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However, until recently, the financial sector and its traditional institutions have been immune to any innovation: only in recent years have they been spurred into action by growing competition from more agile start-ups that have taken full advantage of new technologies and changes in legislation and regulation (open banking and finance, PSD2, APIs).
Not only institutions but also individuals are changing their approach to climate change. A special Eurobarometer Climate Change survey in 2021 showed that 93% of Europeans consider climate change to be a serious problem and a full 96% have taken action to combat it. A UK study by Deloitte in 2021 found that 8% of respondents had already shifted some of their personal investments towards ethical and sustainable options, and a full 34% had specifically chosen brands because of their sustainable practices and values.
To top it all off, early last year (2021) Mastercard conducted a survey among consumers in 24 countries across all continents, which showed that a large majority (85%) of adults are willing to make a personal contribution to tackling environmental and sustainability issues.
Where there is demand, there is supply, and so more and more institutions and initiatives are emerging to focus on a specific niche market - clients who care about the planet and the environment, rather than the masses.
Activities combining the environment (which encompasses climate), finance and digital technologies are most often mentioned in the context of alternative players, financial technology startups and companies. We are talking about so-called green or climate fintech.
According to the Climate Fintech report by New Energy Nexus, there were 250 climate fintech companies in the world in 2020, including billion-dollar businesses and tech unicorns such as Tesla, Beyond Meat and Nest. Today, 8% of all European and UK fintechs using open banking APIs already offer a sustainable product and, according to PwC, the demand for the solutions that climate fintech can offer will only increase in the future as more and more companies, investors and governments commit to the so-called 'net-zero' transition.
Despite the emergence of green products at alternative financial institutions, they are now more or less the rule rather than the exception even at traditional banks, which are pursuing sustainable initiatives wherever possible. The model of collaboration and partnership with new players and fintech startups is often applied here, bringing technology that banks can successfully use and integrate into their existing systems or mobile apps with relative ease.
At the same time, the growth of the new green fintech market is driven by customer demand, public opinion, regulations and global initiatives on a voluntary basis, but also by new partner networks and the availability of specific API products from open banking platforms.
The term ‘green finance’ or ‘green banking’ can be seen as a range of initiatives that in most cases combine digital and sustainable, from the straightforward (payment cards made from recycled plastic or sustainably harvested wood, credit cards that plant trees, etc.) to the more complex (tracking the carbon footprint of individual transactions, offering investments in exclusively sustainable funds, preferential financing for green projects, etc.).
Green initiatives can be found across all sections of the financial industry. According to the Green Digital Finance Alliance, there are a total of 8 product categories within green fintech. Let's take a look at some of these in a little more detail.
Payments are key mainly because the overall volume of consumer transactions is huge and purchasing behaviour is closely linked to carbon footprint. The potential to bring about change towards sustainability is therefore significant for payments. Typical examples of payment initiatives include the possibility of carbon offsets, the choice of eco-friendly packaging for online purchases, or rounding up the purchase amount and using the difference to plant trees.
Examples include the Dutch Adyen which allows customers to donate money to environmental restoration projects, or Sweden's Svalna and its carbon footprint calculator (more on carbon footprint below).
The entry of so-called challenger (or neo) banks into retail banking has brought a number of positive changes, and the new players have attracted mainly younger generations interested in the environment of their services and overall approach to banking. Green retail banking in particular is one of the most straightforward ways for people to understand the environmental impact of their (purchasing) decisions.
Initiatives include tracking the carbon footprint of individual purchases, automatic offsetting of purchased goods, credit cards made from recycled or sustainable materials, and credit cards for which the issuing institution contributes to reforestation.
American Aspiration offers financial products for individuals and businesses with a focus on charity, sustainability and the environment. The focus of London-based Envaluate is then squarely on consumers, whom the startup "enables to log into their bank, track their carbon footprint and lead a greener life".
Commercial banking also works with tools such as sustainable project finance or green bonds.
These two areas have also seen a number of positive changes in recent years thanks to fintech, and the use of the latest technologies has brought speed, transparency and previously hard-to-imagine options such as P2P lending or micro-investments.
Initiatives to reduce climate change and environmental impact include lending for green projects (including green mortgages) or investing in so-called ESG (Environmental, Social and Governance) assets, which Barclays expects to be worth over $53 trillion by 2025. KBC, for example, offers bicycle retailers the possibility to provide credit financing to their customers at the point of sale and Spain's Micappital Eco offers sustainable investments. A form of investment with a significant impact on global warming is pensions, which is the focus of, for example, the UK's PensionBee with its environmentally friendly pension funds, or Tumelo which allows clients to see what funds their money is invested in and have a say in sustainability decisions.
Insurance companies are the world's largest asset managers after pension funds and so their role in efforts to reduce climate change and environmental impacts is crucial. On the other hand, they are themselves highly vulnerable to climate change (including through increasing claims from natural disasters), which positively affects their motivation.
Green initiatives by insurers include, for example, discounted rates for low-emission or electric vehicles, eco-friendly appliances, insurance for ridesharing clients and others. Switzerland's Swiss Re has committed to end insuring and investing in 10% of the world's largest oil and gas producers by the end of 2023, and Allianz has launched its Climate Transition Fund to support the low carbon economy.
Despite the huge energy intensity of the cryptocurrency extraction process, blockchain technology is considered key (by some even the most relevant of all) for both climate fintech in general and carbon footprint tracking and has been applied to a range of green initiatives by financial institutions - from smart energy distribution to green bond issuance. SolarCoin can be spent and traded like other cryptocurrencies, but the essential difference is that it rewards the use of solar technology (1 megawatt hour = 1 SolarCoin).
According to Platformable, 90% of European and UK green fintech solutions are focused on limiting climate change, and it seems as if those who are not trying to neutralise their carbon footprint today do not even exist.
Clients want to know what effect their purchases are having on the environment, so they are turning to sustainable brands and fair trade products in preference to mass production. Information is needed to reduce the carbon footprint, and people demand it from their financial institutions.
However, calculating the carbon footprint is not easy. It is now overwhelmingly determined by the so-called MCC code, a four-digit number for each transaction processed by Visa or Mastercard that classifies businesses based on the type of goods or services they sell.
The MCC codes are used in many cloud-based services by global bank companies and their platforms, such as the Aland Index in the Mastercard Carbon Calculator solution, which was developed in cooperation with the Sweedish fintech Doconomy, or Visa's Fintech Partner Connect programme. Most of those use real-time payment data and calculate the carbon footprint of individual clients based on the Open Sustainability Registry, which takes into account local impacts on the overall carbon footprint. It gives the clients a user-friendly view of how their purchasing behaviour affects the environment, as well as tips for a more sustainable lifestyle. Some companies use a more global view and translate the data into more illustrative examples, such as the number of trees needed to absorb an equivalent amount of CO2.
According to Platformable, 17% of all green fintech products and services focus exclusively on carbon offset, i.e. not addressing the causes but only "cleaning up afterwards". While some of the projects make a lot of sense (an example is the Stripe Climate initiative, which allows businesses to donate a portion of their profits to carbon removal projects), others - such as reforestation - are more controversial and their real positive impact on the environment (and biodiversity) is unclear.
Eco Track is an API-based data enrichment service from Tapix that goes deeper, all the way to the merchant level. Why is it important? Avoiding data inconsistencies by using localization and different levels of categorization means bank platforms can leverage the information much more efficiently. They can offer the clients much-needed context for all their purchases and financial literacy beyond simple data. Eco Track helps clients learn through their banking app and guides them to sustainability by helping them understand the environmental impact of their individual purchases through education, explanation and motivation.
Climate change and mitigation initiatives have significantly increased the demand for new and more accurate data sources in the last few years. Data is a key enabler for global change towards reducing climate change and the environmental impacts of human activity.
While an overall figure on the carbon footprint of individual clients or portfolios is interesting, it is not nearly as useful as it could be without additional data. In order to take a specific action (for example, to reduce or avoid purchases of goods and services with a high carbon footprint), it is necessary to know which of the transactions contributed to the emissions and how much. However, the predictive power of the above-mentioned MCC codes, which are most commonly used to determine carbon footprints, is limited. The 2023 Tapix case study, for example, showed that up to 63% of transactions categorised on the basis of MCC codes are erroneous.
But banks can now offer their customers enriched payment data that is more accurate and reliable than that based on MCC codes while being easily integrated into mobile apps via APIs. One such solution is the Tapix API from Czech fintech Dateio. In its key markets (across Europe, but also in the Middle East), Tapix covers over 95% of all transactions, where it can display the exact name, logo and GPS location of the merchant, purchase category, URL address or eco-tags in addition to the amount. Together with the Eco Track solution, these replace MCC code-based carbon footprint tracking and allow institutions to reward clients for generally "good" spending, such as packaging-free purchases or ride-sharing.
According to Platformable, the development towards sustainability in banking is going in a good direction, but further improvements are needed, especially in terms of product vision and defining business models.
In order to play its role successfully in reducing climate change and environmental impacts, the financial sector will need to innovate in several areas, according to Maddyness.
The barriers that climate fintech will have to overcome in the coming years were also identified by PwC in its report. These include technology, finance, regulations (regulatory), processes and people (availability of talent and skills).
When it comes to carbon footprinting and tracking, we're steering towards an exciting horizon - one that promises more precision, transparency, and a greener future.
Today, we're seeing a shift as major corporations are taking the reins of their own carbon accountability. They're not just talking the talk; they're walking the walk by meticulously measuring and reporting their carbon footprints. The conventional approach of relying on MCC codes to gauge product or service emissions is becoming a thing of the past. The key to a more accurate and sustainable path is to tap directly into their data.
Our path forward also involves celebrating individual merchants for their eco-conscious actions on a transaction-by-transaction basis. We're equipped with powerful tools like the aforementioned Tapix API, seamlessly enriching Dateio data, and fostering a culture of sustainable commerce. Looking further into the future, that also means a possible carbon footprint tracking of each item in your shopping cart. Picture a world where every purchase choice is a step towards a more sustainable planet with smart data keeping you informed on time.
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Ondřej Slivka
Senior insider
