ESG and fintechs: how firms are benefiting from an ESG focus
The current surge in environmental, social, and governance (ESG) investing has influenced a material shift in the financial services sector.
Whether it’s the billions of dollars being invested in green and sustainable instruments, serious institutional efforts to address ESG as a risk factor in lending and investing, big banks restructuring themselves to adopt net zero pledges, or fintechs developing new solutions to address climate-related issues, all these efforts point to recognition that the financial services industry can play a major role in addressing ESG objectives.
ESG-focused fintechs have a unique ability to achieve rapid growth, deliver ESG-focused innovation, and attract investment capital to support their efforts to improve the environment and society while generating substantial returns.
VC interest in ESG-related fintechs has surged in the last 24 months. Mastercard issued a report which stated that venture funds deployed approximately 2.5 times more equity into ESG-related fintechs in 2020 relative to what they invested in 2019 (from $700m to $1.8bn). This trend will continue as earlier stage ESG fintechs mature (and need more growth equity) and more innovative fintechs enter the market to address unmet ESG needs in the financial services industry.
Over the last few years, some of the largest and most influential banks globally have committed to reducing emissions attributable to their operations. They have also pledged to reshape their lending and investment portfolios to produce a net zero carbon footprint by 2050.
A compelling example of a fintech using ESG to market as well as to address environmental issues is Aspiration Bank, a US-based, online-only fintech which offers a ‘Spend and Save’ cash management account (CMA) where the deposits are not used to fund any oil and gas projects. It also offers a zero-carbon footprint credit card whereby the firm claims to plant a tree every time a purchase is made from the card.
The bank is set to go public in a $2.3bn SPAC transaction this year. With celebrity investors, a multi-million-dollar sponsorship deal with the Los Angeles Clippers, and a multi-billion-dollar SPAC in process, Aspiration Bank is setting the tone for high-profile, ESG-linked fintechs to disrupt the banking industry by attracting a younger and more environmentally oriented consumer demographic.
The financial services sector that has most embraced ESG-related efforts is debt financing. There have been many green bonds and sustainability linked loans issued. In addition to these bonds and loans that are promoted by large financial institutions, specialised fintech lending companies are emerging that focus on sustainability and have developed dedicated lending platforms and products to address the ESG objectives of their consumer clients.
Both Goodleap and Mosaic Inc. are good examples of lending platforms focused on financing sustainable home improvements. Goodleap offers home upgrades with flexible payment options. With more than $9bn in loans deployed through its platform, the company is valued at $12bn post its recent $800m capital raise.
Mosaic is a financing platform for US residential solar and energy-efficient home improvement projects. The company surpassed $5bn in loans through its platform in July 2021 as well as closed its tenth solar securitisation — more than any other solar loan issuer in this space.
Climate fintechs in the payments segment focus on influencing the spending and shopping behavior of consumers towards embracing brands, companies, and practices which both are more sustainable and help reduce their consumer carbon footprints. And while all these offerings advance ESG objectives, they also help climate fintechs attract a key demographic segment and sustain their transaction revenue by aligning financial transactions with ESG goals.
Ecountabl is a US-based, purpose-driven tech company that helps consumers shop and spend with brands and companies that align with their social and environmental goals. Ecountabl seeks to make consumers more aware of their spending tendencies. Users can connect their credit card or bank account to Ecountabl so that it can monitor the ESG impact of their purchases. Ecountabl achieves this by maintaining one of the largest databases in the world monitoring the level of ESG adoption for brands and employers. The company is venture backed with funding from CRCM Ventures.
Asset management and wealth management are key focus areas for ESG fintechs. These companies help individual investors generate a more ESG-compliant portfolio by either offering a specialised marketplace to access ESG-friendly investments or by managing consumers’ portfolios with a focus on composing an aggregate portfolio that achieves measurable ESG goals.
Raise Green is one of the first green crowd investing portals in the US that offers investors a marketplace for local impact investing. The portal helps investors attain fractional ownership in clean energy and climate solution projects. The firm is focused on appealing to the younger demographic segment which favors impact investing. It completed an angel round of equity financing in April 2021.
Trading is a sector where fintechs can leverage blockchain technology to lower costs, reduce intermediary involvement, and at the same time establish exchanges and marketplaces that enable the trading of carbon credits to advance environmental goals while monetising that effort.
Climate Impact X is a Singapore-based global carbon exchange and marketplace for carbon credits jointly established by DBS Bank, Singapore Exchange Limited (SGX), Standard Chartered Bank, and Temasek. It supports trading of carbon credits created from projects involved in the protection and restoration of natural ecosystems. The company recently completed an auction of a portfolio of 170,000 carbon credits connected to eight recognised forest conservation and restoration projects located in Africa, Asia, and Central and South America.
Risk analysis is a climate fintech category which has seen the highest rate of exits and mergers and acquisitions (M&A) based on a report issued by New Energy Nexus. Risk analysis companies focus on measuring two kinds of climate risk data: 1) transition risk, which relates to the process of transitioning to a lower-carbon economy and 2) physical climate risk, which focuses on the physical impact of climate change.
Jupiter Intel, on the other hand, measures physical risk of climate change at the asset level by using satellite data, artificial intelligence, machine learning, and Internet-of-Things (IoT) connectivity. The Climate Score provided by its platform enables users to project the effect of climate change on a portfolio of assets.
Banks, asset management firms, and other financial services companies can leverage this data to manage risk and allocate capital to assets that maximise positive climate impact. The company raised $54m in Series C venture funding in a deal led by MPower Partners Fund and Clearvision Ventures in September 2021.
Both fintechs and traditional financial institutions can benefit from an ESG focus
Fintechs as well as traditional financial services players can use ESG to attract customers who care about changing how we interact with our environment and each other. While much of the ESG focus of investors has been on renewable resources and recycling to date, financial services firms have many ways to advance ESG goals while providing valuable services to consumers and businesses. Given the digital nature of the industry, fintechs and traditional financial institutions can do well financially by doing “good” for society.