Looking back, 2022 might end up being one of the oddest years for fintech funding in recent memory, with overall investment dropping 38% quarter-over-quarter in Q3’22 and down 64% YoY. Blame the broader downturn in venture capital. At the same time, however, the sector remained the largest target for venture capital investment last year, exceeding $80 billion, though it was still down from its 2021 peak.
No one expects anything major to change in 2023. Fintech remains a growth area for technology innovators, and the fact that the sector has grown more than 10x in just the last decade is proof that consumers and investors alike understand this opportunity and continue to look for new opportunities.
But it’s interesting to see what this slight downturn is exposing about certain segments of the market.
For example, despite the overall down year climate fintech investment is currently on a tear, up 1.5x through the first half of 2022 as more and more investors start to pay attention to the role that innovation needs to play in addressing climate change over the long term, according to a recent report from CommerzVentures, the corporate venture capital arm of Commerzbank AG. Climate fintech — which includes everything from carbon offset credit management, to natural capital accounting and climate-focused decentralized financial services — might just be a segment within a segment, but don’t expect that to last long.
And that’s why so many are bullish on the prospects for green fintech overall, a catch-all term that includes climate fintech and other sustainably-minded financial technology segments. In fact, 2023 is shaping up to be the year that sustainable fintech hits the mainstream.
Why?
Because customers are demanding it. A recent study by Cornerstone Advisors found that as many as 71% of Gen-Z and Millennial consumers want to track their carbon footprint, and a survey from Eurogroup Consulting determined that 67% of consumers demand sustainability engagement from their bank.
This isn’t entirely new; ESG demands have been rising in financial services for several years, driven by increased transparency about business practices and mounting evidence that taking a bigger picture view does not harm overall returns. As of 2018, institutions were managing more than $30 trillion using responsible investment strategies (including factors such exclusionary screening like divesting from fossil fuels to those targeting corporate engagement in sustainable issues), according to Boston Consulting Group, representing a 34% increase in just two years. ESG-focused institutional investment alone is expected to spike 84% by 2026 and will soon account for some 21% of assets under management, according to a 2022 PwC report.
But fintech rising to meet the challenge is a fresh step in this process that suggests greater reach and impact. Because the entire fintech industry was built on “doing things that major institutions weren’t doing.” Early fintech pioneers built the digital banking services that most banks weren’t developing internally. They created the mobile apps that millions of people now use to monitor and manage their finances. And they leveraged technology to bring everything from payments, to lending, to investing and more into the 21st century.
In practice, green fintech is taking many different forms. Stripe is allowing users to automatically deduct a portion of their sales to fund carbon reduction efforts. Treecard is creating credit and debit cards out of wood instead of plastic and planting trees to replenish what it uses. And a range of companies like Aspiration are helping shoppers fund causes they care about by rounding up purchases quickly and easily.
The fact is, today’s users want to know how their spending habits affect concerns such as climate change and how their financial providers are helping / hurting the environment. There’s an opportunity here for fintech to introduce new transparency to the process, incentivize sustainable practices and simplify engagement across the board.
And this is just getting started.
The United Nations has estimated that it will cost between $3 trillion and $5 trillion annually to meet the organization’s Sustainable Development Goals to address climate change and other pressing concerns by 2030. Where will that funding come from? Corporate investment, helped along by green fintech, will play a critical role. And, thanks to a banner year of fundraising, the industry has the capital it needs to grow into this responsibility.
Tim Sprinkle is Founder and Chief Strategist of Layup Content, a marketing firm that works with sustainability and ESG-focused investment funds and fintechs.
