Climate fintech: Catalyzing green finance to accelerate the net zero transition
Climate fintech: Catalyzing green finance to accelerate the net zero transition
Climate fintech, built on the success of mainstream fintech models, is set to play a pivotal role towards enhancing the adoption of clean energy assets and projects.
In the past decade, India's fintech sector has undergone a remarkable transformation, as shown in Figure 1 below. Initially, mobile banking and digital B2B lending platforms revolutionised access to capital for SMEs. This success led to a focus on consumer finance, with fintech companies using technology and data analytics to offer individuals innovative lending, payments and wealth management solutions. The emergence of neobanks, embedded finance, insurtech and further disruptive approach to traditional banking accelerated the growth of India's fintech ecosystem, reshaping financial management and challenging established norms.
As concerns about climate change intensify, a new trend is emerging within India's fintech landscape: climate fintech. Fintech companies are leveraging technology and financial innovation to tackle carbon emissions, while promoting sustainable practices. Figure 2 depicts renewable energy projects as the primary focus area until 2019. Since then, there has been a significant increase in vertically integrated players, financing sectors such as EVs, carbon credit trading, and risk management.
This shift can be attributed to various factors, including a focused regulatory push, India’s net zero commitments, and the adoption of green financing.
With increased awareness and the integration of climate-focused lending into their priority-sector policies, banks are now better equipped to support these initiatives. Moreover, the overall development of the Indian fintech industry (Figure 1) has also acted as a catalyst to spur innovations within the climate fintech space.
Exploring Thematic Innovations in the Climate Fintech Sector
I. Fintech-enabled Platforms
i) Asset & Project Financing, Sustainable Investments
While green finance has been significant in India from as early as 2007, new financing paradigms are being leveraged to meet India's renewable targets by 2030. Examining India's renewable energy (RE) market structure reveals a distinct shift from the conventional energy sector. The responsibility for developing renewable energy lies with the private sector, necessitating the mobilisation of private capital in alignment with policy targets.
The RBI designated the RE sector as a priority sector for lending in 2015. While a large number of banks and NBFCs are financing renewable energy projects, the latter’s commitment is growing significantly.
SIDBI, dedicated to supporting small businesses, now offers 100% loans for rooftop solar installations at interest rates of 7-7.7%. SIDBI has also partnered with the German development agency GIZ GmbH to operate a Risk Sharing Facility, providing credit guarantees for loans from banks and NBFCs. Ecofy, a first-of-its-kind green retail NBFC promoted by EverSource Capital, received its license last year.
India possesses a remarkable RE potential exceeding 1 TW. This signifies the ongoing development, and commercialisation of utility-scale hybrid, battery storage, and other storage technologies, offering significant potential for large fintechs. Mumbai-based Aerem exemplifies this trend by offering solar financing solutions to MSMEs, empowering them to significantly reduce their electricity costs. The key advantage of renewable energy lies in its inherent divisibility, allowing for easy fractional ownership. This creates a significant opportunity for fintechs to democratise clean energy ownership, and unlock economies of scale for individuals. For instance, Renewshare enables investors to co-own renewable projects. Bangalore-based Pyse launched India's first fractionally-owned solar power plant in 2022, as part of their mission to address the funding needs of green solutions. Mumbai-based Neufin is providing a range of services, including financial projections, credit checks, documentation, and asset monetisation to simplify access to financing businesses working on sustainability.
Clean energy assets such as EVs, batteries and solar pumps are now widely accessible, and financed by players such as Grip Invest. Electrifying demand requires involvement from all stakeholders in the value chain, including financiers. The decreasing value of gas/diesel vehicles, along with lower upfront costs of EVs, stricter emission regulations, and rising fuel prices, make EVs increasingly attractive. Moreover, EVs are software-driven, with geolocation boundaries and tracking capabilities, enabling diverse use cases that can be financed.
This presents a promising opportunity for financiers to underwrite EV technology, identify the right target customers, source affordable capital, and access secondary markets. Financing options for EVs can cover a multitude of uses, including vehicle purchase, setup of charging infrastructure, replacement of batteries and other operational expenses like logistics.
SIDBI has recently tied-up with ADB and World Bank to launch a $1 billion fund to lower the cost of financing for commercial EV vehicles.
Delhi-based Alt Mobility offers vehicles on subscription basis, providing businesses with affordable leasing solutions for intra-city transportation. Bangalore-based Turno and VidyutTech are commercial EV platforms that provide end-to-end solutions for purchase, financing & resale. Similarly, Ohm Mobility enables EV businesses to access institutional capital efficiently.
ii) Carbon Tracking, Offsets and Trading
The global carbon footprint management market is projected to grow by a CAGR of 10.3% from $9 billion in 2020 to reach $16.4 billion by 2027.
New-age startups have emerged across the globe to help individuals calculate, track, and reduce their carbon footprint, and offset the same by financing green projects. Players such as Climes, Lowsoot, and WOCE have launched new offerings while one of the few existing major players, EKI Energy, looks at scaling up B2B operations while also targeting consumers. Climes offers carbon-neutral solutions through brands, for flights, weddings and bus transportation where consumers can directly invest in nature-based projects to offset their footprint. Mumbai-based Lowsoot’s core focus is the reduction of footprint rather than just offering credits. The scalability potential of such startups is huge in India, as more brands are starting to chase sustainability targets.
The government has recently notified a draft framework for India’s first carbon market, which includes the constitution of the National Steering Committee to govern the market’s functioning.
Moreover, the emerging decentralised energy transaction and supply system, facilitated by blockchain-based smart contract applications, empowers consumers to manage their electricity supply contracts and consumption data. Uttar Pradesh piloted a P2P solar power trading project in partnership with Australian blockchain company Powerledger in 2019 which lowered the energy market buy price by 43% vis-à-vis the retail tariff, further incentivising the uptake of distributed energy resources. As a consequence, the Uttar Pradesh Electricity Regulatory Commission issued a tariff order, directing all UP utilities to implement P2P energy trading.
Blockchain technology provides an open and inclusive platform, characterised by the immutable cryptographically-secured distributed ledger, allowing for reliable issuance and tracking of carbon credits.
Public blockchains can help improve transparency and integrity so they can effectively scale carbon credit markets. Global companies such as Toucan have built a 'carbon bridge' to create publicly accessible carbon credit that improves market transparency and unlock better financing for climate projects.
For a deep-dive on the mechanics behind the carbon credit and offset market, please refer to Theia Ventures’ previous article here.
II. Other data-tracking platforms that serve the Finance Industry
i) Climate Risk Management and Insurtech
In the context of investments and trading, risk is inherent in the pursuit of financial rewards. It is widely acknowledged that financial systems are exposed to physical and transition risks from climate change, affecting both macroeconomic and microeconomic outcomes. Addressing these risks requires collaborative innovation from public and private sectors, including divestment from poor GHG performers, promoting net-zero business practices, and investing in renewable energy, resource efficiency, electrification, and emissions reduction.
This presents an opportunity for risk tech and insurtech firms to develop products and solutions that address volatility and facilitate a transition to net-zero emissions. Insurers can focus on three major areas: i) insuring the net-zero transition; ii) providing risk transfer solutions for rising physical risks; and iii) offering adaptation and resilience services. As Figure 4 below shows, fintech provides insurance with the possibility to become more focused on preventing risk, in addition to pooling risk as a last resort. Industry players may offer advisory and risk-engineering services to manage and reduce clients’ exposure to climate risks and enable more effective responses to climate-related losses, such as wildfires, hurricanes and earthquakes.
More traditional financial institutions are also looking to integrate climate risk into their risk management frameworks, as evidenced by an RBI survey that found that 80% were discussing climate-related risks at the board level.
Fintech startups such as Blue Sky Analytics, mistEOand Ambee use AI and satellite data to build environmental monitoring and climate risk-assessment products, offering investment managers exclusive datasets to assist in the analysis of alternative data across multiple categories.
ii) ESG Data Reporting and Analytics
Digital finance also presents novel opportunities for financial institutions to enhance their measurement, valuation, and management of services provided by ecological infrastructure. This is particularly relevant for banks engaged in commercial project finance, as well as private and retail banks aiming to provide clients with specialised accounts connected to the sustainable utilisation of Natural Capital.
Companies with a majority of environmentally conscious consumers or active equity owners are motivated to adopt market-independent stricter reporting standards. They are willing to pay a premium to credibly report their low emissions to highlight the positive impact created and to differentiate from less climate-conscious competitors. This has helped the growth of carbon accounting platforms that offer better ways to measure and manage a company's environmental impact.
SEBI also introduced the BRSR framework in May 2021 to ensure investors can access standardised ESG disclosures.
Such companies’ ability to put blue-sky thinking to practical use is allowing them to discover new, granular data sources and metrics that the traditional vendors are likely to have missed. For example, Green Assets Wallet offers a global, market independent platform to help investors and impact projects connect through quantifiable, structured and trusted impact data, ultimately re-directing capital to finance the transition. Bangalore-based StepChange enables banks to perform carbon accounting accurately by analyzing supplier-specific product carbon footprint data. Germany-based Clime is leveraging this data availability to connect project developers, investors, and landholders to accelerate the development of carbon and natural capital markets.
LOOKING AHEAD
As Figure 5 demonstrates, climate fintech models in India, many of which are benchmarked on similar global models, have successfully utilized innovative technology to address the challenges of carbon emissions in industry, consumer and the services sectors.
The future development and adoption of blockchain, IoT, big data, and other related technologies offer the promise of systemic transformation: a radically different financial and capital allocation system geared toward inclusive and sustainable development.
These new technologies are at an early stage of development, and predicting their future trajectories with confidence is challenging. However, the overall effect of fintech and blockchain technology applications in the various potential use cases mentioned above will be to significantly improve reliability, such as identity verification and financial inclusion, increase access to services like energy, banking, and property ownership, and importantly, lower overall system costs.
At Theia Ventures, we firmly believe that climate fintech has the potential to revolutionise the way financial services are delivered and reshape the investment landscape to prioritise sustainability. We are excited to support visionary founders that are at the forefront of these emerging trends. We look forward to hearing from you!