‘Monitor, manage, and offset’: Behind the opportunities in the growing green finance market
- The rising demand for climate-conscious products is creating a new wave of opportunities for the financial sector.
- Climate-centric software enables banks to calculate and offset their carbon footprint.
Green finance offers new possibilities for financial providers to respond to their customers’ increasing climate awareness.
Consumers’ appetite for integrating sustainability within their financial lives is rising as climate change represents a major social challenge.
Strong environmental concerns from the generations of consumers that are stepping into their prime earning years, such as Millenials, or beginning their financial journeys, like Gen Z, have generated a wave of climate-focused opportunities for the finance industry.
What consumers are asking for is feasible. Research posted by Accenture back in May showed that 71% of US banks can monitor and assess their carbon footprint, and 67% are prepared to transition to a low-carbon economy by directing capital away from the energy sector.
Some banks and financial institutions have already started to look for eco-friendly products and services to appeal to these generations in an effort to remain relevant and solidify their relationship with their customers.
For example, payments fintech Stripe has been investing in carbon removal projects over the past two years. Mastercard revealed a carbon calculator back in April, highlighting the growing trend in eco-conscious spending.
However, the nascent green finance market remains small and disintermediated, although there are new players that offer financial institutions the tools to assess their carbon impact and neutralize emissions.
Take the case of Patch and Doconomy, two companies that recently collaborated on solutions for financial institutions and their customers to the environmental challenge ahead.
Doconomy offers banks, fintech firms and other companies tools to calculate the climate impact of their digital financial transactions, in an effort to inform consumers and institutions of their environmental impact.
“Our role is to provide leading banks the ability to calculate the impact on a transaction level in order to educate and engage their users. We provide an API that presents a methodology to the banks to calculate each and every transaction,” Doconomy CEO Mathias Wikstrom told Tearsheet.
Patch, a carbon removal marketplace, enables fintech platforms to purchase carbon removal and offsets via its API’s. The opportunity here for the fintech industry is to embed environmental measures into payments or card credit products, according to the company’s co-founder and CEO Brennan Spellacy.
“What we've done primarily with crypto companies, traditional banks, as well as neobanks, challenger bank type folks, is give them a toolset to build some sort of climate action into their product,” Spellacy said.
By embedding Patch’s API into its platform, Doconomy enables banks and financial institutions to not only gather insights on the environmental impact of their transactions, but also counter it via the purchase of high quality carbon removal credits.
“Doconomy is the carbon footprinting element and Patch is the complement to that. And so Doconomy and Patch are primarily approaching banks to help them launch some sort of carbon neutral or climate positive credit card or debit card. And they're actually using both API's together,” said Spellacy.
Where does a bank start?
“We begin with enabling everyone on a global level to understand their impact, and then we can start connecting it to credit cards or payments,” Wikstrom told Tearsheet.
Doconomy works with banks globally, representing almost 400 million users, but the largest interest so far comes from Europe.
“We also see emerging curiosity in South and Latin America,” he added, with North America “the slowest to the party.”
Many financial institutions see offering these types of services as a business opportunity to improve customer acquisition, activation and engagement, according to Doconomy. However, not all financial institutions have the same mentality when it comes to initiating some sort of climate-conscious service in their business.
“There are two different approaches. There are those genuinely engaged in enabling everyone to understand more. And then there is the other side, those who just need to get something going into sustainability space, and they're not really sure what,” Wikstrom said.
The capabilities of a company like Doconomy lie beyond understanding environmental impacts, as their methodologies allow companies to do climate-related risk assessment. This is key at a time when many financial institutions are wary of climate regulations that could burden them with new disclosure requirements, especially with pressure mounting from policymakers.
“Everyone will be required to report on not only their users’ footprint but also the effect of their credit portfolio. We're also looking to further that service development to corporations in its own entity,” noted Wikstrom.
The Doconomy executive highlighted that banks need a way to report on their loan portfolios, differentiating between investments in carbon intensive or renewable energy.
“It's important that we shape a language that is comparable for the impact of a transaction. And that's why we are in favor of helping the fintech industry by providing them with a methodology. It's important that the methodology is consistent so that there is comparability between financial services. And that's the standard we're setting on a global level,” he said.
Offsetting the impact
Meanwhile, Patch makes the carbon removal piece of the equation as seamless as possible for businesses, according to its chief executive.
“The way we do that is by partnering with a wide variety of carbon removal and carbon offset developers. And then we make their capacity to sequester carbon transactable, electronically, via both a user interface and API,” Spellacy said.
Built around the idea of structuring unstructured data, Patch wants to provide transparency to carbon markets.
“Historically, one of the biggest detractors for carbon markets has been the fact that a lot of people just don't understand what they're buying. We contextualize all the underlying attributes of each tonne of CO2, because they're not all interchangeable,” he said.
The carbon removal market is becoming increasingly popular. According to a June report by CB Insights, it has seen a surge in investments. $95 million has been invested in carbon accounting and offset marketplaces in the first half of this year, compared to $33 million in 2020, as major corporations “seek out platforms that can help monitor, manage, and offset their carbon emissions.”
This trend is perhaps not just a signal of consumer’s growing environmental concerns. Commercial clients, including financial institutions, want a liquid market to purchase offsets as they transition to clean investments and infrastructure.