Green Finance — The Innovation Imperative
I have spent nearly 10 years working in technology enabled innovation of finance — designing, building and launching businesses that have shaped a new way in how financial products can be more inclusive, accessible, understood, and trusted.
The rise of FinTech and its rightful place in shaping this new world of finance, is something I understand extremely well. I was involved in my 1st application financial services license in 2011. Since then I have gone on to innovate business models in payments, insurance, savings and pensions and more recently investment management.
FinTech — a great baseline adoption potential:
The FinTech market, worth approximately USD 305.7 billion by 2023, is likely to see a growth rate of 22.17% during 2018–2023 (Research and Markets, 2019). Whilst this is sizeable, the impact of innovation — measured by customer adoption — is a mixed picture as seen by the schema below.
Innovation has converted or impacted mostly the consumer facing money market (digital banking, payment, lending) but capital markets (wealth and asset management, investment banking and trading) has seen less disruption.
I call this the ‘diminishing innovation return’ paradigm which can be explained by this diagram below:
Innovation Blockers
Customer acquisition is the proverbial thorn in the side of any innovative venture. Customer acquisition is expensive. For a large bank it could cost between $1,500 and $2,000 to acquire a retail banking customer. In lending costs could be in the hundreds, not thousands, with an expensive customer costing as much as $800, which would include the cost of teasers and bonus loyalty points. Many innovators fail to factor this into their plan.
Innovation in finance costs in other ways. Regulatory adherence and licencing can be an unknown path in terms of time and money. I have seen many start-ups misjudge the demands of this on their go-to-market plan.
The other often mis-placed assumption, is that customers are willing to shift allegiance. Financial literacy and knowledge is one thing, but confidence and trust in a provider outside a traditional financial institution is still the largest barrier to entry.
Green and sustainable finance — the innovation imperative
Our planet is in deep distress. Climate change action is imperative. The adherence to the Paris Agreement to maintain temperatures to below 2 degrees C by 2030, is for the most part the driving force behind how finance and financial markets needs to adapt with speed and force.
Sustainable finance is any form of financial service which integrates environmental, social and governance (ESG) criteria into the business or investment decisions for the lasting benefit of both clients and society at large while green finance looks current and future financial risks and opportunities from climate and environmental factors are integrated into mainstream financial decision making.
Green finance now provides the platform for a whole new spectrum of innovation. But the major difference is the ‘David and Goliath’ analogy so commonly used in FinTech, won’t be the way in which the change will come. These changes were mostly instigated or felt at the consumer end of the value chain.
Green finance implies pressure on finance to change from every direction
For the 1st time this ‘pincer move’ on big business is forcing a shift in priorities from financial returns to impact returns on society, our environment and our precious resources for generations to come.
The role of capital markets in assessing how they deploy funding to market participants has a major role to play on the behaviour of market participants on their path to sustainable and greener business.
Regulation has a significant role to play. Interventions from the Governor of the Bank of England and others, are interested in where risk exists in the system and whether it could have financial stability implications if there is a disorderly correction due to rapid changes in asset prices.
They want to see which entities own assets most at risk — for example, which systemically important financial institutions are exposed directly or indirectly to particularly-at-risk assets.
Policymakers and civil society want to know whether we are on track to delivering the transition to a low-carbon economy, in terms of specific companies, sectors and geographies. To do this, they need to know how much ‘committed emissions’ there are from existing assets or will be from planned capital expenditure.
Consumer pressure is at a tipping point, regulation is mounting to monitor, assess and verify projects for their sustainability and impact quotient and traditional financial markets, especially capital markets are at the centre of this change.
Civil society will want to examine whether companies’ rhetoric and action add up, and also whether financial institutions own or are financing companies and assets that are incompatible with climate change and other environmental challenges.
In all of the above is a minefield of innovative potential. Green FinTech is set to become a major catalyst for change in the world of sustainability. Savings products, personal finance, wealth management and banking are all viable candidates for new financial products demanded by consumers. Blockchain, analytics, robotics and quantum computing engines will be useful to institutional capital providers who are looking to evaluate and monitor corporate clients funding requirements and deployment of finance. Insurance and global market trading platforms will need to adapt to new risk and markets associated with the pursuit of a greener planet.
However, the biggest opportunity and challenge will be the move from pure financial metrics such as ‘store of value’ and return, to non-financial metrics that protect and defend precious environmental resources, which in turn impact society as a whole.
I for one am excited by the challenge and to work with those corporate innovators and professional investors who are truly committed to ‘smarter innovation for a greener planet’
