Sustainable development goals have been on everyone’s lips for quite some time now. Green finance strategy fits into that trend by serving people quality products that are eco-friendly at the same time. But what is green finance and how does it benefit the market, the customer, and the planet?
Green FinTech definition
The easiest way to explain it would be quoting a Green Finance Strategy launched by the UK on July 2nd, 2019. It’s about sustainability and balance growth. The approach combines the efforts from three different branches: the government, regulators, and the private sector alike. It has three major components:
- Greening finance. The country wants to make sure that decision-making involving the financial sector is in line with risks and opportunities involving climate affairs.
- Financing green. The UK will support companies opting for clean growth, which is also in line with international goals and initiatives.
- Capturing the opportunity. The UK wants to spearhead efforts related to climate data and analytics, and support green Fintech companies and services abroad.
UK and London, in particular, is a technological and financial hub. Now it wants to be a green hub as well. The effort lies largely in the government. The rules have to be clear (pun intended) and transparent to everyone involved. The Prudential Regulation Authority, the Financial Conduct Authority (FCA), and the Financial Policy Committee will carry the heavy lifting. The Technical Committee on Sustainable Finance and Bank of England will help in the legislature and as advisors to break down barriers on the way to effectiveness of green finance markets.
The ambition behind these efforts leads to systemic change. The UK wants to build on international experience, adding local flavour to the mix. The country wants to be an active member of the Coalition of Finance Ministers for Climate Action, part of the solution within the UN Climate Action Summit, accelerate the adoption of the Paris Agreement’s objective. A lot of work and not a lot of time because the climate is rapidly changing.
Green light for Green Finance applications
OK, we have coverage for basics but does the world need these solutions? It might very well like applications for them.
Sustainable development goals could be fulfilled on many fronts, by many means. Let’s measure environmental impact, access to impact investments, or inclusion of ESG-related client preferences. ESG stands for environmental, social, and corporate governance and it’s basically a list of factors that serve as a basis for ratings of big firms and countries. FinTech can help with these processes.
Through machine learning, natural language processing, artificial intelligence, and news analytics, companies could monitor their impact on the surroundings and society. As well as be accounted for by international or local bodies.
Internet of Things (IoT) applications, as well as satellite image processing and geospatial observational data analysis, could also be sane adoptions. Distributing additional grants based on countries’ or corporations’ efforts towards a more sustainable future could be a solution for future generations. Or even current ones.
In fact, it’s already happening. Tokenization of energy, green bonds emissions, crowdfunding of renewable energy projects are in place or launched. Like Copernic; a Polish tokenized project for photovoltaic power stations.
Green Finance isn’t exactly a new concept. The United Nations Environment Programme (UNEP 2016) has identified over twenty applications of FinTech. For example, pay-as-you-go resource utilities, flexible energy supply and demand, peer-to-peer renewable energy, and community distributed generation.
Benefits of sustainable development
The short answer: it depends on who you ask. There are many benefits and for many reasons. The marketing department can use FinTech products to highlight companies’ standpoint. Operations can point out savings, etc.
Supply chains may become transparent. In 2018 Maersk, a global spedition giant, and IBM announced a joint venture “to provide more efficient and secure methods for conducting global trade using blockchain technology”. Companies want to reduce costs and eliminate inefficiencies. A year earlier Indonesian government started a pilot blockchain project to establish a sustainable supply chain for skipjack and yellow fin tuna.
Financial inclusion may change peoples’ lives. We have already touched on a subject in the material on African neobanks so let’s make a quick recap. Digital or electronic credentials define a person’s history of economic interactions in the world economy. Green Fintech can serve farmers and give them credibility as providers of healthy and safe food. Free of GMO, for example.
Management of property rights. Countries like Ghana, Honduras, or Rwanda established programs for putting land titles on blockchain products. Thanks to that, transferring the rights to intellectual property is simplified and secure. Even Estonia, a small country famous for large-scale digitization, hoped on this hype train.
Challenges of Green Finance
Making a shift isn’t easy. Transitioning to an economy with a policy on legal, technology, and market changes requires positive human perception, budget, and willingness to create products that are and communicate green. That’s a high-level view but there are other, more down-to-earth barriers. Let’s talk about the most impactful.
- Mindset. The World Resources Institute (WRI) report shows us that less than 50% of the largest global banks committed to prioritization of green energy over fossil fuels. That is both a chance and a challenge for FinTech. They have to educate clients and business partners about rational arguments behind going green. Education, marketing, and in-app campaigns should do the trick but it’s a long run.
- Regulatory environment. What is green finance? If we could pinpoint a problem that spawns all other problems, that would be it. We don’t have a clear definition of green investments. We also lack the terminology to prevent greenwashing. That’s the name for products and activities that act as green. In fact, they cover classic business practices behind an ecological cloak.
Another problem – there are high requirements toward client onboarding and processes regarding know your client (KYC) operations. They create serious entry barriers for many startups. They draw attention from innovation and push it towards legal requirements.
- Business consciousness. A challenge for many countries. Like Switzerland, which has money for investments but misses knowledge about potential economic and environmental impact. This insufficient awareness could cause the birth of FinTech but not green technology finance.
- Funding. Because green FinTech companies face additional legal barriers, development costs are higher. At least in comparison to other firms. This reduces access to growth capital because investors see these startups as slow burners. In this case, the period for profitability is prolonged, so is the patience of some deep-pocketed people.
On top of that, green finance is excluded from many financing schemes. They don’t participate in the reduction of toxic emissions, at least directly.
- Missing transparency. Not a deal-breaker but nonetheless important. Transparency should mean disclosure of (if any) environmental hazards and risks from companies.
Recommendations and remedies for Green Finance strategy
There are many ways in which FinTech and green finance, in general, could benefit from a systemic support system on the highest level. Many countries, especially those in European Union, could establish special rules of engagement, supporting businesses. Especially in the startup and growth phase.
The creation of funding instruments is a good starting point. There is an entire ecosystem that gives money to FinTech companies; now it’s time to support green ones.
Establishing special working groups inside local governments (in each country) should also help. Knowledge of local ecosystems, people, and challenges is paramount.
Cooperation between universities and other higher education establishments, and Green Finance (through open banking, for example) will get the blood flowing. Main street financial institutions could also lower the barriers for startups to enter this world.
Making a shift in FinTech investment trends also sounds like a good idea. There are tons of interesting people with even more interesting ideas. Financing them could establish a new wave of solutions that are practical and environmentally friendly at the same time. The mindset is changing. According to Harvard Business Review, sustainable assets range from 5% to 25% globally. Figures rise with each year. So much in fact, that Switzerland became a great example of how much green finance strategy can help. For local economy and environment alike.
Using climate bonds and certifications as a part of the solution. These methods, as explicitly shown on the Climate Bonds Initiative page can standardize credentials and establish confidence in the market globally.
If you’re green on the subject…
… then you should consider one final aspect. Software. Someone has to develop these cutting-edge products. People have to know about them and accept them. Raw functionalities and benefits to their personal or professional well-being are great but they also have to look the part. That’s where things like simplifying numbers or mitigation of user friction come on the scene. FinTech is for people. If you want to make an app, trust the people who understand them.