Fintech’s place in the Climate Change race

Fintech could be instrumental in financing green and in greening finance. In other words, the facilitating technology behind fintech’s processes has the potential to shift us towards a fairer, more efficient and greener economy.

There are already signs that this greening process is underway. In the public markets, for example, the value of green bonds issued in 2019 grew 51% from 2018, reaching a record $257bn and the UN Principles of Responsible Investment now counts over 3000 investors as signatories who collectively represent $100tr AUM. This is a clear indication of shifting attitudes to favour assets which generate not just a financial return but also produce a positive environmental, societal and governmental one.

“Investment in the space is currently growing at 5 times the average growth rate of all industries”

In venture capital, climate-related investments have boomed over the last few years. Last year, climate tech investments totalled $16.3bn – almost 40 times larger than in 2013 – and investment in the space is currently growing at 5 times the average growth rate of all industries. Innovation will be essential across all sectors to unlock a low carbon economy and, fundamentally, time is running out to do so. Limiting the global temperature rise to 1.5 degrees above pre-industrial levels is key to containing the most dangerous effects of climate change but would require emissions to drop by 45% between 2010 and 2030. To put this into context, global emissions are only projected to fall by 8% this year despite the coronavirus pandemic grinding the world to a halt. Investors are waking up to the fact that investment in climate tech is necessary and timely.

Climate fintech is a relatively new and unchartered subcategory in the ‘climatetech’ space. This is despite the fact that consumers, governments and central banks are placing increasing pressure on financial actors to be more transparent, reduce their environmental impact and better manage non-financial risks.

In order to ‘finance green’ and implement the Paris Agreement and meet our climate goals, an estimated $5-7tr of investment into green solutions is needed every year. Technological innovation is also needed to provide a more transparent financial system, create new financial instruments and raise capital at the scale and speed necessary to fill this investment gap. Such tools will also be important in providing new sources of investment to developing nations who currently face acute investment gaps for mitigation and adaption projects.

“Risks are characterised by ‘tipping points’ and ‘events’ rather than static or incremental changes”

On the other end of the spectrum, there is growing pressure to ‘green finance’ and adapt financial institutions to a changing meteorological and regulatory climate. Traditional methods of modelling risk in financial assets will need to be updated to include the risks that a changing climate poses to financial returns: these include physical damage to assets or regulatory changes that make highly polluting assets unlawful or redundant, so-called ‘stranded assets’. For example, by 2022, the UK government expects all listed companies and large asset owners to disclose their climate-risk-exposure and targets in line with the Task Force on Climate-related Financial Disclosures (TCFD). The development of fintech and data analytics solutions to help financial institutions and corporations to correctly assess climate-related risk, support accurate disclosure and set reduction targets will, therefore, be essential for businesses who lack the internal resources, expertise and bandwidth to develop these in-house. Such support will be even more important given that weather related risks are complex, mutable and non-linear – characterised by ‘tipping points’ and ‘events’ rather than static or incremental changes.

Far from detracting attention from climate change, Covid-19 has been an important catalyst for climate fintech. This is because it has created renewed interest in non-financial threats to financial stability, exposed fragilities in supply chains and unleashed public sector investment to ‘rebuild green’.

In the Fintech team here at Octopus, we seek pioneering entrepreneurs who are building category-defining businesses that push us towards a future of safe and efficient transactions. As the realities of climate change become increasingly evident, what can be considered ‘safe’ and ‘efficient’ takes on a new light. Technology plays an inevitable role in facilitating greener transactions and our transition to a lower carbon economy. Over the next few weeks, I will be exploring innovations in climate fintech such as how technology is being used to better price insurance risk, create green financial products and fill important data gaps.