Global financial services is being upended by climate change. Enter climate fintech.
The future of tech is global. We discuss it here
This piece first appeared in my Forbes column here.
Climate change is driving rapid, unprecedented, and in many cases unpredictable shifts across our planet. Many of the foundational assumptions upon which we have built our financial services are changing. And fast.
These shifts are turning traditional financial services verticals – insurance, lending, payments and savings - on their head. Enter climate fintech.
Insurance: factoring climate into actuarial models
Insurance fills a critical need by essentially pooling collective risk to protect individual outcomes. But when collective risk changes – as it is because of climate change – so too must insurance policies.
That’s why we’re seeing major dislocations in various types of existing insurance policies. For example, home insurance players are having to reprice risk due to unprecedented fire on the west coast or hurricane damage on the east coast. A home insurance crisis is emerging in many of these regions. Antiquated flood maps ignore expanding risks. Auto insurance similarly is facing new losses from hail or flooding that are beyond historical forecasts.
To underwrite in these changing conditions, innovators are using new types of data. For instance, Kin Insurance (a home insuretech that focuses on climate affected areas) uses satellite imagery to determine the type of roof a home has (which is a predictor of quantum of damage in a hurricane). Similarly, they can use data to change behavior, by for instance warning customer about impending storms and asking them to close their shutters or park their cars in the garage when hail is coming.
Climate change is also causing new insurance needs. For instance, businesses face interruption risk due to a climate event like a hurricane, or flood. Risks are not entirely black or white – think the ski hill in warmer winters or the ice cream vendor in colder regions who might not shut down their operations but simply host less visitors. Here, parametric players are emerging to fill the gap. Descartes (a portfolio company at the fund I work with) leverages satellite data and AI to better predict and price emerging climate risks to businesses for business insurance. Sensible Weather offers embedded climate insurance for the travel space.
Credit: incorporating climate risk into underwriting
Credit providers face new types of risk due to climate change. Like insurance, credit providers will be concerned about asset values because this impacts collateral. For instance, a home mortgage provider – whose loan is backed by the value of the underlying home – will now need to factor totally new climate event risks, including total loss in the event of unprecedented fires, hurricanes or other natural phenomena. Like in insurance, innovators are providing new data. For example, Jupiter Intelligence, offer climate impact data for risk modeling for real estate assets.
Perhaps one of the biggest credit opportunities climate change will present will be in financing new projects that further resilience, adaptation and clean energy. Over the last decade, one of the largest new lending categories has been around solar panels. The solar market in the U.S. has grown from less than half a billion in 2012 to $12b today, and is expected to continue growing in the years to come. This will be one of many areas for expansion. Yet there is much uncertainty in nascent industries with unproven track records. For example, it can be difficult for a bank to finance solar panel loans when there is uncertainty on how long the panels will produce and at what rate – i.e. what the long-term value of the collateral will be. Players like KwH Analytics are powering these new data silos to facilitate credit (and in their case also create insurance).
Investments: making climate a factor in the decision
Increasingly investors are demanding their investments align with their values. One of these values is environmental sustainability. Yet, stock selection based on such factors can be challenging. Players like Ethic or ClarityAI power investors’ ability to understand the climate risk of their portfolio and adjust allocations. Investor tools are finally hitting the mainstream (with different quality levels) in many platforms (e.g. Goldman Marcus and Wealthfront recently launched values driven portfolios).
Some investors (myself included) believe companies that are take stakeholder impact including climate, in their decision making will fare better over the long term. For instance, Generation Investment Management believes that evaluating businesses’ for ESG factors drives insights that lead to superior, risk-adjusted returns for investors. The data bears this out. Per research by McKinsey & Co. companies with long-term outlooks were shown to generate ~47% more revenue on average than comparable short-term oriented companies over a 15 year period –with the bonus of improved revenue growth, reduced costs, higher employee productivity and less regulatory or legal issues.
Increased public and governmental pressure will be a further driver to the creation and proliferation of greater climate-related financial reporting. In the US, the “Climate Corporate Accountability Act” (Senate Bill 260) recently passed the California Senate floor and will require companies with operations in California and $1B+ in revenue to disclose their greenhouse gas emissions to the government, who will then publish the results to create more transparency around corporate accountability and help consumers make climate-conscious decisions about what companies to support. Though the bill isn’t expected to be live until 2024, it is part of a global trend that will force companies to better understand their environmental impact.
As a result, many companies will invest in new technologies to better understand, measure and report their climate impacts to investors and other stakeholders. New players like Novisto and Watershed are offering solutions to streamline this process.
Payments: embedding climate action into the transaction
As the world looks to increase our ability to offset our climate impact, we’ll have to be able to understand it in real time, and pay for it in incremental ways.
Stripe offered an incredible transformation for payments. With just a few lines of code, any technology company (or otherwise) could support a top tier payment experience for its customers.
We will see new applications, embedded in the payment (or checkout flow) that allow incremental, bite size purchases of carbon offsets directly tied to a particular activity. Airlines have been doing this for some time for their product with easily quantifiable emissions. Expect to see this extended to a much broader array of products - from your toilet paper purchase to your dental visit – over the coming years.
Companies like Patch and Nori are examples of this change. Patch’s API-driven carbon offset platform focuses on making individual transactions carbon neutral on verticals like eCommerce, logistics, travel and banking. The first step in having people purchase carbon offsets is to have a real time understanding of impact and an easy way to purchase them in real-time.
Retrospective and prediction
Ten years ago, fintech was a small side show in the broader and more exciting technology industry. No longer. Fintech has moved to the mainstage.
Climate fintech will soon be too.