The climate crisis is a defining challenge for Asia and the Pacific, which as a region is the most vulnerable to global warming, and a significant contributor to its cause.
Yet, it is not all doom and gloom. Driven by a combination of climate change, finance, and digital technology —collectively known as ‘climate fintech’ — the financial services industry is preparing to address these challenges and capture opportunities for transitioning to a more sustainable economy.
Climate fintech holds promise for leveraging this digital transformation and retooling the financial sector to benefit people and the planet. By taking the edge off climate change risks, it can support climate action by unlocking the potential of climate finance and realising the Paris Agreement goals for reducing greenhouse gas emissions and improving resilience to climate change.
Driven by the supportive policies and government initiatives, many climate fintech business models are emerging. Applying digital technologies and financial product innovations can help overcome climate finance challenges by connecting banks, insurers, nonbanks, start-ups, big tech firms, technology providers, regulators, and consumers.
Important areas where climate fintech impacts are already visible include:
Climate risk assessment: Software-as-a-service cloud-based platforms using big data, artificial intelligence (AI), machine learning, and sensors coupled with remote sensing technology are helping financial institutions to geospatially map specific loans to specific climate risks. Besides enhanced and transparent disclosures of financial risks regulators and investors face, these technologies help users make informed decisions on monitoring loan portfolios. They also improve the comparability of “green” financial market product offerings and borrowers’ understanding of the risks along the supply chain and where they concentrate.
Aside from satellites and more traditional technologies such as cloud and public databases, insurance companies are investing in the latest robotics and drone technology to provide previously unavailable data on agriculture, buildings, and property boundary inspections. The risks of floods, rising sea levels, deforestation, and wildfires can be automatically factored into the latest climate models and attendant risk analysis of projects and investments, impacting allocation and cost of risk capital. The data enhance underwriting, assist in developing parametric products, perform loss and damage assessment, and expedite claims payments.
Deployment of capital: Using big data processing, AI, and machine learning operations and ensuring their integration through an enabling platform provides comprehensive analysis of structured and unstructured data that can transform environmental, social, and governance due diligence and profiling. The net effect will provide long-term certainty, transparent valuations for corporates, and better pricing for financial institutions and other investors.
Digitisation of lending and tax incentive structures using fintech solutions has eased debt financing deal structuring for climate investments, such as peer-to-peer lending for capital accessibility.
Banks innovating in this area are leveraging artificial intelligence and using alternative data to design eco-friendly lending models and issue green bonds. Blockchain-based platforms are becoming popular for transparent and intermediary-free green loan issuance.
“Neobanks” –or challenger banks offering some or most of the services of a traditional brick and mortar bank with a purely digital model – have developed ethical, transparent, and simple products with positive environmental impact, such as decarbonisation tracking of shopping, automatic offsetting of purchased items, and tree planting credit cards.
The ripple effect is reorienting capital flows into sustainable investing, switching investments from coal to renewables, and financing a just transition to a lower carbon economy. In addition, it will help manage fiscal and financial risks arising from climate change—resource depletion, environmental degradation, physical hazards, and social issues.
Carbon credits and offsets: Carbon tracking fintech providers now enable businesses to understand how the carbon impact of their transactions. And carbon offsetting providers are helping them to compensate for the emissions. The basis for calculating emissions is daily payment transactions tracked for carbon footprint using open banking tracking software. Businesses offset emissions by paying a fee based on the cost of the emitted carbon attached to the product and the transaction. The fee is reinvested in carbon-offsetting projects to provide a net-zero balance.
Financial institutions are adopting ‘robo-advisors’ and artificial intelligence-driven software to optimise portfolio management and overcome opaque carbon accounting. In addition, climate fintech helps create additional incentives and accessibility for climate-conscious stakeholder participation.
Regulatory technology for enhanced observance: Regtech solutions can enable financial institutions to measure and assess the impact of climate risk regulations and policies by expanding regulatory reporting and incorporating climate-related disclosures. In addition, regulators can use hypothetical data sets created with the help of statistical tools for generating climate-specific scenarios and conducting simulations for better stress testing to enhance climate risk management and governance.
The disruptive innovations emerging in climate fintech are refreshing. In this green journey, these solutions can give “wings” to financial institutions and consumers to better manage risks, secure efficiency gains, and make informed choices on spending, saving, and investment.
Arup Chatterjee is Principal Financial Sector Specialist, Sustainable Development and Climate Change Department, Asian Development Bank. His current work involves financial, governance, risk management, and regulatory reforms across different industries. He has held stints with the Bank for International Settlements in Switzerland, and Insurance Regulatory and Development Authority of India.