Inside ‘climate fintech’: The fintech firms using carbon offsets to address climate change
- Financial institutions are increasingly rallying around environmentally friendly initiatives.
- Startups are turning towards carbon offsets to build a carbon-neutral future.
Fintechs are scaling up greener solutions aimed at neutralizing the adverse impact of climate change. The uptick in climate friendly startups -- the ‘climate fintech’ sector -- can be largely attributed towards a steady influx of climate change consciousness among consumers, investors and policymakers.
Fintechs aside, traditional financial institutions are also diving into eco-friendly practices. Recently Nasdaq announced that it is developing a trading platform for carbon removal credits. In February of this year, the American Bankers Association joined 10 other financial trade organizations in releasing a set of guidelines for financing the transition to a low carbon economy.
Tapping into public sentiment, fintechs are working towards zero carbon goals through carbon offsets for individuals and businesses that aim to compensate for carbon dioxide emissions through activities such as tree-planting or carbon sequestration.
Negative emissions platform Patch is focused on supporting businesses with building their carbon offset portfolios through a variety of features such as its APIs, climate change technologies, e-commerce, banking, and payments tools.
“We think that coupling climate insights and action with digital financial services will prove to be an incredibly powerful combination for turning the tide of climate change,” said Patch’s CEO, Brennan Spellacy. “What better way to get businesses and consumers to consistently act more sustainably than to closely link climate action to their financial behaviors and purchasing patterns?”
Climate-focused challenger bank Aspiration provides consumers with sustainable saving and spending products such as its feature for carbon-neutral driving where automatic offsets are tied to consumer gasoline purchases and its ‘Plant Your Change’ initiative which lets customers plant a tree with every purchase they make. The bank has planted around 10 million trees in the last year.
“Aspiration has created the category of socially-conscious, sustainability-focused consumer financial services, helping its customers spend and save in ways that combat climate change,” said Aspiration’s CEO, Andrei Cherny. “Our customers are conscious consumers who move from their current bank to Aspiration in order to align their money with their moral values.”
Carbon footprint app Joro provides consumers with personalized insights into their spending behavior’s carbon impact. The app’s Net Zero membership enables users to offset every purchase. “We're seeing clear evidence that the Joro community can have a significant impact at scale. In 2020, Joro users lowered their carbon footprints by 10 percent on average. More people than ever before want to take climate action,” said Sanchali Pal, Joro’s founder, and CEO.
According to research by the Yale Program on Climate Change Communications, 58 percent of Americans are either concerned or alarmed about climate change. “This is only growing, as Gen Z and millennials believe climate should be a top priority. Especially to cater to a younger demographic, sustainability should be a top priority for FIs,” said Pal.
Financial institutions that want to engage with the climate-conscious consumer need to establish trust and actively avoid ‘greenwashing’. Greenwashing is marketing spin that falsely portrays a company’s products as environmentally friendly.
“People want to participate ethically in the global economy. For that, you need a brand that you trust. Trust requires transparency and a really clear impact. The core product has to have that baked in. It can’t just be marketing putting lipstick on a pig after the fact,” said Zach Stein, co-founder of climate focused robo-advisor Carbon Collective.
Despite recent advances, the financial services industry has remained largely complicit in contributing towards ecologically harmful practices. A report by Rainforest Action Network indicates that 60 of the world’s largest commercial and investment banks such as JP Morgan Chase, Citi, Bank of America, and Wells Fargo poured a total of $3.8 trillion into fossil fuel financing from 2016 to 2020.
“As the saying goes, ‘follow the money.’ The banking industry is the foremost force driving the climate crisis,” said Cherny.
“They are using literally trillions of dollars of their customers' deposits to fund oil and gas pipelines, drilling, and other fossil fuel exploitation that is destroying our planet. There are some good local banks and community credit unions that don't lend to oil and gas. But a ‘do no harm’ approach is not enough.”
As the financial services industry inches further into the green movement, open-ended questions remain on the actual efficacy of carbon offsets themselves.
“Carbon offsets are both important and highly problematic in solving climate change. To solve climate change, we need to re-forest and protect large areas of land and sea,” said Stein.
“Offsets help pay for such projects. That’s the good part. The bad is that not all offset projects are created equally. There are many that have little to no impact. Also, people who buy them can sometimes feel ‘absolved’ of their climate impact and don’t take additional actions.”
The sentiment that carbon offsets can be counterproductive is shared by writer George Monbiot who famously compared carbon offsets to the ancient Catholic Church’s practice of selling indulgences in exchange for spiritual absolution. He writes, “Our guilty consciences appeased, we can continue to fill up our SUVs and fly around the world without the least concern about our impact on the planet.”
Proponents of carbon offsets emphasize that they are the beginning stages of achieving carbon neutrality. “At Joro, we know offsets can't be a license to pollute. Instead, they're the start of a more intentional way of living - a tool to accelerate the shift to a zero-carbon society,” said Pal.
Spellacy recommends that businesses start offsetting their footprints while reduction efforts are underway. “We see a lot of businesses saying ‘we're going to focus on reduction for the next few years, then think about offsetting.’”
“While we certainly believe the reduction is the most important thing a business can do as they work toward net-zero emissions, the barrier to entry to accessing high-quality offset and removal projects is very low because of platforms like Patch. Offset less and less each year rather than kicking the can down the road,” said Spellacy.
Pal believes that financial institutions need to look within to evaluate how green their internal operations are. “FIs operate tens of thousands of physical retail locations and employ millions of people in the United States alone. Decisions they make to transition to clean energy, boost energy efficiency, and reduce waste can have far-reaching impacts,” she said.
Ultimately, it all boils down to investment. Annual investments in renewable energy must double to support the transition away from fossil fuels and catastrophic warming. “Invest in project finance. Invest in developers. Divert lobbying dollars to pushing lawmakers to establish bold mandates for expanding these products. Run more analysis on the financial risks of holding long-term fossil fuel debt,” said Stein.