The Green Finance Podcast Ep. 5: The rise of carbon offsets with Patch CEO Brennan Spellacy
- The carbon offsetting market has grown tremendously over the past few years, attracting a lot of interest from banks, fintechs, and investors.
- In today's episode, we chat with Patch CEO Brennan Spellacy about how the fintech enables financial providers to embed carbon footprinting and offsetting into their products.
Our Banking on the Planet Conference is right around the corner! Tuesday, July 26th, starting at 9:45 am Eastern Time. So if you haven’t registered yet, please do so on our website – it’s totally free and we have some great speakers lined up.
We'll be talking about everything green finance and the intersection of climate risks, sustainability, ESG investments and banking, bringing together leaders from the banks that have set out to make a difference, and the fintechs and technology providers bringing us closer to a net zero future.
One of the companies that we will be talking to at the conference is Patch, an API-based solution enabling companies to embed carbon footprint estimation and removal directly into their digital products and experiences.
Today, I’m talking to its CEO Brennan Spellacy, to hear how Patch works, as well as his insights on the whole carbon offsetting market, which has grown tremendously over the past few years, attracting a lot of interest. While it’s not a central solution to the wider problem of climate change, it’s an important piece of the puzzle – so tune in to find out how it all works.
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The following excerpts have been edited for clarity.
Tell us about Patch and how it's able to embed carbon footprint estimation and removal directly into digital products?
Brennan Spellacy: At the highest level, Patch is an API-first marketplace for carbon removal. For those who don't know, an API is how computers talk to each other. So, whenever you use a software application, whether it's on your mobile device or on a laptop, there's usually a series of APIs behind the scenes enabling that program to talk to other programs.
At Patch, we work with a really large variety of what are called carbon removal developers, organizations that sequester carbon dioxide – that's our core business. And we digitize their ability to sell. So we load their capacity to sequester carbon dioxide into the Patch platform, and then we expose that sequestration capacity to end buyers through our dashboard products, which corporations might use to manage their carbon footprint.
There's an actual visual interface or web application, you can track for it, and there are also a series of APIs that allow you to remove carbon dioxide through a few lines of code. The way we actually embed that within applications, we typically give this code to FinTech companies to ecommerce platforms, and they'll actually embed these few lines of code that patch produces into their application to surface that feedback, typically to their end users. A really concrete example of this is the BNPL provider Afterpay, which actually enabled the ability for consumers to compensate for their carbon footprint from within the application, and that's all powered by Patch’s APIs.
How soon should we expect our banking apps to tell us the carbon footprint of our financial actions?
Brennan Spellacy: It's already beginning to happen. Patch already partners with a sub-brand of RBC, which is one of the largest banks in Canada. And we have a few others coming up in the next one to two quarters that will be going live.
Something that's important to call out, and that's a particular example within banking, is that Patch typically partners with a third party to estimate the transaction footprint. We think a lot about making sure the incentive structure is set up such that everyone is operating ethically. And so, one thing that's really important for us is to never do the footprinting ourselves, but partner with a third party like Doconomy and Cogo.
The reason we do that is because the footprint is essentially the diagnosis of what you have to do, versus the carbon removal, which is the medicine. You wouldn't want your doctor making money off of all the medicine they prescribe you, because they would be incentivized to prescribe you more medicine. That's a very similar situation with Patch, but we want to make sure that the people actually footprinting and the people compensating are always separate entities. So at scale, there's never any sort of fishy conflict of interest.
What's the demand that you're seeing in the sector for a product like yours?
Brennan Spellacy: The demand is massive. If you look at the top 10 retail banks offering some sort of either credit or debit card product to their end user, we're probably in active conversations with about half if not two-thirds of them. So there’s a huge amount of interest. Now, these large banks obviously operate within a fairly strict regulatory framework, and some of their technical abilities are maybe not as sophisticated as newer challenger banks might be. That means the rate at which they can move is a little bit different, and the time when these products actually go live is going to vary over the next two to three years.
The actual interest of intent is incredibly high, and it's been primarily driven by the fact that these banks are trying to acquire new users. It’s a very sticky product, so you typically get folks in a checking account or savings account, you might send them a credit card. And then if you're a truly large bank, you might then get loan products and mortgage products, which is where a lot of these banks make the bulk of their money off of an individual, less so on the debit, interest and savings accounts. And so, because of that, getting a lot of top of the funnel for these new customers is really critical for them, and they view building sustainability into their product as a very important customer acquisition channel in order to make sure they stay competitive over the next 5,10,15 years.
Besides this pressure coming from the end consumer, are there other factors that are playing in the background?
Brennan Spellacy: This is a heavily regulated industry, and there's beginning to be a lot more regulatory pressure on sustainability more broadly, not just banks, but in most industries. As a result, it's something these banks are beginning to think about from a risk perspective. One of the ways to make sure you stay out of the crosshairs from a regulatory perspective, is to operate as if you're already being regulated, to make sure you're already acting like a good actor or a good faith actor within the ecosystem. And so, there is this interesting combination of top line driving opportunities with new customers as well as regulatory threats that are accelerating the investment these banks are making within sustainable products.
One can't ignore the flurry of greenwashing accusations regarding companies using questionable carbon credits. What is going on in the carbon credit market, and how do you choose the projects to partner with throughout this whole debacle?
Brennan Spellacy: It's a great question. Zooming out, whenever you have a huge amount of capital going to any new market, there's always going to be bad actors. Banking has not been free of scandal, but the way to get around that is at some point, rules of the road are gonna have to be read. We're just beginning to see that now where there's so much attention on voluntary markets, that regulators are beginning to look at the space.
We're actually one of the few businesses that advocates for our ecosystem to get regulated more versus less. A lot of folks are pro-deregulation. There are certain types of regulation I think are very important within carbon markets, specifically as it pertains to the underlying quality of the credit.
Without regulation in place, it’s very difficult to standardize, because there's so much room for interpretation. So because of that, we're going to actually see a lot more regulation coming into the ecosystem, in my opinion.
What sort of rules or regulations do you think the market needs to weed out the bad actors?
Brennan Spellacy: I think there needs to just be more general oversight. It's actually not necessarily related to the rules, but actually the crediting process itself, because a lot of verification standards have the concept of additionality tests. The problem is, these are highly under-resourced organizations, so when it comes to oversight and auditing, they don't have the proper capacity right now in order to enforce the rules they've already put down. I think that's actually the biggest oversight. That's how you end up in situations where they want the adoption of their verification standard to expand because that validates their core business, but at the same time, they need to be enforcing the quality and kind of the underlying efficacy of their standards. And sometimes, these two dynamics are at odds with one another. When you layer that on top of the fact that they're under-resourced organizations, it's just not a recipe for success, right? We're not setting up these verification standards to be successful right now. That regulation could come in the form of public resourcing for these organizations, it could come in the form of the federal government standing up their own series of verification standards. I think that's actually what Canada is doing. They have a federal Carbon Credit program, in addition to the Voluntary Carbon Credit program that operates within Canada. And so, there are a couple of different options.
What do you see next in this new relationship between the finance industry and the climate FinTech sector?
Brennan Spellacy: I think the world we're in right now, having sustainability built into your product is considered a nice-to-have or maybe a bonus differentiator. The world we're moving towards, though, is that this is going to become table stakes. And I think actually, in a very surprising short amount of time, just based on the conversations Patch is having with banks’ representatives, probably like 80% or 90% of the top 10 banks in the world are going to have some sort of product that offers some consumer-facing product that has such a sustainability offering folded within it. And so, we're gonna flip from something nice to have to a must-have very, very quickly.
How is the collaboration with banks going?
Brennan Spellacy: Candidly, there is a lot of education taking place right now, there's a lot of intent and desire and even budget being allocated. But a lot of folks aren't actually sure where to start. And the reason for that is primarily because there's not a lot of precedent. We're in this interesting situation where Patch operates in a category creation business, not a category disruption business. And so, when you're creating a category, you have to create all the educational materials and best practices yourself to kind of show what success looks like.
The approach we've taken is very education-forward. How do people understand what's the difference between a net zero claim, and a carbon neutral claim? What's the difference between the concept of avoiding emissions versus removing emissions? What's the difference between all these different technology types you described earlier? There's a huge amount of education required in order to just begin to have a constructive conversation afterwards.
How do you think the market downturn is going to affect the climate tech sector and the investment going in this area?
Brennan Spellacy: Investment in general is down across the board, whether that's in public or private markets. I have the opinion that climate tech specifically is going to be hit less hard than other verticals, and that's primarily because, again, there's so much energy internally related to these initiatives, now that sustainability is no longer being viewed as a nice-to-have, it’s either a compliance item or a revenue driver. Those are the types of things that don't get caught during downturns.
Although investment dollars from either venture growth, equity, institutional investor perspective might decrease within actual organizations, we haven't actually seen any market softness at all, with the exception of some centralized crypto companies who are becoming increasingly illiquid. But that's more anomalous, the banks aren't really suffering from that. And so for us, we're continuing to double down on e-commerce, banking, private equity which is actually a huge vertical for us. Although there was a huge amount of pain being felt in the short term, at the end of the day, this is still going to be a 24 or 36-month cycle, and a lot of people are still growing towards their 2030 goals, which is two cycles around. Because of the timescales we operate on, I'm fairly optimistic that we're not going to see material change in our trajectory.