Many current investment themes in venture capital resonate with increasing efforts to finance carbon sequestration, mitigation and adaptation to climate change. Climate tech, cleantech, ag-tech and fintech are all working on aspects of the challenge. The emergence of carbon finance is adding to these efforts, with carbon credit markets an area of growing innovation.
Fintech innovation is particularly relevant to these efforts. Climate change linked fintech opportunities include satisfying consumer demand for sustainable finance and transparency in financial institutions, delivering insurance and risk management products protecting against climate risks, providing financial incentives linked to achieving sustainability targets and making carbon markets more effective in pricing carbon. With emission reduction opportunities concentrated in developing economies fintech’s potential to remove barriers to finance is critical.
Sustainable Fintech requires credible metrics
For fintech to link environmental impacts and finance, the ability to credibility measure such impacts becomes essential. The measurement and reporting of carbon reductions required for carbon credits beginning with the Kyoto Protocol in 2005 provides a ready toolkit for credibility making such measurements. Fintech’s need for metrics to measure and report the non-financial aspect of borrowers or targets for investment provides a natural link to carbon markets where there is long-term expertise in deploying rigorous, scientifically credible methods to measure, monitor, report and verify not just reductions in greenhouse gas emissions but a range of additional social and environmental attributes of emission reduction projects.
These established methodologies both provide roadmaps for how to measure non-financial returns as well as a process for bringing the scientific rigor frequently lacking in claims of sustainable finance, ESG objectives and climate impacts. Fintech’s demand for these tools will be well served by established carbon certification processes and the continuing improvement in measurement and assessing environmental outcomes these markets provide. Perhaps most importantly, carbon markets can supply a cadre of expertise to support fintech as it responds to consumer demands for engagement on climate issues.
The intersection of carbon markets and fintech
Carbon credit markets are a common link across the climate linked venture capital themes. With more opportunity to create revenue streams by securing payment for reducing carbon intensity, innovative new companies will need to link fintech, climate tech and carbon finance. For example, in ag-tech a number of companies are building a financial ecosystems for farmers around monetizing the capacity of soil to sequester carbon. In cleantech, renewable energy projects have long included various forms of carbon credit income in financing packages. Fintech will play a central role in building the financial structures that will underpin the low carbon economy both rewarding achievement of sustainability objectives and assuring transparency in financial reporting.
The carbon market itself is the target of innovation efforts as the fintech sector becomes more connected to climate change efforts, from net-zero targets in loan books to sustainable investment criteria for trillions of dollars in assets under management. The current fragmentation in carbon markets across geography and asset classes requires innovative solutions. New companies are exploring ways to use fintech to improve links between markets and different carbon assets and to remove barriers to buying carbon credits. Carbon tokens are using fintech innovation from blockchain to make purchase of some projects offsets easier. Trading platforms are leveraging B2C fintech innovation to make trading carbon easier and to create deeper carbon markets.
A unique opportunity for fintech
As with all venture capital sectors, success is far from guaranteed for any of these efforts. At this stage, most important is to identify the growing connections between the power and scale of fintech innovation and nascent industries in climate finance. While globalisation is in retreat in trade, finance and geopolitics, carbon markets are building linkages across economies. Independent of the climate change mitigation function, carbon markets provide an opportunity for fintech innovation and financial engineering to address real social risks and support economic development. There are not many financial products that can claim this social license to consider important global agendas including trade and regulatory policy, demographic change, food security and the roles of public and private capital. We believe that innovators working on carbon based fintech have a unique moment to bridge finance and these essential social agendas.
