Climate Tech: 8 innovative trends to make finance more sustainable
In order to achieve the climate objectives defined by the Paris Agreement, our economy needs to be completely reworked. Financial institutions and services are at the forefront of the ongoing fight against climate change. Indeed, they have the power to guide funding and investments towards more environmentally friendly projects. In fact, sustainable investments have actually grown by 605% between 2016 and 2020 according to a Climate Bonds report, and sustainable debt has increased by 29% to reach $732bn in 2020. Nevertheless, the banking, finance and insurance sectors are by nature slow to innovate. They still largely finance fossil fuels whereas their clients want to give meaning to their savings. This brings us to the startups developing "climate tech" solutions.
Indeed, a new category of players is emerging to promote a greener and more sustainable economy. These "Climate Fintechs" are also known as "Green Fintechs" or "Sustainable Fintechs". These companies aim to catalyse decarbonisation by combining finance, climate and technology.
Below are the eight climate tech trends that are shaping the sustainable finance market.
1) Green neobanks
The climate crisis and consumers' demand for transparency have led new challengers to emerge: green neobanks. These institutions are particularly appealing to millennials, young city dwellers and people in the upper middle class under 40 years old. These emerging players offer the same services as regular neobanks (current account, credit card, etc.) while promising to finance only sustainable projects. They stand out through various services and partnerships: wooden credit cards, ESG investment recommendations, or by donating part of the management and interchange fees to finance carbon offset projects.
- Helios, a pioneer in the French market, recently raised €9m and offers its customers the opportunity to co-construct their savings account in complete transparency using a list of sustainable financing solutions.
- OnlyOne* donates €1 of each client's monthly fees to finance environmentally impactful projects.
- Green Got allows its customers to measure and analyse the CO2 emissions associated with each of their expenses.
- Treecard offers debit cards made of eco-sourced wood or recycled plastic. It donates 80% of its interchange fee profits to reforestation projects.
2) Carbon footprint assessment solutions
Thanks to open banking, these solutions can access the banking data of consumers and companies, and then measure the carbon impact of each of their purchases. We can split these climate tech startups into two categories:
- B2C: these startups are developing mobile apps that score the environmental impact of users' daily spending. Swedish startup GoKind, for example, offers a sustainability index for various retailers and provides users with eco-friendly alternatives matching their consumption patterns.
- B2B: Doconomy* (top 1% of startups rated by Early Metrics), in partnership with Mastercard, develops an offer to calculate CO2 emissions linked to credit card purchases. Other startups such as Yayzy* and Carbon Zero have developed APIs to enable banks to calculate carbon emissions through a white-label solution. Finally, Greenly (which raised €21m last April) completes the carbon footprint assessment with adapted recommendations and an offset offer. The kilos of carbon not emitted are converted into euros that companies can use to finance sustainable projects.
3) Carbon offset solutions
Achieving the climate objectives set by the Paris Agreement means achieving carbon neutrality by 2050. Increasing carbon storage will therefore be a major challenge for the future. In addition to the existing regulatory requirements, more and more companies and individuals are starting to finance carbon capture projects. Several climate tech startups select these projects, certify their environmental performance and then issue carbon credits.
- Pledge enables freight and travel companies to offset the carbon emissions of their products and their customers' buying journey.
- Cloverly develops an API that connects e-commerce platforms and other businesses to a marketplace of verified carbon-related projects.
- Compensate automates the calculation of companies' emissions and provides them with a dashboard to track the impact of their carbon offset projects.
- Climate Trade offers about 60 carbon capture projects. It uses blockchain technology to enable companies to improve the traceability of their operations and thus strengthen the trust of their customers.
- Sylvera offers a carbon credit rating tool. Machine learning algorithms process and analyse a wide variety of environmental data (satellite or Lidar images) to improve the credibility of carbon offset projects.
4) Carbon credit trading platforms
The first carbon credit trading platforms are beginning to emerge within a highly fragmented and complex market. They are laying the foundations for a market that intends to become more efficient, liquid and secure.
- Enmacc was the first European platform for OTC trading of environmental assets related to energy projects. It is mainly aimed at traders, banks and highly energy-consuming industrial companies. As in the stock market, various products can be traded: emission allowances, carbon offset gas or carbon credit certificates.
- SparkChange has gone a step further by creating the first publicly traded ETC, set on the European Union Emission Allowance (EUA) price. In order to avoid greenwashing, the company ensures that the allowances held in the ETC are not used by polluting companies.
5) Responsible investment platforms
As early as 2015, crowdfunding and crowdlending platforms made their debut in the financial landscape. Some of them now dedicate themselves entirely to impact investing.
The Covid-19 crisis marked a tipping point in the SRI sector, which has since been at the centre of investors' strategies. Individuals, and especially millennials, are interested in this type of investment (+79% of associated research in 2 years). Sustainable assets under management reached $35.3 trillion in 2020 (+15% in two years). Several startups have taken note of this trend:
Responsible savings platforms:
These solutions combine finance and ethics. They allow individuals to allocate their savings to finance sustainable projects. With Goodvest*, the companies managing the invested funds have been carefully selected based on several criteria, including ESG, returns and associated risks. Nalo, Clim8 and Mon Petit Placement (life insurance, employee savings) or CaravelPension, Circa5000 and Cushon (retirement savings plan) also offer individualised management products for investments in ETFs, labelled funds or portfolios of sustainable projects.
Direct investment platforms:
These platforms provide impact entrepreneurs with access to alternative sources of funding. Individuals can support projects that match their values. Several crowdfunding platforms allow people to invest in local renewable energy projects, such as Raise Green in the United States, or Ecoligo in developing countries. In France, Ecotree* offers individuals and companies the opportunity to purchase trees from forest areas where it owns the land. A few years later, investors receive the profits from the felling.
6) Software for automated ESG reports
The recent years have seen an increasing demand for ESG data from regulators, investors, customers and employees. However, this need for transparency faces three main challenges:
- There are no universal ESG standards but a multitude of standards (GRI, SASB, CDP, IIRC).
- European sustainability regulations are complex and changing.
- Collecting ESG data is costly: data is often fragmented and not standardised.
Several climate tech startups are automating the creation of ESG reports to address these challenges and comply with new European standards.
- Datia offers asset and wealth managers an API that generates customised ESG reports for each of their portfolio companies.
- Atlas Metrics offers a SaaS tool aimed directly at SMEs. Its tool integrates with the company's IT systems to extract relevant data and automate the creation of ESG reports.
7) Climate risk management technologies
While investors usually consider many risk factors, one has long been overlooked: climate risk. A UN report reveals that 560 medium and large-scale disasters will occur each year by 2030, compared to 400 in 2015. Climate tech companies have therefore set themselves the goal of predicting climate risk. They rely on technology to map natural disasters representing a threat to physical assets and bond issuers.
- Climate X provides various sectors (insurance, banking, real estate, energy and infrastructure) with industry-specific analytical tools to assess, predict and report on their physical assets’ exposure to environmental risk.
- RisQ uses satellite imagery, public databases and AI to predict and quantify the climate risk of different geographical areas. The solution divides the United States into 100m x 100m digital plots and allocates each of them a risk level. The startup targets bond investors.
- Kettle offers a reinsurance solution to traditional insurers. It uses satellite and Lidar data to more accurately predict risks related to climate change, such as forest fires.
8) Decentralised finance (DeFi) and carbon tokenisation
The purchase of carbon credits by companies and individuals faces several problems, starting with the transparency and traceability of operations. Thanks to the blockchain, investors, suppliers and regulators can have irrefutable proof of the nature of the project, since its characteristics are sealed and made easily accessible.
- Toucan brings together the voluntary carbon offset market and web3. It offers carbon credit holders a system to convert carbon credits into tokens that are integrated into the blockchain. The startup thus provides access to standardised data on these environmental assets.
- Single.earth encourages landowners to preserve natural ecosystems on their land rather than razing them for agricultural projects. Landowners can issue a virtual currency, the MERIT (1 token = 100 kg of CO2 captured), corresponding to the ecological value of their land.
- Klima DAO uses the principle of the bond market by selling bonds collateralised by a real carbon asset in the form of tokens (KLIMA), entitling its holders to interest payments.
- Smart Forest offers to issue tokens for trees to decarbonise the atmosphere. Prices start at €40 for the purchase of an NFT.
Given the significant environmental challenges ahead, climate tech startups are offering alternative and complementary solutions to the traditional banking system. Their growth has already helped make sustainable finance accessible to the greatest number of people, meet the environmental expectations of both individual and professional investors, but also pique the interest of traditional players.
European sustainable fintechs raised a record $1.2bn in 2021 (3x more than all previous years combined). The sector looks set for a bright future. Nevertheless, many challenges remain to build an efficient, credible and robust ecosystem:
- Share the use of funds in full transparency
- Reassure investors in case of greenwashing suspicions
- Create converging European regulatory standards
- Educate the market on the concept of sustainable finance
- Standardise carbon credit calculation and pricing methods
* Startup rated by Early Metrics
