360 views on tech #43: What is climate fintech and why do VCs love it so much?
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What is climate fintech and why do VCs love it so much?
By AMY O’BRIEN AND FREYA PRATTY — Sifted
Climate Fintech seems to be the new trending mashup in the VC ecosystem. In the first six months of 2022, startups that sit at the intersection of climate, finance and tech have raised $1.8bn globally — already 1.5x the total for all of 2021. It is Europe that is taking a global lead in the sector. In the first half of 2022, European climate fintech startups raised 3.5 times more than their US counterparts — $1.4bn versus $401m.
What exactly is climate fintech?
It is difficult to determine if it is just fintech in a more sustainable packaging, or if it addresses businesses looking to make a tangible difference to the environment.
These are the subsectors that often get pulled into the term:
1. Carbon accounting - software that helps companies to measure their carbon emissions, by collating a company’s environmental metrics into a platform and calculating associated emissions. Carbon accounting is by far the best-funded subsector within climate fintech.
2. Climate risk management - a new wave of European startups has cropped up to provide businesses with climate intelligence and help them insure themselves against risk. This is the second best-funded subsector.
3. Carbon offsetting - where a company buys carbon credits that represent the removal, or prevented emittance, of CO2 from the atmosphere. It is a common tool used by industries struggling to lower emissions directly. Credits are generated from things like direct air capture, forestry projects or algal carbon sequestration.
4. ESG reporting - in a similar vein to carbon accounting, there are a number of startups working on platforms that enable companies, or investment firms, to measure metrics which fall within ESG.
5. Climate crypto - there are several crypto companies in the climate space, especially centred around carbon credits. The use of crypto could offer some wins, particularly around preventing double counting of credits. However, alarm bells have been rung over the quality of credits that end up on crypto projects, and whether adding another layer of tech does anything to improve the amount of emissions saved.
6. Impact investing and sustainable banking: a group of direct-to-consumer startups that want to make it easier for individuals to put their money into sustainable projects. Sustainable banking refers to fintechs that ensure customers’ money is being invested in sustainable projects — but indirectly through customer deposits.
What do fintech investors say?
Within all these subsectors, fintech VCs have their eyes on carbon credits as the most lucrative and promising in terms of returns. As more and more industries buy into carbon credits, this will open up a “new financial world” within climate offsetting.
The startups closest to the money naturally offer the most obvious return on investment. So as the demand for carbon credit grows, fintech investors are eyeing up the voluntary carbon market brokers and exchanges that sell the offsets.
However, a number of fintech investors say they’re sceptical about the lack of complete transparency and definitive regulations when it comes to carbon credits — and the lack of guarantee that the project associated with the credit will come to fruition.
But in the eyes of others, this risk is a lucrative business opportunity. Climate credit insurance are insurance products that offer some kind of guarantee on carbon credit deliveries — so a company knows the dollars they’re spending on tree planting aren’t going to waste.
What do climate investors say?
Among climate VCs, there’s a certain amount of scepticism about the extent to which software — and climate fintech within that — can help fight the climate crisis, particularly in comparison to the emission reductions that hardware innovation can bring.
The reality is that to solve climate problems we need physical solutions that answer physical products. However, even if software alone can’t solve the climate crisis, measuring and tracking software can be useful and could help pointing out which hardware should be prioritised.
It is possible to conclude that this influx of capital into climate fintech in general is good. However investors need to be cautious and make sure that capital goes to high-quality initiatives.
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- Smartex, automated real-time inspection for Circular Knitting Machines, raised $24.7M, the round was led by Lightspeed Ventures and Build Collective together with DCVC, SOSV’s HAX, Spider Capital, Momenta Ventures and Bombyx Capital Partners.
- Constellr, space tech startup, raised €10M, led by Lakestar and VSquared together with FTTF, IQT, Amathaon Capital, Natural Ventures, EIT Food, OHB Venture Capital, Next Humanity, and Seraphim.
- LetsBuild , the startup building a digital future for construction, raised €6.3M, from Fortino Capital, KAYA, Matexi and Solar.
- All Gravy, the startup developing a employee-centric payroll solutions, raised €3.2M, from Moonfire, Founders, Upfin and The Nordic Web Ventures and a syndicate of angels.
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