The two industries are set to grow closer next year, especially with new fintechs coming in to bridge the gap and pair capital with clean projects. A new wave of ‘climate fintechs’ is emerging, offering consumer products such as wooden debit cards and carbon footprint trackers, as well as commercial services like ESG management and portfolio optimization for fossil fuel divestment.

This means partnership opportunities for traditional banking institutions looking to add “green” products to consumers, but also more environmentally-focused lending solutions. The global green bond market is expected to double to $1 trillion by the end of 2022, according to Climate Bonds Initiative CEO Sean Kidney. Just this year, $435 billion of green bonds have been issued.

Overall, for the banking industry, there are three broad levers that drive climate action: pressure from regulators, commercial performance and stakeholder sentiment, according to Partha Bose, Head of Capital Markets at climate intelligence startup Cervest. And all three are beginning to be pulled in the right direction. 

What to keep an eye out for in 2022

ESG investments on the rise 

ESG investments are quickly being adopted across the board, turning into “must have” portfolio assets. The ESG market experienced a meteoric rise in recent years, with global sustainable investment up nearly 70% since 2014 to over $30 trillion. 

There’s a lot of buzz around this asset class, but also a lot of confusion as there’s a wide spectrum of ESG criteria and investment strategies. Moreover, as social and governance factors often rely on self-reported information, it can be trickier to substantiate, so banks might choose to focus more on the environmental side of the equation. Nevertheless, ESG is well positioned to be of strong interest for investors next year as well.

“As a result of the demographic shift and the Millennials and Gen Z generational cohort that “get it”, ESG has moved from a good idea to a necessary reality. Couple this demand with the exploding funding by Wall Street, Main Street and the federal government and we finally have a recipe that may result in success,” said Ken LaRoe, CEO of Florida-based ESG-driven community bank Climate First Bank.

However, LaRoe also highlighted that there has to be an understanding of a “just transition” as funds begin to be increasingly allocated towards green projects. 

“All of the fossil fuel industries are going to find themselves with massive stranded assets. This reality will finally start to drive investors and lenders away. However, the big banks and Wall Street should not be maligned because they cannot throw a switch and immediately divest this asset class,” he said.

More regulation

Another key emerging trend is the growing regulatory pressure coming from government agencies. They want to incorporate climate risks into regulations, asking for stress testing from large US financial institutions to identify systemic risks that could affect the economy as a whole. 

Investment and lending practices are also coming under increased scrutiny from both the public and federal watchdogs. 

“Disclosure is key in satisfying both regulators and stakeholders, as well as identifying possible drivers of commercial performance, so I can see a lot of activity emerging in the disclosure space, and then a lot of secondary activity emerging from the findings of disclosure,” Cervest’s Bose told Tearsheet. 

Bank regulatory agencies are to develop supervisory expectations around climate-related financial risks. This represents both opportunities and risks for banks, according to Tracy Basinger, senior advisor at Klaros. 

“There is a recognition that it is incredibly complicated to quantify, measure, monitor and manage climate-related financial risks. Neither regulators nor bankers have the capacity or data necessary to do this. It adds pressure on bank risk management functions as they need to incorporate climate-related financial risks into their risk management frameworks,” she said.

The Build Back Better bill

US President Joe Biden’s Build Back Better package of social and environmental spending is set to pass, which includes more than $500 billion in climate investments. If enacted and implemented, it will be the biggest investment in mitigating climate change in US history.

The bill has provisions for tax credits for clean electricity generation, electric vehicles, carbon capture and sequestration, and clean hydrogen production. These tax credits are set to play a valuable role in developing the technologies necessary to reach emission targets. 

“A lot of what happens in this arena will depend on what the Senate does with the Build Back Better bill,” said Peter Krull, founder and CEO of Earth Equity Advisors, a financial advisory firm focused on socially responsible investing.

“I believe that 2022 will be another good year for sustainable investments simply because of demand and widespread acceptance of the strategy, but passing the BBB bill should supercharge this, even without all of the current provisions,” he told Tearsheet. 

Concerns to keep in mind 

Greenwashing

As everybody rushes to add environmental investments to their books, there are concerns that regulation is not moving quick enough to keep pace with the fast adoption of ESG investments. The lack of clear oversight has allowed for greenwashing, aka false claims about the sustainability of certain investments.

Earlier this year, Deutsche Bank came under investigation by the SEC and Germany’s financial regulator BaFin, due to allegations that its asset management division has been misstating the environmental—and possibly the social—credentials of some of its ESG investments. The investigation is at an early stage, and the bank has rejected the claims.

The rise in greenwashing will likely result in more ESG regulation in order to standardize criteria, measurements and reporting.

The ESG debate

Another pressing issue is the lack of consensus around what constitutes ESG, who rates these assets as ESG, and who regulates the ratings agencies. 

“We urgently need to see a harmonization of standards.  With the current plethora of ESG regulations, businesses and countries are adopting climate risk mitigation and adaptation strategies at different rates and levels. For the world to successfully combat and adapt to climate change,  we need to be moving at the same pace -  either we all win or we all lose,” said Bose.

Too much focus on carbon?

So far, it seems that the majority of climate fintech startups and bank integrations have been revolving around carbon: carbon capture, sequestration, offsets, footprints. While carbon reduction is essential, it doesn’t solve all our problems. Even in a Net Zero scenario, the planet would continue to experience the impacts of climate change for decades to come. 

Bose stressed the need for climate fintech that addresses adaptation, and more green finance approaches that integrate mitigation efforts to reach Net Zero with the need to adapt to climate change. 

“In my view, there are three elements that are increasingly top of mind for people within the industry: incomplete pricing of climate risk; inadequate optimization of investment portfolios from a climate risk perspective, and a lack of innovation around non-carbon related financial instruments and opportunities,” Bose told Tearsheet.

“Investors need to see that the technologies they invest in are taking action on adaptation as well as mitigation and building climate resilience into their strategy, ” he said.

Plus, the sharp increase in carbon capture and reporting also invited “a fair amount of opportunists that are not interested in the long game,” according to Mathias Wikström, CEO of Doconomy, a fintech that helps companies calculate the climate impact of their digital financial transactions. 

“With carbon being the new gold of sorts there is bound to be a few gold-diggers. That too shall pass and real positive change built on high quality data, transparency driven insights and competitive comparability will be in the driver seat,” he told Tearsheet.

New market players emerging

Before we step into 2022, let’s take a look back at new players that joined the climate fintech arena over the past year.  

The industry welcomed the launches of:

• Carbon-neutral credit cards: Aspiration Zero 
• Debit cards: Treecard
• Green neobanks: Atmos, Ando Money
• Banks: Climate First Bank 
• Green robo-advisors: Carbon Collective
• Crowdfunding platforms: Energea, Raise Green

Lana Khabarova, founder of personal finance website SustainFi, expects to see more green fintech launches next year on the banking, robo-advisor and crowdfunding side. 

“Traditional robo-advisors like Betterment introduced various sustainable portfolios. Expect to see even more options in 2022, and some of the green neobanks will probably launch credit cards,” she said. 

Therefore, with the green finance market on the rise, new entrants are expected in the future. It will be interesting to see which trends will materialize further next year, and where the industry decides to focus its attention. In any case, while there are concerns we should keep an eye on, the fast adoption of climate-centric financial solutions and technology represents a source of optimism. On to 2022!