FinTech for the Future: Why VCs invest in carbon-neutrality startups
Companies such as Microsoft and a growing number of consumers offset their emissions by paying for carbon reduction projects. In order to reduce the carbon footprint effectively, offsetting is used in addition to direct measures.
The first step is to lower the footprint. After that, offsetting would apply to emissions that are hard to avoid (eg. heating in winter).
There are two markets for carbon offsets. In the compliance market, companies or governments buy carbon offsets in order to comply with caps on the total amount of carbon they are allowed to emit.
In the voluntary market, individuals, companies, or governments purchase carbon offsets to mitigate their own emissions from transportation, electricity use, and other sources. For example, an individual might purchase carbon offsets to compensate for emissions caused by personal air travel.
It is entirely possible that large parts of the voluntary market will become mandatory, ie. the price of certain products will need to include offsets.
Projects in the following areas are funded by carbon offsetting:
- Renewable energy and energy-efficiency
- Avoiding deforestation
- Reforestation and afforestation (planting forests on land that was previously unforested)
- Carbon capture and storage (eg. using air capture technology such as that developed by Climeworks)
Carbon offsetting has been criticised due to a number of questionable projects. The infamous “Coldplay forest” is often quoted as an example.
To achieve its goals and avoid unintended consequences, carbon offsetting projects must therefore meet some important criteria:
- Be ‘additive’ — only involve activities that otherwise would not have been undertaken
- Permanence — ensure benefits are not reversible, eg. prevent harvesting of planted trees
- Leakage — implementing the project must not cause higher emissions outside the project boundary
- Transparency — accurate calculation of emissions to be offset, and clear and transparent pricing of the offsets
Startup opportunities:
Several formal standards exist to ensure that the above-mentioned criteria are met, such as Verified Carbon Standard (Verra) or Gold Standard.
How can these standards be enforced at scale — and globally? Given the rapid growth of carbon offsetting, solving this problem opens up valuable opportunities.
Technology to capture these opportunities already exists. For example, a carbon offsetting ‘RegTech’ company could monitor projects using high-resolution satellite imagery. It would be able to track exactly when a tree is cut down. Such data could be used to power smart contracts on a blockchain, unlocking payments from an offset funder to a project manager if the tree is still there.
San Francisco-based Pachama is an example for such a carbon offsetting RegTech startup.
Other startups could deploy big data analytics to rate individual offsetting projects and their project managers, thereby predicting the likely effectiveness of projects and ensuring that only legitimate projects are awarded a smart contract.
Project managers could be insured against loss of income, in case their projects are affected by climate conditions such as drought, cyclones, flooding, etc. This could be done cost-effectively at scale by InsurTech companies using parametric solutions. Startups such as France-based Descartes Underwriting are experts at leveraging sensor and satellite technology to design parametric insurance covers.
Another opportunity for startups is the matching of carbon offsetters with projects. For example, Greenly conducts automated analysis of consumers’ carbon footprints using PSD2 account aggregation data. Consumers receive suggestions on how to lower their carbon footprint, and can offset their remaining footprint by funding curated offset projects.
Tomorrow — a green challenger bank in Germany — protects one square meter of rainforest for every Euro that is spent by customers using its Tomorrow debit card. In addition, the bank offers a “Zero” account, promising users to offset one metric ton of carbon emissions per month, ie. the average monthly carbon footprint of a German citizen.
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If you are building a FinTech or InsurTech company helping to Decarbonize our economies, we at CommerzVentures would be happy to hear from you. CommerzVentures is an independent venture capital fund sponsored primarily by Commerzbank Group.
