Climate Fintech: Driving Innovation for Climate Action
Climate action and sustainable solutions to climate change go beyond environmentalists and scientists. As the effects of global warming impact all aspects of society, climate mitigation and adaptation require a collaborative, multi-sectoral approach. The financial sector – both traditional institutions and start-ups – are entering the fray with their own initiatives and projects. An example of such an initiative is the Net Zero Banking Alliance, a group of banks committed to aligning their portfolios to reach net zero greenhouse gas emissions by 2050 or sooner.
The fintech sector uses innovative technologies to provide financial services efficiently in affordable and accessible ways. Companies such as Stripe, Binance and Ripple contribute to transforming the sector and align it with climate goals. Climate fintech is somewhat different. While fintech companies may use their products and services towards climate action, it is not their primary or sole focus. On the other hand, climate fintech “holds promise for leveraging this digital transformation and retooling the financial sector to benefit people and the planet” as explained by the Asian Development Blog. Climate fintech uses financial technologies to address and adapt to climate change. There are different categories of climate fintech. The three main categories are:
1. Carbon trading platforms. Carbon trading platforms are online marketplaces to trade carbon credits. There is no single global platform for carbon trading, but there are platforms that operate on regional, national and local levels. Compliance markets (which are mandated by law and regulated by a government) are the most actively used platforms, with voluntary markets providing an alternative not regulated by government, where organisations voluntarily participate in trading carbon credits. The European Union has an Emissions Trading System, with platforms such as Verra and AirCarbon Exchange serving as one of the biggest voluntary markets.
2. Carbon accounting. Carbon accounting consists of frameworks and processes used to calculate and track the greenhouse gas emissions of a particular organisation, institution product or service. The goal of carbon accounting is to assess and quantify environmental impact. Carbon accounting has three scopes: I) Scope 1 emissions cover direct emissions, which are the direct result of an organisation’s activities (such as fuel combustion); ii) Scope 2 emissions cover indirect emissions, which are emissions from electricity used by an organisation for its work (such as heating and air conditioning) and; Scope 3 emissions cover supply chain emissions, which includes activities such as business travel and commuting to work. With big companies such as Alphabet, Amazon, Microsoft and IBM, and regional blocs such as the European Union setting net zero targets, calculating emissions is a necessary part of reaching targets and balancing greenhouse gas emissions with greenhouse gas removals.
3. Climate crypto. Climate crypto is one of the more clear-cut examples of climate fintech. Still a relatively new enterprise, it uses cryptocurrencies and blockchain as a form of climate action. The decentralised nature of cryptocurrency makes it conducive for community-driven projects to fund renewable energy, provide financial incentives for businesses and individuals to reduce their emissions, and facilitate trading of carbon credits. Climate crypto such as Solarcoin, MOSS Earth and KlimaDAO each aim to address specific areas of climate action. Larger initiatives such as the Crypto Climate Accord aim to “decarbonize the global crypto industry by prioritizing climate stewardship and supporting the entire crypto industry’s transition to net-zero greenhouse gas emissions by 2040.”
Climate fintech is just one of many approaches to climate action. The use of financial technology in the climate arena highlights how the success of climate action is reliant on a multi-sectoral approach.