The need to reach net zero has never been more pressing than it is today. COP19 laid the groundwork for achieving this aim across markets, but how difficult will corporations find reducing carbon emissions to nothing? How much more difficult still, is this for burgeoning industries like fintech?
We look at the challenges the fintech industry faces in achieving this aim, its successes so far, and the impact of carbon tracking fintechs on supporting financial services providers and institutions in achieving the very same goal: net zero in finance.
CEO and Co-Founder of HeavyFinance, Laimonas Noreika, believes that “achieving net zero carbon emissions is now at the top of the agenda for many fintechs”, with growing societal and regulatory pressure helping fintech recognise the importance of aligning their operations with sustainability goals.
“As sustainability becomes a competitive advantage and regulatory necessity, fintechs are actively positioning themselves at the forefront of the net zero movements in the financial industry”, adds Noreika.
The industry’s commitment to achieving sustainable growth is a view upheld by Kris Sharma, Financial Services Sector Lead at Canonical, citing the UN-convened Net-Zero Banking Alliance. “This brings together a global group of banks,” says Sharma, “currently representing over 40% of global banking assets, which are committed to aligning their lending and investment portfolios with net zero emissions by 2050.
“These pledges signal the financial industry’s recognition of the importance of sustainability.”
He adds: “In a world that is rapidly shifting to a net zero economy, achieving net zero carbon emissions is high up on the agenda for a growing number of fintechs.
“FinTech sits at the apex of two net-zero enablers – financial services and technology. Many fintech companies across the globe have already made commitments to become carbon-neutral or achieve net zero emissions by specific target years.”
Despite the wide-ranging belief that fintechs sit on a path to sustainability, it is not a ubiquitous point of view. Co-Founder of SaaScada, Steve Round, feels that achieving sustainability “isn’t happening” right now.
For Round, “sustainability and the measurement of environmental impacts must become a higher priority if FS firms want to move the needle and achieve net zero emissions for themselves and their customers.”
He adds: “It’s also important to consider our financial systems’ unique position in the world economy – they control which businesses receive funding, what services are offered that support growth, and they can provide carbon impact information on the purchases and investments of millions of customers.
“Banks and FS institutions have the potential to drive meaningful change that extends beyond their own boundaries. Banks need to go beyond their own net-zero ambitions and look at how they can help to drive the low carbon agenda more broadly.”
Net-zero in Fintech: Status report
Despite not seeing a full drive toward net zero yet, Round admits to having seen “some incredible sustainability initiatives that move us closer to net zero emissions” already put in place.
Round adds: “The Bank of Palestine has been pursuing a Green Loans programme for individuals in rural areas for greater water and energy efficiency.
“Meanwhile, Bank Australia has purchased a private conservation reserve to protect over 2000 hectares in Western Victoria from any future development.
“Members of the GABV have implemented a wide range of initiatives, but a collective effort is required to achieve net zero and more action must be taken by all financial institutions.
“Green initiatives are a positive step forward in the fight to reduce greenhouse gas emissions, but unless all fintechs take the journey to net zero seriously, we won’t move the needle.
“The next challenge for firms is how to prove the impact of these value-driven decisions. How do they measure the outcomes of net zero initiatives? How do they show customers what it is really doing?”
So, while proving the effectiveness of initiatives is a must for fintechs to prove they take net zero initiatives seriously, for Suresh Vaghjiani – CEO and Co-founder of Clowd9 – “having a plan and route to net zero is a big differentiator” to achieving net zero, particularly businesses that would struggle to change their business model to achieve net zero.
Vaghjiani believes many fintechs have made a good start to embracing carbon offset, although feels the industry needs more than the “add-ons” so far seen to achieving net zero.
A push to net zero is “perhaps not as systemic as it could be” according to Vaghjiani.
Fintech: Closing the gap to net zero
With Vaghjiani’s assessment in mind, what more can subsequently be done to systemise net zero initiatives into the very fabric of a fintech’s operations?
For Round, banks and fintechs need to do more than simply publish CSR reports expressing their commitment to net zero, but rather, “weave sustainability into product offerings and give customers a financial incentive to support the transition to net zero”.
“These might entail offering reduced loan rates for low emission cars or for energy-efficient houses,” he adds, “or more flexible lending to support socially inclusive business initiatives that will have a knock-on effect for communities and ultimately the environment.
“To achieve net zero, FS firms must take a data-driven approach, harnessing environmental data and embracing external partnerships to gain a comprehensive view into environmental impacts and help customers to make decisions on long-term sustainability.”
However, while harnessing data to quantify the environmental impact of your organisation can be useful, the tools with which data is harnessed (not just for environmental causes) themselves pose significant drains on energy.
As Canonical’s Sharma notes: “One of the issues facing the tech industry in reaching net zero is the energy intensiveness of blockchain, artificial intelligence (AI), the cloud and big computing.
“According to the Cambridge Bitcoin Electricity Consumption Index (CBECI), Bitcoin consumes nearly 100 TWh per year of electricity and data centres use 200 TWh per year.
“Cloud computing and the powerful computing needs of AI are fueling much greater energy consumption.”
Despite the energy consumption of fintechs to bring innovative solutions to the table, Sharma believes that “there is a huge opportunity for the fintech sector to bring innovative services and develop new business models that enable net zero and establish climate resilience.”
But how can fintechs lead a drive to net zero given the energy-intensive means they employ to harness data and deliver solutions?
Sharma boils it down to three categories of direct and indirect emissions: “Fintechs can help create a net zero world by adopting science-based Green House Gases (GHGs) reduction across their supply chain and operations.
“They can then enable other businesses with tools and technologies to develop net zero products and services and enable consumers to take action by aligning spending and investment with net zero.
“Fintechs can help financial institutions to get better data on ESG and impact analytics around their portfolio companies, to enable greener investment and divestment decisions.
“Fintechs can enable financial institutions’ compliance with climate risk regulations and embed net zero in capital markets.”
The demand for climate change-based fintech firms is growing too, something Sharma feels is “evident from the flurry of investment seen from asset owners and financial institutions in the last couple of years.”
The rise of climate change-based fintechs
Investment in climate change-based fintechs is no shot in the dark. Noreika’s HeavyFinance facilitates sustainable investments through its Green Loans, “connecting individual investors with borrowers in need of equipment financing, enabling sustainable financing solutions that align with environmental objectives”, according to the CEO.
Noreika adds: “The platform not only helps farmers access essential machinery but also promotes the adoption of more energy-efficient and environmentally friendly practices.
“By financing sustainable machinery, HeavyFinance plays a crucial role in reducing carbon emissions in sectors such as agriculture, which traditionally has a significant environmental footprint, contributing to around 20% of global carbon emissions.”
HeavyFinance is but one example of a fintech supporting institutions in their bid to reach net zero. As far as Round is concerned, core banking engines have the capabilities to “equip financial institutions with the visibility needed to better assess net zero progress and drive real change, bringing together real-time data from disparate sources.”
But these companies can do more. “Measurement should not stop at calculating and offsetting carbon footprints”, adds Round, “it should deliver a more nuanced understanding of impact linked to social aspects, such as inclusivity and jobs.
“To create such detailed impact assessments will require a 360-degree view of business operations, which presents a problem if financial institutions are hampered by data silos.
“With a core banking engine, FS firms can access data in a quick and cost-effective way to support business decision-making and make rational choices to help achieve net zero.”
For Sharma, these fintechs will play a vital role in the future to predominantly help financial institutions achieve net zero goals, providing the “infrastructure and technology solutions to bring transparency on emissions across portfolios, assess and mitigate risk in individual transactions and support investment decisions.
“Net zero-focused fintechs can also help financial institutions comply with regulatory requirements by providing tools for robust climate and transition risk disclosure and reporting, providing financial regulators with the tools to monitor and test compliance along with data analytics to support policy insights and decision making.”
Perhaps most critically, it will be the demand from consumers that drives the proliferation of climate-based fintechs on the market.
Sharma sees this as another opportunity for green fintechs to expand their services. “Fintechs can equip consumers with tools and insights”, he says, “helping them gain an understanding of how consumption affects climate change and support behaviour changes.”
He adds: “For example, an open banking platform that enables consumers to see the carbon impact of their spending in real-time. Personal finance and wealth management tools can enable individuals to contribute to net zero by enabling them to invest their money in sustainable assets.”
It is also another area where fintechs can “leapfrog” the challenges legacy institutions face, driving industry-wide adoption of sustainable services according to Clowd9’s Vaghjiani.
Fintech: Will net zero truly be reached?
The potential for growth in the climate-based fintech space is growing alongside its importance. So, looking ahead, we ask if net zero in fintech can truly be achieved.
For Sharma, the key to achieving true net zero will depend on fintech’s ability to overcome a “lack of universal methodology to standardise product-level climate impacts” something that will “require consistent methods for measuring and reporting carbon impacts across the life cycle of products and services”.
He concludes: “This extends from scope one and two (direct and indirect) impacts to scope three impacts across the whole value chain. Often the largest product or service impacts are in scope three, requiring a much wider data set from across the value chain.
“This can be hard to obtain given the fact that different stakeholders hold different data sets.
“Several other factors including regulatory landscape, consumer demands, advances in technology and renewable energy sources, commitment and collaboration between fintechs, financial institutions, governments and other stakeholders will influence the timeline and feasibility of reaching net zero emissions.”
This is true too for Round, who notes: “Fintechs and financial institutions may well achieve net zero for the purposes of their reporting, but it is also the impact they can make in the wider world that is key to making a meaningful difference.
“We need to change the world with every single transaction - one transaction at a time.”
And, for Vaghjiani: “Fintechs and banks need an example of someone truly working to net zero with clear plans showing the benefits and quickly everyone will follow suit. All it takes is one.”