. The emergence of online banking, including mobile deposits, has made driving to the bank to deposit a check something of a novelty. Let’s take a look at some of the use cases.
Digital payments are a more sustainable form of e-commerce and can also help the global economy. According to New Energy Nexus, the pivot from cash to digital payments in emerging markets could result in $4.2 trillion in new deposits into the financial sphere, while technologies like AI can bolster global GDP by $15 trillion-$20 trillion by the coming decade.
Polymer plastic cards (debit, credit) are highly unsustainable, while ATMs consume a great deal of energy. This is in addition to the energy that is consumed to print banknotes in the first place. Fintech that is out front for digital payments provides consumers with the choice to take a more sustainable option.
The next wave of innovation for payments companies could see transactions tied to carbon offsets. This could be anything from planting trees to using more efficient wood-stove technology in Africa. Carbon offsetting is already being implemented in such sectors as travel and gaming. It could be expanded so that consumers could support carbon offsets when payments at anywhere from the grocery store to their next dental cleaning.
Climate change directly impacts insurance underwriting, as the prevalence of natural disasters in certain regions of the world has created a crisis for home insurers. Ancient flood maps are not sufficient to help the industry tackle this challenge. Innovation on the insurance front could see the emergence of new data sets.
In this case, developers and entrepreneurs are focused on satellite imagery that can assess objects like a home’s roof. This, in turn, helps to forecast the type of damage that might be expected during catastrophic weather. The data can be applied to alter behaviors, such as alerting customers about an upcoming hurricane and advising them to protect their homes better. Advice could be simple: parking the vehicle in the garage to avoid a hailstorm or closing their shutters to protect against high winds.
Lending is another leading area for fintech companies, one that, in many ways, lends itself to decarbonization. For example, the proliferation of solar panels has only yet begun in the United States.
Nevertheless, considering the uncertainty of solar energy coupled with the market’s limited operating history, banks have difficulty assessing the risk associated with solar panel lending. The startup community is working on ways to harness data analytics to slash the risk inherited by renewable energy lenders. It’s part of the maturing of the industry.
One ag-tech startup that is putting climate fintech to work is AQUAOSO, a location-based climate intelligence company. AQUAOSO uses integrated data, maps, and analytics for today’s ag-lender.
AQUAOSO believes that financial institutions have a major role to play in building resilient agricultural and food systems.
As a climate fintech company, they exist to help financial institutions meet the needs of farmers in a changing climate with data management, advanced analytics, and powerful mapping tools. Climate fintech paves the way forward.
VCs and Climate Fintech
Venture capitalists have caught wind of climate fintech, and they are also on board. The data doesn’t lie. In H1 2022, venture capitalists poured $1.8 billion into climate fintech startups, representing a 1.5 increase vs. full-year 2021, CommerzVentures data reveal.
Most climate fintech startups are located in Europe, 43% of them as of November 2020, followed by the U.S. at 32%, others at 17%, and China at 8%, according to New Energy Nexus.
To that end, European climate fintech is out front for fundraising, having attracted $1.4 billion to their coffers compared to just over $400 million in the United States. In the EU, France-based climate fintech managed to raise over $730 million in H1 2022.
Fintech as a market segment came into its own following the Great Financial Crisis in 2008. Then, cracks in the banking industry began to show, with government bailouts and the failures of financial institutions like Lehman Brothers. Developers took their cue and began to innovate, and to their credit, venture capitalists recognized the potential of this nascent market segment.
Since then, the financial industry has been turned on its head. Fintech has bridged the gap between consumers and legacy institutions thanks to their technology whimsy. Now that the industry has been around for over a decade, it is more mature and ready to enter its next phase of growth.
In addition to technology, decarbonization has become a key focus in how fintech approaches innovation. As a result, consumers are coming to expect greater sustainability from their financial apps. Climate fintech is in the early innings. Climate fintech is important because financial technology apps have a wide reach and can transform how consumers think about and achieve decarbonization.
Given the reach of fintech-related companies on financial services, the potential for climate fintech is big. The global fintech market is expected to be worth $936.5 billion by 2030, according to The Brainy Insights. As a result, the more traction that climate initiatives gain in this sector, the greater the impact on the planet is likely to be.