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.
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.
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:
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.
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.
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:
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.
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.
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:
Several climate tech startups are automating the creation of ESG reports to address these challenges and comply with new European standards.
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.
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.
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:
* Startup rated by Early Metrics