Innovation thrives in times of crisis. The Civil War brought us the telegraph and railroads; the Spanish flu inspired the flu vaccine and later the broader discovery that DNA held the genetic code; and World War II spawned synthetic rubber and oil, mass production of penicillin, and nuclear fission. The COVID-19 pandemic has similarly accelerated innovation: Italian startup Isinnova saved lives with its 3D-printed replacement ventilator valve,1 Biobot mainstreamed wastewater testing as a form of virus detection,2 and AI-based chest X-rays from Qure.ai and Lunit have sped patient triage 70-fold.3
But another crisis looms and will demand even greater invention: climate change. Just as COVID affected citizens of all nations, so too will climate change, though over decades instead of months. COVID is expected to depress global economic growth by 3% to 6% this year, while it’s estimated that climate change will eliminate $2.5 trillion in global asset value.4
Combatting climate change will require massive public and private investment and innovation. The EU committed 21% of its 2020 budget to climate change5 and the private sector is stepping up too through:
- Venture capital. VC firms poured $25 billion into cleantech startups between 2006 and 2011 and lost over half their money.6 After licking their wounds for a few years, VCs and private equity firms invested $10.5 billion in the space last year, the highest total since 2010 (albeit only 15% of what went to software startups).7 Some smaller VC firms have entered the fray. Dedicated cleantech firm Lowercarbon Capital emerged this year while Clean Energy Ventures raised a $110 million fund last fall. High-net-worth investors have committed significant funds to cleantech as well through the likes of the $1 billion Breakthrough Energy Ventures fund spearheaded by Bill Gates.
- External corporate investment. In June, Amazon formed a $2 billion clean energy fund to help it and other companies reach net zero emissions by 2040 – on the heels of Jeff Bezos’ own $10 billion pledge to mitigate climate change.8 Other companies are pooling their cleantech investments. Chevron, State Street, and Unilever, among others, partnered with Greentown Labs to fund 230 startups developing everything from bio-fertilizers and ultra-efficient air conditioning to electric de-icing for airplanes.
- Internal corporate investment. A study of 225 of the world’s largest corporations by international nonprofit CDP found that they could face a $1 trillion hit related to climate change in the coming decades, from the likes of higher data center cooling costs to supply chains interrupted by floods. But these companies also foresee $2.1 trillion of revenue upside from things like rising demand for pharmaceuticals and clean energy products.9 Driven by risk avoidance and the pursuit of profits, French food giant Danone pledged €2 billion over the next three years as it shifts to 100% recyclable plastic bottles, alternative packaging materials, and regenerative agricultural practices.
Green Fintech Will Complement Cleantech
Like VCs and corporations, fintechs are turning their attention to climate change. Good timing, as climate change is beginning to stress some core elements of the financial system. The 30-year mortgage – an institution dating back to the Great Depression – is on shaky ground as lenders require 40% down payments in coastal areas and homebuyers seek the flexibility to walk away from homes that become uninhabitable.10 With climate change as an impetus, green fintechs are creating new products and services across five core functions of the financial system:
- Payment. While Venmo and Transferwise make payments and currency transfers easier and cheaper, green fintechs focus on nudging consumer behavior by bringing transparency to their purchases. With “My Carbon Action,” payment processor Enfuce shows 8 million consumers their carbon footprint based on their purchase history. Other startups aim to bring flexibility to green purchases. Kenyan solar energy company M-Kopa offers solar home systems on credit to customers who previously lacked affordable, reliable electricity. Customers make daily micropayments from their mobile money account which also earns them creditworthiness towards purchasing other equipment, such as energy-efficient stoves.
- Saving and lending. Though green fintechs haven’t come up with the 30-year mortgage savior or killer, they are helping customers meet their carbon neutral goals. In partnership with Goldman Sachs, LoanPal has lent over $28 billion to help 150,000 U.S. families go solar. Dividend Finance goes beyond solar and will also finance energy efficiency home improvements at no upfront cost. And for consumers looking for a sustainable way to bank, ESG-conscious Aspiration pledges not to fund fossil fuel projects with its customers’ deposits.
- Exchanging value. In the past two decades, crowdfunding and blockchain have started to alter how markets operate. Green fintechs, almost exclusively European, are using them to create new, green markets. Swedish-based Trine enables private, institutional, and corporate investors to crowdfund loans to sustainable businesses; it’s raised €30 million with a low default rate of 2.1%. Another EU company, Ekofolio, is making sustainable forestry and timber investment vehicles accessible to mass market retail customers, while also creating a secondary market for trading these tokenized assets before they reach their 10-year maturity. And using blockchain in a different way, German startup Conjoule developed a decentralized peer-to-peer marketplace for producers and consumers to share locally generated renewable energy.
- Funding and investing. While many European fintechs have focused on creating new green markets, U.S. startups are creating data products to make “green” investing more efficient and effective. Designed for asset managers, TruValue Labs uses machine learning to extract timely insights on companies’ positive and negative ESG behavior from more than 75,000 data sources, including news outlets, social media, and trade publications. Software platform Measurabl aims to consolidate a company’s own ESG data, so it’s easier to manage and report that data to investors. And analytics startup, Jupiter Intel, analyzes public and private data to forecast how environmental risks like flooding will impact the value of specific locations over the next 50 years.
- Insurance. Perhaps the sector most heavily impacted by climate change thus far, insurers are trying to figure out how to cover vulnerable customers while managing their own exposure. Insurtech Kin aims to lower home insurance premiums in disaster-prone regions by using catastrophe modeling and geospatial intelligence to create more granular risk and pricing models. New York’s WorldCover offers 30,000 African farmers in drought-prone regions crop insurance, using satellite imagery and ground sensors to analyze risk and price options. And India’s Syngenta Foundation sells seeds with a replanting guarantee in case of drought and bundles insurance with phone services to reduce transaction costs and reach more farmers.
What can we learn from green fintechs' approach to innovation? Where can firms expand their sustainably-focused financial product offerings? And how can firms help customers that feel the effects of climate change, both acutely and financially?
4 https://www.nature.com/articles/nclimate2972 and https://crsreports.congress.gov/product/pdf/R/R46270
6 Gaddy, Benjamin and Sivaram, Varun and Jones, Timothy and Wayman, Elizabeth, Venture Capital and Cleantech: The Wrong Model for Energy Innovation (June 2, 2016).
7 https://www.nytimes.com/2019/05/07/business/carbon-removal-technology-start-ups.html and https://www.businessinsider.com/top-10-most-active-clean-energy-investors-in-2019-bnef-2020-1