Financial innovation Goes Green

More and more founders and investors are turning to ESG fintechs.

From my spot in the asset management industry, I’ve seen in the past decade the main focus being the passive vs active debate. But now that passive investing has become increasingly dominant, it looks like we’ll need something else to discuss. The next issue could be whether to incorporate values into the investment decision and the industry is developing a range of new products that do this.

Both to meet existing investor demand and create a new market. We’ve seen a renewed and growing focus on Investing which incorporates Environmental, Social and Governance concerns (ESG) over the last few years and this area of the industry looks set to grow further. ESG is a term that is often used interchangeably with sustainable investing, socially responsible investing, and impact investing, although all are subtly different. For many the rise of ESG is linked to more environmental conscious decision making and a more ethical approach to capitalism.

As we enter the largest intergenerational wealth transfer ever from baby boomers to millennials, it is likely that the wealth management sectors new client base will think about their investments differently. Currently the industry looks at investment as a simple payoff between risk and return, but younger (and older!) consumers of financial products are interested in more than simple financial metrics and often look to engage with their investments. Fund managers and platforms have been developing products to meet this demand. We now have products that are explicitly green investments where ESG factors contribute to the investment decision.

Products that are impactful where the intention is to generate positive social benefits alongside a return on capital, and the more holistic approach of values led investing, where consumers can invest in alignment with their ethics. This product universe is growing every day, but is attracting increasing regulatory scrutiny.

As a forward looking regulator the FCA announced last year that it would be supporting innovative firms that are looking to bring services to market that will aid the UK’s transition to a low-carbon economy which will support the growing ESG ecosystem. Indeed with Regulatory support London can become home of the 'green' ginance industry as well as fintech.

Timed to co-incide with Fintech Week, but also co-inciding with recent attention on all things environmental the FCA this week announced the first cohort for its first green accelerator. The snappily titled ‘Green Fintech Challenge.’ The challenge was launched last year, and applicants included start-ups, incumbents and technology providers.

After the success of Project Innovate which is now in its fifth year and copied across the world, the FCA has looked at how it can help firms that have propositions to help us move to a low carbon economy. Just nine firms have made the cut for round one, with a list of services designed to make sustainable finance either easier or less expensive. With a range of ideas and services being included in the first batch and of course some mention of Blockchain (This is FinTech after all) and just like in Project Innovate we see both FinTech challengers and legacy institutions looking to the regulator for advice in product development.

The firms are split between a sandbox environment where they are conducting live testing of financial products, direct support for product development and an advice unit which will aides route to market.

The firms include Barclays (Direct Support), who are developing a platform which aims to connect accelerators, fund managers, institutional investors, investor networks, and wealth managers for impact investments.

Plenitude.io (Advice Unit) which is an ethical robo-adviser which allows users to incorporate their values into their investments plan. Digital Platforms are likely to be the way that end investors deal with ESG investments, and it is possible that robo-advice could have some impact on the transition to lower carbon investments.

Enian (Sandbox) a machine learning tool that uses live satellite data and draws on Enian’s data library of 100,000 commercial solar photovoltaics (PV) and wind power assets to predict investment returns for greenfield projects.

At the same time the FCA launched cohort 5 of its regulatory sandbox with 29 firms accepted.

With a consensus forming that climate change is likely to fundamentally transform the economy it is likely that interest in this sector will grow. The FCA is constantly assessing the impact on the markets and institutions they regulate seriously, and although this is considered a trial project, I would predict a second larger cohort launching in the next twelve months.