Jul 07, 2021 05:04 PM

Road to COP26: Unlocking the Power of Fintech to Tackle the Global Climate Challenge

Undoubtedly more can be done by the government and regulators to create a better enabling environment for fintech ESG initiatives.
Undoubtedly more can be done by the government and regulators to create a better enabling environment for fintech ESG initiatives.

The financial services industry has a significant part to play in the worldwide mission to foster a greener future, including being a vital enabler of more sustainable investment across the globe. Fintech in particular has demonstrated its ability to solve long-standing challenges facing the sector. Now is the time to harness this same innovation and disruption to help tackle the global climate challenge.

Fintech is offering more choice through greater competition, improved customer experience, and more transparency. There are groups of fintech companies working to solve specific issues too, such as access to finance for SMEs and financial exclusion. Fintechs are scaling up quickly too. There is a growing cadre of well-established companies gaining traction among consumers, SMEs and other parts of the ecosystem. They are increasingly partnering with incumbent institutions who want to harness the new technologies and know-how that fintechs offer.

Fintech is a global industry driving change across North and South America, Europe, Asia, and around the world. China has consistently been a top destination for fintech investment, regularly ranking in the top five countries for the number of deals and capital raised. In 2018 and 2019, over $20 billion was invested into Chinese fintech companies.

The U.K. has a similarly strong track record, which has seen it take the role as a global leader next to the U.S., China and Singapore. Investment in U.K. fintech hit $4.1 billion in 2020, which is more than the next five European countries combined. The U.K. has 10% of fintech’s global market share and it is home to eight of Europe’s 12 fintech unicorns. Adoption continues to grow, with 71% of British citizens now using the services of at least one fintech company.

British fintechs are beginning to expand overseas and tackle new markets. Europe and the Americas are key targets. However, the global nature of fintech means many U.K. companies are looking to Asia-Pacific, and China in particular.

The MoU signed between the National Internet Finance Association of China and Innovate Finance aims to develop the very clear opportunities for partnership between the U.K. and China fintech ecosystems.

Indeed, U.K. business-to-business focused fintechs, which aim to help banks with back-office functions, such as decision support, uncovering fraud and maintaining compliance, are beginning to see opportunities to partner with Chinese financial institutions.

The successes and clear potential of U.K. fintech startups to do business in many other markets, as well as transforming financial services in the U.K., has led to the sector gaining significant support from the successive governments. There is a clear belief that this industry can be a jewel in the crown for the British economy.

However, fintech will need the right support along the way. This was the context for the Kalifa review of U.K. fintech, commissioned by HM Treasury and published in February 2021.

The review produced a set of recommendations which, combined, are designed to give fintech the backing it needs to reach the next stage of global growth. These include the investment needs of fintech, its talent and skills requirements, international expansion support, and necessary regulatory change.

Of course, this review sits in the context of the macro issues of Brexit, economic uncertainty and stiffening international competition. It also considers how the technology sector can help tackle specific problems, including that of climate change and the race to net zero. This will no doubt feature at the U.N.’s Climate Change Conference COP26 to be held at the end of the year in Glasgow.

The policy and regulation chapter of the review recommends a set of key actions to help move forward ESG within financial services and fintech. One of the biggest barriers to developing ESG is data collection. There is little doubt that technology solutions exist to make light work of processing rich seams of data and turning them into useful insight, but a blockage exists because there are no universal ESG data report standards, terminology and taxonomy requirements. To solve this issue, the review recommends that the U.K. should create uniform sustainable reporting standards and terminology, and calls for the creation of a centralized electronic register for ESG data. A further recommendation is to form a common reporting template for the industry. The review suggests possible areas for standardization, such as reporting for climate accounting and benchmarks for how assets under management are scored for ESG factors.

Undoubtedly more can be done by the government and regulators to create a better enabling environment for fintech ESG initiatives. We have to remember that these are complex and global challenges, and that one government or regulatory body acting alone cannot solve these problems. There is a great opportunity here for global collaboration as it is in everyone’s interest to tackle these multi-pronged issues. This could be the next focus for China-U.K. fintech partnership.

In the U.K., we can see promising shoots of green business models within U.K. Fintech companies today. During U.K. Fintech Week in April, we ran a panel discussion looking specifically at green finance, featuring some of the key players in this space, including fintech startup Clim8. The CEO of Clim8, Duncan Grieson, highlighted the need for truly “green” propositions that focus on investing in companies that have a properly positive impact on climate change. Francesca Hopwood Road, from the U.K.’s Financial Conduct Authority, pointed to the need for transparency, as much as tools and innovation, to accelerate green finance.

We are beginning to see these approaches coming to the U.K. Digital wealth managers are leading the charge on helping investors understand the environmental impact of their portfolio. Some startups are basing their entire proposition on green investing, so that customers can choose to invest in sustainable portfolios and are aided by tools such as automatic round-ups to encourage saving and investing.

Research published earlier this year by U.K. bank Triodos, which focuses on sustainable financing, highlighted the market opportunity for green financial services. According to Triodos’ survey, 94% of younger investors (aged 18-34) said they have moved, or are looking to move, their savings and investments to an ethical provider. This group of people will be our future high earners and investors. Their desire to make good returns and invest sustainably, in every sense of the word, can be well-served by new and nimble players.

However, sustainable investments are only part of the answer. For financial services firms to become greener they need to look at the impact of their entire product suite. Reducing their own business’ environmental impact is a start, but the real aim must be to evolve their business models to finance and enable a greener future.

That will be the real test of the next decade, but with the help of global fintech, the industry can rise to the challenge. We cannot underestimate the power of cross-border collaboration. Fintech leaders like China and the U.K. need to use COP26 as a platform to begin the global drive for truly green finance.

What seems to drive so many fintech leaders right across the world is the thought: “it doesn’t have to be this way.” The energy and laser-focus shown by the fintechs who are breaking down long-standing and complex barriers in the financial services sector shows the industry’s potential to solve big problems.

We must help unleash that potential and ensure fintech has the tools it needs to play a truly global and meaningful role in tackling climate change.

Janine Hirt is CEO of Innovate Finance, a non-profit membership-based organization and industry body serving the U.K.'s financial technology community.

This article is part of a series of commentaries, in collaboration with the British Embassy in Beijing, in the run-up to the 26th U.N. Climate Change Conference of the Parties, scheduled to take place in Glasgow in November 2021.

The views and opinions expressed in this opinion section are those of the authors and do not necessarily reflect the editorial positions of Caixin Media.

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