As a new decade rapidly approaches, the global conversation around the world’s journey to low-carbon is growing louder and louder.
Although the financial sector has previously been privy to these exchanges, there’s now a fresh urgency to its engagement with the topic as it realises the potential of green finance and green FinTech to change lives.
At the UN Climate Action Summit, Mark Carney, Governor of the Bank of England, underlined this focus, stating:
“Financial markets increasingly recognise that sustainable investment is the new horizon that can bring enormous opportunities.”
His comments emphasise the importance of the role financial services, companies, investors and new technologies could play in the transition to a greener world mapped out by The Paris Agreement and the UN’s Sustainable Development Goals (SDGs).
The amount of investment required to power these changes is staggering. According to 2016’s New Climate Economy, an estimated $6 trillion will be needed each year to implement the green infrastructural changes required between now and 2030. Meanwhile, the UN’s targets have incremental financial needs of £1.4 trillion in low and lower-middle income countries by 2030.
With so much capital required, The World Economic Forum believes as much as 80 percent will need to be unlocked from private sources. While this opens up myriad opportunities, back in September Carney also emphasised the difficulties:
“The task is large, the window of opportunity is short, and the risks are existential.”
As the next decade comes closer, our financial markets and the wider world stand on the brink of huge changes. Here, we explore some of the headline challenges and opportunities for green finance and the innovative potential of green FinTech to help make sustainable investing go mainstream….
1. Challenge: Finance (for the most part) continues to favour profit over planet
Traditionally, many decision makers favour short-term solutions without considering the environmental impact, prioritising shareholder gains over long-term risks. Although there is an argument that we’re in the midst of a sea-change, finance still contributes to many environmental issues.
Recent research from the World Resources Institute (WRI) revealed that less than half of the world’s largest banks have outlined commitments to prioritise renewable energy investments over fossil fuels. The tide may be changing in favour of green but arguably, it is moving slowly.
1. The FinTech Opportunity: Winning over the consumer
Millenials are increasingly driving the demand for greener products while simultaneously seeking greater transparency in how companies integrate Environmental, social and corporate governance(ESG) with their products, services and policies. FinTech startups are now responding to this greater demand for knowledge and transparency by providing information and greater overview of investment supply chains.
Finimize provides a range of products including a mobile app to help consumers and investors ‘navigate the financial jungle’. The startup’s aim is to empower consumers to be able to act smarter and more strategic when it comes to investing without relying on a financial advisor.
Tumelo is another FinTech startup enabling green behaviours. It provides investors with a unique dashboard to enable greater transparency and engagement over businesses they have shares in as well as increasing the depth and quality of client conversations. It also provides investors with a better overview of opportunities across various sectors and industries.
2. Challenge: The risk and transition to green investing needs to be mitigated
An adjustment towards a lower-carbon economy is and will continue to cause a reassessment of the value of many traditional assets.
We’re already seeing this in the coal industry with Murray Energy the eighth coal firm to file for bankruptcy in 2019. Mark Carney recently stated that the market capitalisation of the top four US coal producers has fallen by well over 90 percent in the last six years.
As the sector swings towards sustainable practices, the Bank of England has warned that some assets could lose their value if they are reliant on fossil fuels and the market shies away from them too quickly. According to the bank, up to $20tn of assets could be lost or stranded if the climate change challenges are not effectively met.
2. The FinTech Opportunity: Alternative data sourcing
A growing number of analytical tools and platforms are being utilised to screen investments. While traditional ESG Data players provide valuable metrics to understand those risks, over the last five years we have seen a growing number of AI players supporting the demand for alternative data.
Artifical Intelligence (AI) and machine learning algorithms have the potential to scrape any public data around non-listed products to help fund managers find robust alternative funds.
Truvalue Labs is a FinTech company with its roots in analytics around Environmental Social and Governance (ESG) reporting. The firm’s products uses AI to analyze and interpret massive amounts of unstructured data to help investors make more informed decisions across their portfolio.
Various ESG frameworks can be aggregated and standardised into weighting systems, then combined with other criteria from investors to evaluate green credentials. Information can also be made into more easily digestible formats to ensure investors are capable of making more informed decisions.
OWL Analytics is a financial data and index firm utilising alternative and diverse data sources to improve the standard of reporting ESG investments. Their index takes data from a range of sources to give investors confidence in the green credential of the areas where they deploy their money.
3. Challenge: 50 shades of green
Since 2015, the number of sustainable investment options has opened up with Morningstar revealing that 133 new Environmental, social and corporate governance (ESG) funds have launched.
At the same time, investors need to continue to be wary of ‘greenwashing’, a practice where funds are amended or engineered to appear more beneficial for the environment than they actually are. This has led to some scepticism of the legitimacy of green finance and required investors to conduct thorough due diligence when making financial decisions.
3. The FinTech solution: New market standards
While green investments increase in popularity, there’s been more debate about how funds or products can qualify as green.
Several initiatives are attempting to tackle the issue by standardizing the use of proceeds and screening projects compatible with the low carbon economy.
Efforts such as the The Climate Bonds Standard and Certification Scheme have been made to standardise green credentials and provide uniformity alongside greater transparency and confidence in the markets.
The Climate Bonds Initiative has also created a Taxonomy drawing on research from technical experts to help investors and issuers achieve greater clarity on what is green and what is not.
Brave new green futures
While the road to a low carbon future is potentially long and challenging, green FinTech can play a huge part in making this goal become a reality. As we stand at the beginning of a decade of huge change across society and the environment, with so many innovative new products, funds and investment opportunities appearing all the time, this blend of innovation with sustainable ambitions means there’s plenty to be hopeful about…