Fintech/Analysis/

What is climate fintech and why do VCs love it so much?

Climate fintech is hot right now — and Europe is leading the way, outpacing the US for investment. But is it worth all the hype?

By Amy O'Brien and Freya Pratty

The team from carbon management platform Sweep

VCs love an industry mashup. And their new favourite is climate fintech. 

More and more fintech investors are looking for climate-related investments — and more climate-focused VC firms are also looking into this intersection. 

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, according to data from VC firm CommerzVentures. 

And Europe 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, according to the same dataset. 

France in particular is doing well, bringing in $733m in the first half of this year — largely driven by a $500m round into EcoVardis, a sustainability ratings platform.

So what exactly is climate fintech?

Despite the hype, what actually counts as a “climate fintech” is still open to debate. Is it just fintech in more sustainable packaging, or is it businesses looking to make a tangible difference to the environment?

These are the subsectors that often get pulled into the term:

1. Carbon accounting

This is software that helps companies to measure their carbon emissions, by collating a company’s environmental metrics into a platform and calculating associated emissions. 

They’ll also go in and assess the supply chains for companies, collating Scope 1, 2 and 3 of a company’s footprint (more on what those scopes mean here). 

Carbon accounting is by far the best-funded subsector within climate fintech. In the first half of 2022, carbon accounting startups brought in €673m globally, according to data from CommerzVentures. 

In Europe, it’s an increasingly crowded sector. The best-financed player in the sector in Europe is Sweep, a French company which secured a $73m Series B round earlier this year. There’s a lot of discussion at the moment on what the next move for the industry is — with some investors waiting for the market to consolidate before they pick winners.

2. Climate risk management

As increased extreme weather knocks out business operations and disrupts supply chains across the globe, companies are needing to build climate risk into their day-to-day decision-making.

A new wave of European startups has cropped up to provide businesses with climate intelligence and help them insure themselves against risk. This comes in the form of climate projections; artificial intelligence and satellite monitoring; and insurance products, so that businesses can understand how they may be impacted by various climate threats and how they can minimise losses.

It’s the second best-funded subsector, raking in $385m funding in the first half of this year, according to CommerzVentures data. 

One of the biggest rounds in climate fintech this year was climate insurance provider Descartes Underwriting’s $120m Series B, led by Highland Europe and Eurazeo.

Other notable European players include Cervest, a London-based startup which quantifies climate risk; London’s ClimateX, which provides location-specific climate risk projections for specific industries; and Lisbon’s Tesselo, which uses satellite imagery and AI to estimate the risk and impact of wildfires. 

3. Carbon offsetting 

Carbon offsetting — where a company buys carbon credits that represent the removal, or prevented emittance, of CO2 from the atmosphere — is a common tool used by industries struggling to lower emissions directly, including aviation. Credits are generated from things like direct air capture, forestry projects or algal carbon sequestration. 

The voluntary carbon market is where companies buy credits — as opposed to the compliance markets, where countries trade offsets and credits. 

There’s a lot of startups popping up around the voluntary carbon market, be it ratings services to determine the quality of a credit or APIs, brokers and marketplaces helping companies buy credits. 

It’s a booming industry, but it already has its problems. There are issues around double counting, reliability and the longevity of credits. There’s also no universal monitoring mechanism for the claims companies can attach to the amount of credits they buy, such as being “carbon neutral”.

4. ESG reporting 

Companies and investors are now obliged to track their ESG — environmental, social and governance — performance. 

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.

A lot of the platforms also offer auditing services, hoping to combat the criticism often levelled at the ESG acronym: that there’s little commonality between the metrics taken by different firms.

Players in the subsector include Net Purpose, based in the UK, Berlin-based Atlas Metrics and Sweden’s Datia.

5. Climate crypto 

There’s a number of crypto companies in the climate space. A lot of them are centred around carbon credits, like Switzerland’s Toucan, which tokenises credits on blockchain. 

It could offer some wins, particularly around preventing double counting of credits by putting them onto blockchain and making all transactions transparent — though  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.

In Europe, there’s  SolarCoin, which rewards solar energy producers with coins, and Efforce, a new project cofounded former Apple founder Steve Wozniak, which is working on using tokens to incentivise energy-saving retrofits of existing buildings.

6. Impact investing and sustainable banking

Perhaps the most “fintech” subsector of them all, impact investing and sustainable banking comprises a group of direct to consumer startups that want to make it easier for individuals to put their money into sustainable projects. 

On the impact investing side, there’s the UK’s Clim8 investing platform, which allows customers to invest in stock portfolios that are filtered according to specific climate-related metrics — such as tonnes of carbon dioxide saved, gigawatts of clean energy generated or litres of water saved. Circa5000 (previously named Tickr) similarly allows users to invest in impact-oriented companies and offset their carbon emissions via its mobile app.

Sustainable banking refers to fintechs that ensure customers’ money is being invested in sustainable projects — but indirectly through customer deposits. Some have clearer climate credentials than others.

Paris-based neobank Helios raised a €9m seed round this April for its mobile banking platform, which invests its customers’ deposits in sustainable projects, and Germany’s Tomorrow does the same. Amsterdam’s bunq also has a “green” focus, and allows users to offset their CO2 emission by planting a tree for every €100 transaction.

UK neobank Tandem has rebranded as a “green neobank” after acquiring “green lenders” Oplo and Allium in the last 18 months — but the exact climate credentials of the bank are unclear. 

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, investors tell Sifted 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. 

Not only is carbon credit buyer demand increasing, but the price of a carbon tonne is going up rapidly. Carbon credit prices currently stand at an average of $3 to $5 per metric tonne, but are forecast to rise tenfold by 2030, to between $20 and $50 per metric tonne, according to the latest research. 

“The take rates [the fees collected for each carbon credit purchase] are really high right now, which means there’s huge investment potential for the brokers and exchanges,” says Nick Sando, partner at Octopus Ventures, which recently invested in carbon accounting software startup Minimum. 

This is also why a number of carbon accountancy platforms want to call themselves “carbon management”, letting them expand into more revenue streams — like offering a marketplace platform where they could connect the credit buyers with the offsetting project developers — in future.

“A lot of the accountancy platforms are realising that they could be a conduit to more,” Sando says. “No one’s really done this yet, but it’s on everyone’s radar.” 

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. 

Not the kind of insurance that startups like Descartes Underwriting provide to protect businesses against climate catastrophes by paying out according to the magnitude of the event — so-called parametric insurance, which VCs tell Sifted is hard to do well. But 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.

Climentum, for example, a new climate tech VC firm that launched in the summer, set out from the start that it would never back a software company. 

Software solutions don’t enable sufficient direct impact. We need physical solutions to physical problems,” Yoann Berno, founder of Climentum, says. 

Climate fintech makes generalist funds feel more comfortable about investing in climate, Berno says, because the economics of SaaS and fintech are something they’re comfortable with. 

Tove Larsson, general partner at Impact VC Norrsken, agrees that software alone can’t solve the climate crisis, but says some measuring and tracking software is useful.

“We need underlying innovation that usually comes with hardware, but we also need a massive shift in behaviour by individuals and corporates alike,” she says.

Things like carbon accounting platforms and climate risk software can also help point out which hardware should be prioritised, Larsson says. “Software is critical for measuring and tracking — if we don’t know where we’re at, how do we know what to address, and which hardware solutions should be prioritised.”

Heidi Lindvall, partner at climate-focused fund Pale Blue Dot, agrees that some software is useful. 

“Personally, I see the most impact in setting up new financial structures to replace the old polluting ones,” she says — platforms that can help people direct savings and pensions towards greener investments.

So is an influx of capital into climate fintech good?

“Yes, in general, it’s good,” Larsson says, “but one also has to be cautious to make sure that capital goes to high-quality initiatives.”

Amy O’Brien is a reporter at Sifted. She tweets from @Amy_EOBrien and writes our fintech newsletter you can sign up here

Freya Pratty is a reporter at Sifted. She tweets from @FPratty and writes our climate tech newsletter you can sign up here

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Lee Banks
Lee Banks

Things like carbon accounting platforms and climate risk software can also help point out which hardware should be prioritised