FinTech goes green

There is a growing acceptance that business has a role to play in combatting climate change. The desire to accelerate a transition to a low-carbon economy is real and is shaping transformation across many sectors. Just last week, Ryanair pledged to power 12.5% of the carriers flights with green fuel — currently two to four times more costly than the standard fuel — by 2030 in a bid to cut carbon emissions. As Peggy Hollinger pointed out when “Michael O’Leary is ready to pay a premium for sustainable jet fuel to help save the planet, you know the business world has changed.”[1] Digitisation and sustainability are also firmly at the centre of change in the financial services sector. The global value of assets where investment decisions are driven by environmental, social and governance data reached $40 trillion (€33.3 trillion) in 2020, having almost doubled over four years.[2] Up until now, companies focussed on whether climate change was going to impact on the business, now the important question is if the company is going to impact on climate change.

What is happening at an EU and Irish regulatory level?

There is a renewed focus within the EU on the transition to low-carbon, more resource-efficient and sustainable economies. Reflecting the growing importance of climate change for the economy and the role it has to play within the European Central Bank’s (“ECB”) policy, the ECB has set up a climate change centre to bring together the work on climate issues in different parts of the bank and to drive the climate agenda. Christine Lagarde, President of the ECB, noted recently that the centre provides the structure needed “to tackle the issue with the urgency and determination that it deserves.”[3]

From a regulatory perspective, the European Green Deal (“EGD”) sets out a roadmap for Europe to become a climate-neutral economy by 2050, de-carbonising the economy, transitioning to clean energies, and favouring the circular economy.

In the framework of the EGD, the Commission announced a renewed Sustainable Finance Strategy, expected to be adopted in the first half of 2021, which aims to ensure that financial systems genuinely support the transition of businesses towards sustainability in the context of recovery from the impact of the COVID-19 outbreak. The Sustainable Finance Strategy pursues several goals, including reorienting private capital to more sustainable investments; managing financial risks stemming from climate change, environmental degradation, and social issues; and fostering transparency and long-termism in financial and economic activity.

The EGD also introduced three key regulations implementing a new taxonomy classification system, environmental, social and governance disclosures and low carbon and positive impact benchmarks. Mairead MacGuinness, the EU Commissioner for Financial Stability outlined that these new EU rules will put environmental information on a par with financial information for large companies’ annual reports[4]. This was supported by Christine Lagarde who highlighted the “information gap” when it came to the environmental impacts and activities of businesses. We will discuss the EU sustainability regulations further in the next insight in this series.

In Ireland, the Minister for Finance noted that EGD and the Commission’s Renewed Sustainable Finance Strategy will help Ireland’s COVID-19 recovery, enabling it to build back better based on a transition to a green, low-carbon, sustainable economy. In the Department of Finance’s Finance Action Plan 2021, which underpins Ireland’s strategy for the development of its international financial services sector to 2025, ‘sustainable finance’ is one of the main priorities. The strategy is a clear indication that Ireland is seeking to begin capitalising on changing markets post Brexit and Covid-19 with the sector also playing a crucial role in the worlds transition to a ‘digital and sustainable’ future.[5]

Similarly, the Central Bank of Ireland’s vision for the Irish financial system is that it sustainably serves the needs of the Irish and European economy and consumers over the long term. It is imperative that financial services companies bear this in mind when planning their own growth strategies for 2021 and beyond.[6]

What is ‘Green Fintech’?

The term ‘Fintech’ has been widely used in recent times and generally describes technologies that strive to improve and automate the delivery and use of financial services to clients. The concept of ‘Green Fintech’, however, has not yet had such a global reach and while it does not have a universally recognised definition, it typically describes companies or initiatives which have a positive impact on the environment, e.g. resulting in lower greenhouse gas emissions or greater biodiversity.

The ‘Green Fintech’ ecosystem is rapidly growing across the globe but is still young. Many Fintech companies are actively shaping this fundamental shift to sustainability from planting trees to offering fossil-fuel-free investment options. Interest in Green Fintech solutions is steadily increasing with innovations across sustainable and competitive tech-driven financial products services.

We take a look below at some of the various ways fintech companies are playing their part in greening the economy:

Production of clean energy:

The use of technology in financial services has the potential to channel financial resources to environmentally sustainable firms more efficiently and incentivise the production of clean energy (e.g. green crowdfunding platforms; ‘energy’ tokens on DLT platforms and peer-to-peer exchange networks), or at least provide a trusted measures of impact and actions to produce it. One example is SolarCoin (§), which was created to reward solar energy producers and to give an incentive to others considering installing solar panels.

Carbon offsets:

Roughly 400 of the world’s largest 2,000 companies have announced net zero emissions targets. Some fintech companies, like CoGo and Almond, have taken a unique approach to automating the procurement of carbon offsets to reach net-zero emissions. They track corporate or individual activity through bank account data, automate offset purchases based on this data, and provide recommendations to reduce carbon emissions overall such as by switching to a green energy supplier or plant-based diet and encourage them to spend with brands whose values align with theirs.

Sustainability as a core value:

A number of fintech companies are making sustainability one of their core values, even if it is not part of their primary product. bunq is a challenger bank with a focus on sustainability. It promises to plant a tree for every €100 spent with their card. They state that green impact of a user who spends €1,000 a month with their bunq Green Card is such that it takes just 5 years to start offsetting their yearly carbon footprint and be fully carbon neutral. Another example is EcoTree, a Danish company, which invites people to become tree owners through investing in trees via a digital wallet and to receive returns once the tree reaches maturity and the forest is renewed.

ESG ratings and investing:

ESG metrics are having a noticeable impact on the world’s top investment vehicles. With customers increasingly demanding funds with environmental, social and governance credentials, it has become a top priority when making investment decisions and has become increasingly important in middle management day-to-day activities. Green fintech companies can also use artificial intelligence and distributed ledger technology to help record and convey relevant data about companies’ social and environmental impacts, thus reducing research costs and improving the pricing of environmental risks investment opportunities. The use of this technology facilitates the comparison of company disclosures with almost real-time data and publicly available environmental data to improve a companies’ environmental, social and governance standards.

Meet some of the other Green Fintech players:

A new generation of ‘green’ financial companies and funds are planning to leapfrog ahead of big financial institutions by offering environmentally-friendly fintech options:

• Irish-American financial technology company, Stripe is at the forefront of this movement with an ambitious initiative which aims to see the company not only become carbon neutral, but to actively remove carbon from the atmosphere. In the past year the payment processing platform has contributed $1 million to fund frontier carbon removal technologies. It has also rolled out an initiative offering customers the opportunity to direct a fraction of their company’s revenue directly to carbon removal projects. With the recent board appointment of Mark Carney, former Governor of the Bank of England and current UN special envoy for climate action, Stripe looks set to continue to push the green agenda, with Carney’s profile likely to assist in their existing initiatives to improve the global climate crisis.
• Tomorrow is a German-based mobile banking start-up. When customers use their card in a store or online, the shop owner pays a small fee to your bank, known as an interchange fee (0.2% of the transaction). Tomorrow will use a part of the interchange fee to cover the cost of the transaction and invest the outstanding amount (0.13% of the transaction) in climate protection projects.
• Cooler Future, a Finnish stock investment app, allows users to invest exclusively in sustainable companies and projects actively reducing carbon admissions. Users can track the CO2 impact of their investments alongside their financial returns.
• Venture capital fund, 2150 has also received attention for announcing a €200 million fund to back startup companies building sustainable technologies that construction firms and city planners can use. With offices in Copenhagen, London and Berlin, 2150 was founded on the concept that over half of the world’s population lives in cities, with this expected to increase to two-thirds by 2050, creating an unsustainable environmental impact. 2150 invests in technologies where sustainability impact can be measured and plans to build an initial portfolio of 20 companies, each with the potential to reduce or mitigate a Gigaton of CO₂ equivalent. Similar to Stripe, the fund is supported by an advisory board of environmental experts.

Now looking at the potential challenges…

While these areas of Green Fintech have much to offer, they still face challenges.

To ensure a successful transition to a greener financial system, it is critical that the sustainability features and risks of new products are properly designed and disclosed and that the additional layer of complexity this represents is navigated properly by regulated firms. Many traditional banks and companies offer different products and funds with a ‘green’ label but, in reality, few of these are truly sustainable and many don’t live up to their promise. Green Fintech companies must therefore address the ‘greenwashing’ risk, creating sufficient trust in their sustainability element so as to avoid accusations of greenwashing that would not only impact their business reputation, but can also erode trust in green markets more generally.

In Ireland, the Central Bank has committed to increase scrutiny on firms raising money internationally for eco-friendly investments, outlining that it will focus this year and beyond on the implementation of incoming international regulatory changes aimed at working out what financial products are “truly eco-friendly”.[7]

There has been significant press around high energy consumption and the negative impact which blockchain technology has on the environment overall. Mining bitcoin consumes more energy per year than the country of Argentina, and bitcoin’s carbon emissions are on track to equal that of the City of London.[8] However, given the risk to its ability to scale, efforts are being made to find a solution to this carbon footprint problem, with companies looking to accelerate the use of low-carbon / no-carbon renewable energy for mining.

Significant technical obstacles also stand in the way of growth in this area, for example operational risk in DLT networks (i.e. business interruption, privacy and failure of IT systems), potential financial exclusion of individuals without appropriate technical and online access, and job losses from the increased digitalisation in financial services. There are also potential legal frictions relating to the reliability of data; transparency and intelligibility of algorithms whilst protecting copyrights and innovation incentives; investor protection; digital data protection; and principles for blockchain governance.

While some of these challenges apply more generally to fintech and are not specific to green fintech, they should be carefully considered by a sector waving the ESG flag.

Summing up:

Green finance is gaining increasing attention around the world as an important way of meeting the needs of environmentalism and capitalism simultaneously. The global Fintech market is projected to reach almost 500 billion US dollars by 2025 and Green Fintech is set to represent an increasing share of this fast-growing space.

Political, demographic and regulatory influences are encouraging companies to closely examine Green Fintech. Millennials and Gen Z, the primary users of Green Fintech, are especially concerned about sustainability issues and an Environmental Social and Corporate Governance focus can further proliferate these new companies, allowing them to thrive post pandemic.

In the midst of a digitisation wave affecting the entire financial sector, sustainability has become an important consideration. Given the increasing number of Fintech companies already focussed on being green, despite its challenges, Green Fintech holds great potential to not only help achieve the EU Sustainable Development Goals, but to act as a driver in pushing for green innovations that will help to address climate change and make net-zero pathways and clean energy more accessible, measurable, and bankable.