The current surge in ESG (“Environmental, Social, and
Governance”) investing has influenced a material shift in the Financial
Services sector. Whether it’s the billions of Dollars being invested in green
and sustainable instruments, serious institutional efforts to address ESG as a
risk factor in lending and investing, big banks restructuring themselves to
adopt net zero pledges, or fintechs developing new solutions to address
climate-related issues, all these efforts point to recognition that the
Financial Services Industry can play a major role in addressing ESG objectives.
As merchant bankers focused on Financial Services and impact
investing, Middlemarch Partners believes that ESG-focused fintechs have a
unique ability to achieve rapid growth, deliver ESG-focused innovation, and
attract investment capital to support their efforts to improve the environment
and society while generating substantial returns.
We believe that major financial institutions in their effort
to adopt these ESG tenants, will be compelled either to partner with these
sustainable fintech firms or to invest/acquire them to gain an upper hand with
their industry peers.
VC interest in ESG-related fintechs has surged in the last
twenty-four months. MasterCard issued a report which stated that venture funds
deployed approximately 2.5 times more equity into ESG-related fintechs in 2020
relative to what they invested in 2019 (from ~$0.7B to ~$1.8B). Middlemarch
believes this trend will continue as earlier stage ESG fintechs mature (and
need growth equity) and more innovative fintechs enter the market to address
unmet ESG needs in the financial services industry.
Rise of Climate Fintechs
Climate action – addressing damage done to the environment
by human activities– is perhaps the most talked about and researched topic
among all the Sustainable Development Goals promoted by the United Nations and
embraced by ESG investors and thought leaders. There is no surprise then, that
Climate Tech was one of the fastest sub-sectors to emerge within Fintech. While
there are many interesting segments in this space, we focus on banking and
lending as well as payments, investing, trading and risk analysis. For each
segment, we present unique companies that are building innovative products to
tackle climate change through financial innovation.
Banking
Over the last few years, some of the largest and most
influential banks globally have committed to reducing emissions attributable to
their operations. They have also pledged
to reshape their lending and investment portfolios to produce a net zero carbon
footprint by 2050. Although it remains to be seen how much this ‘Net Zero
Banking Alliance’ can actually achieve among the largest banks, Middlemarch
believes next-generation fintechs are winning the battle for ESG-focused
consumers who choose their banking providers based on the strength of their
ESG-related banking products and their ability to address climate-related
objectives.
One traditional financial institution that is taking actions
to advance ESG goals in a material way is Amalgamated Bank, a US-based regional
bank. It is a great example of a traditional bank focused on sustainability. A
net-zero bank powered by 100% renewable energy, Amalgamated Bank believes in
supporting sustainable organizations, progressive causes, and social justice.
It does not lend to fossil fuel companies, and 24% of its loan portfolio is
dedicated to climate protection loans and PACE financing (e.g., financing for
energy efficiency upgrades, water conservation upgrades). Amalgamated Bank has
made tangible progress in aligning its long-term business to achieving Paris
Climate Agreement targets. Amalgamated Bank offers a strong business case for
how a bank can deliver against socially responsible investment objectives.
A compelling example of a fintech using ESG to market as
well as to address environmental issues is Aspiration Bank, a US-based,
online-only fintech which offers a ‘Spend & Save’ cash management account
(CMA) where the deposits are not used to fund any oil and gas projects. It also
offers a zero-carbon footprint credit card which claims to plant a tree every
time a purchase is made from the card. The bank is set to go public in a $2.3B
SPAC transaction later this year. With celebrity investors like Leonardo
DiCaprio, Orlando Bloom, Robert Downey Jr. and Drake, a multi-million
sponsorship deal with Los Angeles Clippers and a multi-billion SPAC in process,
Aspiration Bank sets the tone for high-profile, ESG-linked fintechs to disrupt
the banking industry by attracting a younger and more environmentally oriented consumer
demographic.
Similarly, Ando, a US-based, online banking platform,
invests customers’ deposits exclusively in green initiatives like renewable
energy and responsible agriculture. By allocating more than $12M of its
customers’ money to green loans since launch, Ando has empowered its users to
make meaningful impact with their savings. Launched in Jan 2021, the Company
announced a $6M seed round in Oct 2021, with over 30,000 customers.
Lending
The financial services sector that has most embraced
ESG-related efforts is Debt Financing.
There have been many green bonds and sustainability-linked loans issued.
In additional to these bonds and loans that are promoted by large financial
institutions, specialized fintech lending companies are emerging that focus on
sustainability and have developed dedicated lending platforms and products to
address the ESG objectives of their consumer clients.
Both Goodleap and Mosaic Inc. are excellent examples of
lending platforms focused on financing sustainable home improvements. Goodleap,
America’s top point-of-sale platform for sustainable home solutions, offers
home upgrades with flexible payment options. With more than $9B in loans
deployed through its platform, the Company is valued at $12B post its recent
$800M capital raise. Mosaic is a leading financing platform for US residential
solar and energy-efficient home improvement projects. The company surpassed $5B
in loans through its platform in July 2021 as well as closed its 10th solar
securitization — more than any other solar loan issuer in this space. Both these platforms offer simple financing
solutions for their customers and are poised to capture a critical component of
the sustainable lending market in the years to come.
Carbon Zero, a US-based credit card issuer, offers a simple
way for customers to offset their carbon impact. The credit card fee collected
by the Company is invested in industry-leading forestry and carbon capture
projects instead of environmentally harmful ones. Users can automatically
neutralize their carbon footprint and achieve a Carbon Zero lifestyle.
Incumbent credit card provider Visa recently announcing a similar card program
called FutureCard which offers 5% cashback on green spending to reward
consumers who demonstrate ESG-supportive purchase behavior.
Payments
Climate Fintechs in the payments segment focus on
influencing the spending and shopping behavior of consumers to help influence
them towards embracing brands, companies, and practices which both are more
sustainable and help reduce their consumer carbon footprints. And while all
these offerings advance ESG objectives, they also help Climate fintechs attract
a key demographic segment and sustain their transaction revenue by aligning
financial transactions with ESG goals.
Ecountabl is a US-based, purpose-driven tech company that
helps consumers shop and spend on brands and companies that align with their
social and environmental goals. Ecountabl seeks to make consumers more aware of
their spending tendencies. Users can connect their credit card or bank account
to Ecountabl so that it can monitor the ESG impact of their purchases.
Ecountabl achieves this by maintaining one of the largest databases in the
world monitoring the level of ESG adoption for brands and employers. The
Company is venture backed with funding from CRCM Ventures.
Meniga, a UK-based Company, focuses on addressing the issue
of carbon emissions produced by consumer spending patterns. It offers a carbon insight platform that
banks can use to inform their customers about their carbon footprint based on
their spending. The platform also helps offset this emission by inviting
customers to take challenges, adopting green products, participating in the
bank’s CSR initiatives, or finding other ways to offset their carbon footprint.
Meniga drives insights from the Meniga Carbon Index to provide accurate
estimations using transaction data.
Alipay, the mobile payment app by Ant Group of China,
launched an initiative called Ant Forest which encourages users to make
decisions that lower their carbon footprint through the spending behavior using
the Alipay app. The resulting reduction in carbon emissions are recorded, and
users are rewarded with “green energy” points which can be used to plant actual
trees that users can monitors using satellite imagery. Ant Forest has helped
over 600 million users plant more than 326 million trees since it launched in
2016.
All three of the examples above focus on influencing the
customer to make better energy consumption choices, rather than help them
offset their emission by investing in environmentally friendly projects. By
putting the customer in charge of their emission’s behavior, these companies
help consumers focus on their own contributions to advancing ESG goals. It appears that these firms are intent on
changing behavior and are leaving the carbon trading investment opportunity for
more institutional investors who are likely to be more effective participants
in that market.
Investing
Asset Management and Wealth Management are key focus areas
for ESG-focused Fintechs. These
companies help individual investors generate a more ESG-compliant portfolio by
either by offering a specialized marketplace to access ESG-friendly investments
or by managing consumers’ portfolios with a focus on composing an aggregate
portfolio that achieves measurable ESG goals.
Raise Green is one of the first green crowd investing
portals in the US that offers investors a marketplace for local impact
investing. The portal helps investors get fractional ownership in clean energy
and climate solution projects. The firm
is focused on appealing to the younger demographic segment which favors impact
investing. The firm completed an angel round of equity financing in April 2021.
There are numerous fintech portfolio management providers
like Arnie Impact and Carbon Collective that offer personalized or pre-built
portfolios which focus on sustainable investments and are aligned to the
personal values and financial goals of the ESG-focused individual investor.
Arnie recently completed its early-stage venture round in September 2021 while
Carbon Collective completed one in January 2021. Both companies offer a new
option for retail investors to build a long-term sustainable portfolio.
Trading
Trading is a sector where fintechs can leverage blockchain
technology to lower costs, reduce intermediary involvement and at the same time
establish exchanges and marketplaces that enable the trading of carbon credits
to advance environmental goals while monetizing that effort.
Aircarbon, a Singapore-based, global carbon exchange
platform built on blockchain technology, bundles carbon credits from different
projects into a single instrument that can be traded on its digital platform.
Unlike the current system of carbon credits trading, where companies purchase
credits linked to individual projects, Aircarbon aims to create and offer
standardized carbon credits instruments via bundling of projects. This approach
could enable a more standardized carbon credit economy which could catalyze
large-scale, institutional commodity trading.
Climate Impact X is another Singapore-based global carbon
exchange and marketplace for carbon credits jointly established by DBS Bank,
Singapore Exchange Limited (SGX), Standard Chartered Bank, and Temasek. It
supports trading of carbon credits created from projects involved in the
protection and restoration of natural ecosystems. The company recently
completed an auction of a portfolio of 170,000 carbon credits connected to
eight recognized forest conservation and restoration projects located in
Africa, Asia, and Central- and South America. The company aims to have such
auctions on a regular basis starting in 2022. The development of an expanded
carbon credit supply via auctions could help the carbon offset market reach
$100B in tradable carbon by 2030.
Risk Analysis
Risk analysis is a Climate Fintech category which has seen
the highest rate of exits and mergers & acquisitions based on a report
issued by New Energy Nexus. Risk analysis companies focus on measuring two
kinds of climate risk data: 1) transition risk, which relates to the process of
transitioning to a lower-carbon economy and 2) physical climate risk, which
focuses on the physical impact of climate change. Both of these risks are
important to investors, and investors rely on these analytical solutions to
guide their investment decisions.
Carbon Delta, a Swiss company, provides insights that
evaluate climate change risk in public companies for investment professionals.
A key example of a company that measures this transition risk – Carbon Delta
calculates ‘Climate-value-at-Risk” which provides forward looking and
return-based valuation assessments for an investment portfolio. By offering a
calculation of the value of the future costs related to climate change, the
company can help influence how investors and operators can direct capital to
less environmentally harmful projects. This company was acquired by MSCI in
2019.
Jupiter Intel, on the other hand, measures physical risk of
climate change at the asset level by using satellite data, artificial
intelligence, machine learning and Internet-of-Things connectivity. The Climate
Score provided by its platform enables users to project the effect of climate
change on a portfolio of assets. Banks, asset management firms, and other
financial services companies can leverage this data to manage risk and allocate
capital to assets that maximize positive climate impact. The Company raised
$54M in Series C venture funding in a deal led by MPower Partners Fund and
Clearvision Ventures in September 2021.
Middlemarch is Poised to Support ESG-focused Fintechs
Middlemarch Partners believe that fintechs as well as
traditional financial services players can use ESG to attract customers who
care about changing how we interact with our environment and each other. Not
only is Middlemarch Partners focused on helping capitalize next-gen financial
services companies that want to focus on environmental objectives, but we also
want to help established traditional financial services companies find ways to
reorient themselves towards ESG efforts.
Middlemarch Partners is also cultivating investors who want
to help lead the charge in ESG-oriented financial services companies. We know those investors are looking for those
businesses that can deliver strong returns and, at the same time, advance ESG
objectives. That is the winning strategy that will allow us all to do well by
doing good.
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