‘Climate Finance’: What is it? And where do ‘climate-focused fintechs’ fit in?
By Heather Ribbans, Head of Partnership Sales at Railsbanks
As defined by the United Nations Framework on Climate Change (UNFCCC), ‘Climate Finance’ is “finance that aims at reducing emissions and enhancing sinks of greenhouse gases and aims at reducing the vulnerability of, and maintaining and increasing the resilience of, human and ecological systems to negative climate change impacts”. That’s a mouthful! In short: finance that reduces humanity’s impact on the planet. And it’s a hot trend here to stay.
At the 2015 Paris Conference of Parties (an event also known as COP 21), the world’s leaders, from national governments to multinational companies, from international associations to investment funds, ushered in a new era for climate finance, policies and markets. To limit global warming to well below 2°C above pre-industrial levels, the parties that attended made several pledges and launched new initiatives around ‘Climate Finance’. For example, 20 countries (today 24) launched Mission Innovation, a global initiative whose primary goal is to reinvigorate and accelerate global clean energy innovation, making it more widely affordable.
Big banks, such as Crédit Agricole, Societé Generale, Bank of America and HSBC, pledged to scale up their investments in renewable and clean energy, green bonds, low-emission transport and agriculture. Several investors who manage trillions in assets, like the Portfolio Decarbonisation Coalition or the Fossil Fuel Divestment Campaign, signed up to gradually quit carbon.
The shift toward ‘Climate Finance’ and the recent emphasis on climate change, with the so-called climate movement becoming increasingly vocal around the world, is leading a growing number of both large and small institutions to incorporate Environmental, Social, and Corporate Governance (ESG) metrics into their purpose plans of action. For organisations, it is becoming increasingly important to go green, show their customers they are environmentally friendly and are ready to give something back to our planet.
Whilst at first sight it may seem that the financial services industry has less impact on the environment than, let’s say, the automobile industry or the energy sector, is in a unique position to influence the climate agenda. In their role as financial intermediaries, banks, building societies, insurance companies, investment banks, pension funds, etc. have important relationships with, and invest in, firms whose operations may (and do) cause harm to the environment.
As the debate around ‘Climate Finance’ within financial institutions heats up, one of the biggest issues is associated with how our sector can deliver on this in line with declared targets and sustainable development goals. And who will lead the charge? Will this change be led by large traditional banks or are there new disruptors in play that can deliver something unique whilst providing a product or service that encourages uptake in users?
Personally, I believe the real game-changers in the market are those non-bank players who are looking to embed financial propositions into their current offering, whilst ensuring they have a sustainable product. Recently, some industry outlets have begun highlighting fintechs promoting similar services. These environmental products take many forms, whether an eco-friendly debit card, recyclable packaging, the off-setting of carbon emissions or incentivising users to donate towards ‘save the planet’ initiatives.
A good example of such a value-added proposition can be found with the next-gen neo-bank, Novus, and their Visa debit card, which enables its customers to contribute to various sustainability and social causes. The contributions are shared from the revenues generated with the provision of the payment service. Novus thereby works with various sustainable brands and businesses to create a “sharing” network effect, but also to strengthen the sustainability ecosystem in London and the UK by driving volumes and motivating its customers to spend within this network of conscious businesses.
Novus is just one great example of a fintech start-up combating climate change. Many other fintechs are starting to combine their new financial products with climate technology: Aspiration in the US, Cooler Future in Finland, CoGo in New Zealand and the UK, and Tomorrow in Germany could be mentioned in a list of ‘climate-focused fintechs’ that keeps getting longer.
As the public’s focus on climate change is here to stay and legislation, pledges and commitments around ‘Climate Finance’ increase (who knows what new ideas and initiative will be brought forward at the upcoming COP26 which will be hosted in Glasgow in November 2021), we all hope that ‘climate-focused fintechs’ will very soon be able to generate meaningful returns and hence merit continued investment. I hope shortly not only to get excited by new cool and handy financial products but also to know that the financial companies who help me manage my own money daily can keep the planet alive thanks to their bold and eco-friendly offerings.