Can fintech help consumers make a difference in the fight to save our climate?

January 12, 2020 | Nicole Anderson

A new year and a new decade offers a great opportunity for consumers, investors and financial institutions to explore the drastic changes required to help save the planet and protect our environment from the grave threat of climate change. 

But, as we transition into 2020, like many others, I am deeply saddened by the ongoing catastrophe seen in Australia over the last few weeks.

14.5 million acres have been affected by raging fires, emitting 250 million tonnes of CO2 destroying 500 million animals. The carnage is impossible to conceive.

Despite the political arguments – somewhat like the growing onset of wildfires – which continue to rage as to whether climate change is in any way responsible for the growth in natural disasters, individuals are becoming increasingly  frustrated, fearful and mistrustful of authority. Some of this angst is played out in protests and banner-thrusting public forums, but for the majority of individuals, the question most commonly asked is: ‘what can I do to make a difference’?

Taking action implies consumer choice

There is so much complex information available for the average consumer to interpret when it comes to climate change and their personal impact on the environment. Very few are equipped to fully understand how their lifestyle choices – where they shop, what they consume, how they travel and what services (energy, data, water) they use – can make for good green decisions. 

About 70-80% of Europeans live in high-tech accommodation, located in close proximity to work and personal, social and community services. Consumers are moving towards valuing products and services based on their resource efficiency, as social status is now linked to sustainable living. The most successful firms are those offering eco-innovations, which enable consumption and drive the economy, but result in minimal environmental impact. 

But if there is no choice or competitive option – then taking action is much tougher.

Green finance and the link to consumer choice

So what does this mean for consumers when it comes to financial decisions, the services and financial products they use? The answer is that information and choice is asymmetrical and complex. The finance industry is in transition in how it copes with a low carbon reality. Many aspects of the financial value chain have to be reimagined to serve the best interests of the environment and communities.

Capital markets and insurers at the top of the value chain have to contend with transitional risk:

How industry addresses its operations to provide greener choices is a growing concern for consumers. 

This can lead to a change in demand for products and services (e.g. diesel cars) and in investment demand (e.g. for assets heavily dependent on fossil fuels). This is called substitution risk, where consumer and investor perceptions of potential benefits, costs and impacts of certain behaviours begin to shift. This in turn leads to transitional risk – an economic implication for capital markets as outlined below:

The implication is for the asset management, investment management and  insurance industries to grow. Consumer pressure is one trigger for change along with regulation. Ultimately, financiers need to be accountable to these stakeholders and the industry players they support through financing.

Consumer demographics are changing and creating greater pressure on the investment industry:

Millennials are said to be the wealthiest generation in history. The World Bank forecasts that the collective annual income of millennials will exceed US$4 trillion by 2030.

Another UBS report estimates that this generation could be worth up to US$24 trillion by 2020. These factors have put a spotlight on the investable sectors and companies that target this age group. Added to this, as per a Morgan Stanley survey released this year, 85% of investors say they are interested in sustainable investing. Most of them (49%) say they are “very interested” while 36% say they are “somewhat interested”. 

A sustainable saver could have 82 x as much effect on climate change as someone who takes the train instead of driving or 37 x that of someone who reduces their meat consumption to just one meal per week (Nordea 2019 study).

However, the mainstream investment industry is ill-equipped to satisfy this shift given its complexity and complex value chain. Financial products have not evolved fast enough to educate and embed the needs of conscious retail investors and savers.

Investors are and will look to invest directly into sustainable projects as impact investing gains ground through disruptive global propositions.

Traditional or established businesses stand to alienate consumers

One approach to developing a green and sustainable economy is the ‘circular economy’. In contrast to a traditional ‘linear’ economy (make – use – dispose), in a circular economy, the value of products and materials is maintained for as long as possible. Waste and resource use are minimised. Resources are kept in use for as long as possible, reused, repaired or recycled, then brought back into use. A ‘product as a service’ approach is a common feature of many circular economies.

But to make this move, viable government policy is required to drive further changes in behaviour. These policies need to include legislation involving price signals such as the taxation of consumption of environmentally- harmful products and services rather than direct regulation. Consumers have provided early adopter markets for the new, developing technologies and consumer products. Ultimately this mix of regulation, taxation and advances in technology can deliver a net reduction in consumption for society overall.

Sustainable finance: a new era of consumer oriented green fintech

Green fintech can work in many ways to aid the transition and serve consumers who want a greener financial choice in products and services. 

This will happen through changing consumer behaviour tracking and nudging consumers towards more climate-positive spending and behaviours. Some of these include:

  • Microfinance and insurance can support investing in climate mitigation/adaptation activities and enhance climate resilience.
  • The use of advanced data analytics to better understand and price risk can lower the costs of providing financial services, making previously unbanked/uninsured individuals more attractive to providers.
  • Data analysis and distributed ledgers can reduce the cost of issuing bonds and other securities. This makes it easier for smaller businesses and projects to receive funding currently only accessible by larger issuers.
  • Digital platforms and data analytics enable issuers, fund managers and others to target retail or institutional investors with an appetite for green and sustainable finance investment.

Through the transition to a low carbon world, organisations large and small, have key roles to play, and so too do individuals. 

Finance is built on pillars of financial and human capital. Change is led, ultimately, by individuals – not by organisations. The change we need is to be found in innovative thinking and understanding of the critical role that financial products, services and tools have to mobilise capital to support the transition, address climate-related risks, and direct customers and communities in their green choices. In this way, a new era for fintech is just beginning.

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