Green fintech proving crucial to global sustainability goals

Marianne Haahr

The definition of ‘green’ is elastic, something that investors, regulators and governments around the world continue to debate. This is also true of ‘green fintech’, which stretches from retail banking applications through to the capital markets. There is, however, general agreement on the crucial part that fintechs will play in accelerating the transition to a more sustainable global economy.

“Fintechs are playing a critical role in diversifying the range of financial services, from providing services to the vast number of people who remain unbanked, through to connecting sophisticated financial markets and developing platforms for green bonds,” says Maria Ramos, co-chair of the UN secretary-general’s Taskforce on the Digital Financing of the Sustainable Development Goals (SDGs).

Green niches

By combining digital technology, such as artificial intelligence (AI), powerful data analytics, Internet of Things (IoT) and blockchain technology, with agile and innovative business models aimed at supporting a reduction in carbon emissions and negative environmental impacts, fintechs that have green credentials are carving out specific niches – and attracting mounting interest.

Many governments and financial authorities are turning to this sector to help achieve their Paris Agreement targets and SDGs. “Finance, technology and innovation will be critical for our transition to a sustainable world,” said Ong Ye Kung, Singapore’s minister for education and board member of the Monetary Authority of Singapore, in his keynote speech at the fourth Singapore Fintech Festival (SFF), held in November 2019.

He announced that ‘green finance’ will be a key horizontal theme for the 2020 Fintech Hackcelerator, adding: “It will be exciting to see new green fintech solutions at SFF 2020.” 

The UK’s Financial Conduct Authority (FCA) took a similar approach a year earlier when it launched its Green Fintech Challenge in October 2018, to address the lack of green finance firms participating in its Innovate programme. Nine firms were accepted in April 2019 as part of the first green cohort, covering areas such as improving consumer behaviours, data and data quality, metrics and taxonomies, and transparency and disclosures.

Better behaviour

Many fintechs are influencing consumer behavioural changes to encourage lower carbon footprints. “It is not just those that position themselves as native green fintechs, but also existing or scaled fintechs that are building in green functionalities,” says Marianne Haahr, director of the Green Digital Finance Alliance (GDFA), which was founded by Ant Financial Services and the UN Environment Programme, and acts as a knowledge partner for the UN taskforce.

She points to Bunq, which launched its Green Card, a metal Mastercard, in November 2019. In partnership with Eden Reforestation, the challenger bank plants a tree for every €100 spent on the card; as of March 19, 100,000 trees have been planted. In April, Bunq introduced SuperGreen, which links client spend across all its cards. “An average Green Card user is able to offset their carbon emissions completely within two years by using SuperGreen,” says Ali Niknam, Bunq founder and CEO.

And Bunq is also an initial member of Mastercard’s Priceless Planet Coalition, launched in January 2020. “We wanted to use the power of our network, including merchants, transit authorities, banks, fintechs and technology companies, to build a coalition that would see 100 million trees being planted [over five years],” says Scott Abrahams, senior vice-president of business development and fintech at Mastercard. Importantly, the coalition will be led by a panel of experts in the field to ensure its activities have the greatest impact on the environment.

Cutting carbon

These efforts are important because limiting the rise in average temperature to the critical target of 1.5 degrees Celsius by 2030, as specified in the 2015 Paris Agreement, requires an extra 1 billion hectares of trees, according to the UN’s Intergovernmental Panel on Climate Change.

Mastercard, Bunq and others are following Alipay’s lead, which launched the Ant Forest project on its mobile app in 2016. Its 500 million users are rewarded with ‘green energy points’ each time they reduce their emissions; it had planted about 122 million trees in China, as of September 2019. GDFA is working with the Ant Forest project, the Chinese Academy of Financial Inclusion trust fund under the Paris Agreement and the Central University of Finance and Economics in Beijing to explore the appetite of Chinese Ant Forest users to invest into African rainforests via the platform.

“We want to incentivise some of those 500 million users to use their energy points to plant trees in rainforests, which will have a larger carbon and biodiversity impact,” says Ms Haahr. GDFA launched the first insights on how to design behavioural triggers to incentivise Chinese users to invest in tree planting on Earth Day, April 22.

Targeting financial flows

While changing consumer behaviour is part of the solution, the capital markets hold the key to funding the green transformation. However, the amount of financing that needs to be unlocked is vast: in 2018, the Organisation for Economic Co-operation and Development estimated that $6900bn a year would be required up to 2030 to meet climate and development objectives.

And while 2019 marked a new record in green bond annual issuance, according to the Climate Bonds Initiative, increasing by one-third over 2018 to $254.9bn, this only represented about 5% of the total bond market in 2019.

As such, green fintech needs to focus on the institutional markets and helping to unlock capital reserves to foster new businesses and transition traditional industries, according to Nicole Anderson, co-founder and managing director at Redsand Group, which invests in and builds environmentally sustainable ventures.

“The financial industry itself has to adapt and become more sustainable. It has to explore how it can unlock, protect, underwrite and foster the transformational industries and, of course, the launch of new sub-segments and business lines,” she says. “It also needs to help the traditional industries, such as construction, transport and raw materials, which are fraught with challenges but are absolutely necessary in order to help us achieve low- or zero-carbon status.”

Ms Anderson uses the example of financing green or sustainable real estate, which was historically viewed as unlikely to provide returns. “We can’t just look at short- to medium-term financial returns; we must look at whether these businesses add value and create positive impacts over much longer time horizons. However, the products that underpin the baseline economy have not been adapted to make that transition,” she says. “Therefore, the biggest change needs to come from the institutions themselves because that is where the big capital and underwriting is unlocked. And the innovation is going to come from outside those institutions.”

Ms Ramos agrees that fintechs will have a significant impact in facilitating the financing of SDGs, from innovation and the development of new business models through to analysing new data sets and providing a better understanding of the risks and opportunities. “It is all about data – more and better data on risks and impacts, which allows for better pricing,” she says.

Alternative data

Ms Anderson points to several fintech solutions that make green opportunities more transparent and understandable to the institutional market. One example, in the environmental, social and corporate governance space, is Truvalue Labs, which has developed a sophisticated AI engine to analyse and interpret the masses of unstructured data to help investors make better informed decisions across their portfolio. “It accesses alternative data, such as information about unlisted companies and secondary market data,” she says. “Therein lies the opportunity to achieve better alpha for portfolio managers, because they can identify new investment opportunities.”

Emmanuelle Aubertel, sustainable finance markets at BNP Paribas Corporate and Institutional Banking, adds that accessing alternative data will also help integrate climate risk in investment decisions. She says: “Having a clearer view of climate performance is going to be increasingly key because the expectations are mounting on the financial industry and investor community to better assess climate risk from a transition perspective. In many cases, current climate disclosure by companies does not enable this type of assessment.”

Alongside four other international banks, BNP Paribas is a signatory to the Katowice Commitment, which is focused on aligning lending portfolios with global climate goals. “To understand how to assess our lending portfolio, we need to work together to co-develop tools. For example, the group is working with organisations, such as 2 Degrees Investing Initiative, which are developing forward-looking data and science-based scenarios,” says Ms Aubertel.

Other green fintechs are focused on the information asymmetry in the marketplace. For example, Enian – which is one of the companies chosen for the FCA’s green fintech sandbox – addresses the pain of making commercial renewable energy projects bankable at an early stage. “Our mission is to decentralise access to renewable energy data and intelligence. We do this using digital tools such as machine learning to enhance the way that projects are pre-qualified, making the process a lot faster and more efficient,” says Phillip Bruner, Enian's co-founder and CEO.

Blockchain application

Blockchain is also being deployed to drive efficiencies by digitising green capital market products. For example, in 2019 GDFA worked with HSBC to assess emerging practices around end-to-end green bond digitisation, where the assets are automatically recorded through a blockchain-enabled chip that communicates directly to the ledger and can be viewed on the investor’s phone.

“We haven’t seen end-to-end digitisation as yet,” says Ms Haahr. “[Such a solution needs] 5G technology to enable truly intelligent assets; also, to do proof-of-impact reporting directly from an asset requires analytics before such data can be passed directly to investors.”

She says security token offerings (STO), akin to cryptocurrencies, is an emerging space and could have a “democratisation” effect. “A lot of green assets are currently too small to travel to capital markets, whereas an STO financing mechanism often better matches the green asset in size,” she says. “We haven’t seen a green STO yet, but that will come.”

Sofie Blakstad, CEO of Hiveonline, which builds financial and trust solutions for communities, is also interested in alternative currencies. The start-up is working with a company in Pakistan that is digitising the value of goats, allowing villagers to exchange them for utilities such as water. “The ability to digitise assets and natural capital, and start to associate value with those in real ways, is incredibly cool,” says Ms Blakstad.

In addition, she points to the emergence of biodiversity bonds using blockchain: “For example, Wadappt in South Africa is pulling together proof of impact based on tracking at a local level, using IoT devices and blockchain to fractionalise bonds.” 

Biodiversity tokens

Many countries, such as Australia, have biodiversity offset schemes that operate similarly to carbon markets. “Basically, if you construct a hotel in a part of Australia, then you are obliged to measure the impact on biodiversity. If you can’t mitigate that impact by designing it differently, then you have to pay to regenerate nature to the same amount of biodiversity lost,” says Ms Haahr.

In August 2019, Commonwealth Bank of Australia (CBA), together with BioDiversity Solutions Australia, developed a blockchain-based digital marketplace prototype where users can trade government biodiversity credits, or ‘biotokens’.

Ms Haahr believes that this concept points to the future. “Green fintech is not only going to be banking on carbon, but banking on nature as well. In addition, the long-term vision of a biotoken is that retail investors can invest part of their savings into an asset such as nature that appreciates over time. They could also open it up to the international markets – for example, if there are bush fires in Australia, a retail investor in the Netherlands could invest in a ‘koala token’ on the CBA platform.”

Biodiversity-linked financial products were being developed even before the advent of blockchain. For example, eight years ago Rabobank, in association with the World Wildlife Fund, designed a biodiversity monitor for the dairy sector and created a biodiversity-linked loan. "If a farmer performs in the best quartile of the Netherlands dairy sector on biodiversity performance, then they will receive an interest rate reduction,” says Bas Rüter, director of sustainability at Rabobank. “This is to offset the fact that the farmer may have slightly less production and higher costs per litre of milk because it is a more extensive farming system.”

Reimagining the system

The Covid-19 pandemic has started many thinking about how global systems could be improved in the wake of such a widespread crisis. Rabobank, for example, is not only thinking about the short-term survival of its clients, but also about a system change that could help to stabilise the global food system, according to Mr Rüter.

“We are highly dependent on long supply chains that are relatively vulnerable, so we need to redesign the system with shorter supply chains but also with ones that we know better. The transparency and traceability of the chain is important in order to manage it properly, and there we use fintech,” he says. “For instance, blockchain technology is helping us to identify in detail where the food comes from and how it was produced. If we are able to provide that transparency for all food supply chains, then we can help redesign the food system in a way that makes it more stable in the longer term than it has proved to be over the past months.”

Such a rethink is just as applicable to the financial system. As Ms Anderson at Redsand says: “Right now, we are sitting at the precipice – the profound level of change is inconceivable. I am convinced that the way in which we attach value and how we make the world turn moving forward is going to change.”

Ms Blakstad at Hiveonline says: “Innovative solutions can step in where there is a vacuum. Regulators and the [financial] industry have a part to play in ensuring that space is filled by impact and green solutions, not by opportunistic and get-rich-quick ones.”