Issues like climate change, inflation, and the ongoing effects of the global pandemic are leading to a surge in the attention given to green and sustainable finance. What was once a peripheral concern is now gaining increasing momentum through policy, regulation, market forces and consumer demand.
As an industry notorious for disruption and innovation, fintech stands to play a big part in the move towards sustainable finance. When most people consider sustainable or green finance, they think of terms such as Environmental, Social, and Governance (ESG) and carbon offsetting.
Undoubtedly, these play important roles. However, the scope for fintech to deliver on sustainability is much greater than one or two initiatives.
Changing business practices or personal behaviours towards being more green is not always easy, but fintech holds the power of change.
What is sustainable finance?
“A sustainable financial system is… one that creates, values and transacts financial assets in ways that shape real wealth to serve the long-term needs of an inclusive, environmentally sustainable economy.” – UNEP, 2016
Sustainable finance is an umbrella term describing the collection of activities taken by financial services providers to
- reduce harm to the environment and climate
- promote social engagement
- encourage sustainable corporate governance.
With the effects of climate change and inequality becoming increasingly apparent, sustainability has become a key consideration for those in the financial sector.
And as natural innovators, fintechs are uniquely placed to address these challenges. Through both direct and indirect action, there are multiple avenues by which fintechs can enact positive change.
Helping consumers make sustainable choices
Overwhelmingly, consumers want to make sustainable choices. The Global Sustainability Study 2021 found that 85% of consumers have shifted their purchase behaviour to become more sustainable in the past five years. As a result, companies which progress to sustainable business practices will be most likely to succeed.
One of the most widespread use cases is the emergence of carbon tracking fintechs which utilise their data harvesting and analytical capabilities to track customer transactions and create nudges towards sustainable spending behaviours. In turn, this also facilitates the development of innovative sustainable products and services.
Use case
An example of a fintech company educating and influencing consumers is our partner Connect Earth, which uses APIs to enrich financial transactions with carbon footprint insights and direct banking consumers towards more sustainable habits.
Read on: How can APIs contribute to your business success?
Promoting financial inclusion
The promotion of financial inclusion is unique in that it has an effect on all three pillars of sustainability:
- Environmental
- Social
- Governance
Fintechs play a key role in that they have the potential to lower costs, while increasing speed and accessibility, leading to tailored and scalable financial services. In addition to use cases such as mobile money, there have also been positive developments in areas such government-to-person payments.
Use case
The Gimi app is one that promotes financial inclusion amongst young people. The company develops educational fintech products to help young people and their supporters make smarter financial decisions in the future.
Towards direct climate action
The financial sector has taken important initial steps towards sustainability. For example, it’s becoming more common for banks and other financial services providers to include carbon trackers in their list of product features.
However, carbon offsetting practices tend to focus on one aspect of the purchase, without considering the many environmentally unfriendly practices (chemical toxicity, water impact, etc.) involved in the production. This is a phenomenon known as ‘carbon tunnel vision’, and is something that fintechs are largely not yet addressing.
The next round of innovations from fintechs need to address environmental impacts beyond carbon emissions.
Use case
There are some exciting initial use cases in this area, such as rePurpose: the world’s first plastic credit platform. Their solution makes it simple for people to take meaningful environmental action by financing innovators on the frontline.
The future of sustainable finance
Change will not happen overnight, but a lot of important steps are currently underway. Whether it is influencing consumer behaviour or altering business practices, the process plays out over a long period. With that being said, fintech is an industry of innovators, and one that can have a meaningful and long-lasting impact on the planet.
Fintech tools are able to generate more actionable data than ever before, which in turn lends itself to the development of innovative sustainable financial products and services. In addition, the fintech industry plays a key role in shaping policy towards a more sustainable future, and is aptly recognised by policy makers and regulators. There is a strong platform now in place for the next generation of sustainable fintechs to shape a green future.