The rise of green fintech: exploring a new trend

Between digitalisation and sustainability

Two main trends are currently reshaping the financial sector. On the one hand, technologically enabled financial innovation (fintech), resulting in, e.g., new business models, products and services, has deeply impacted the financial sector. On the other hand, the aim to support the green transition urges policymakers to examine effective ways to make sustainability considerations an integral part of financial strategies. So far, these two fields have been treated separately at the EU level. There are currently two separate frameworks that promote and regulate the digitalisation and the sustainability of the financial sector. Nevertheless, there is a raising interest in examining their interconnectedness and exploring possible ways in which digital and sustainable finance can interact with each other.

Fintech activities, such as, e.g., digital banking, robo-advice and crowdfunding, are enabled by multiple technologies that include but are not limited to artificial intelligence (AI), machine learning (ML) and distributed ledger technology (DLT). When these activities are used to intentionally support the Sustainable Development Goals and the reduction of sustainability risks, they are defined as green fintech.

Nowadays, the role of fintech companies is becoming increasingly fundamental in supporting efforts to fight against climate change. In 2023, European companies operating in the fintech climate sphere secured USD 1.4 bn in venture capital.

Fintech solutions can contribute to channelling financial flows towards more sustainable objectives, for example through crowdfunding, by matching investors with environment-friendly companies or projects on digital platforms. There is also an increasing number of platforms being launched on public, private and semi-private blockchains for the tokenisation of carbon and biodiversity offset credits. Furthermore, in 2019, Banco Bilbao Vizcaya Argentaria (BBVA) issued the first blockchain-supported structured green bond, negotiations on which took place on the bank’s internally developed platform.

While fintech solutions can bring benefits to the financial sector, they may also exacerbate some risks. There is currently a rise in technology risks which are linked to the adoption and implementation of AI in financial institutions and non-bank intermediaries, and integration of cloud computing services in their business models. The increase in green fintech activities, especially in the private sector, has highlighted a variety of challenges. One major challenge is the difficulty in collecting comprehensive and high-quality climate-related data, which is essential to obtain accurate outputs. Another significant challenge is related to the environmental footprint green fintech activities may leave behind. The financial services industry is increasingly relying on cloud infrastructures, which are energy-consuming and might impair the achievement of environmental sustainability.

Looking ahead

The rise in green fintech activities, also at the EU level, shows that there is an increased interest in exploring synergies between digital and sustainable finance. International organisations such as the UN have already developed programmes devoted to this.

EU policymakers are expected to create a supportive and enabling environment for (green) fintech solutions while addressing their risks and challenges. Moving forward, a progressive interconnection between the EU digital and sustainable frameworks could benefit key players in the industry as well as regulators and supervisors. A special focus should be put on data quality, consumer protection and efficient infrastructure. In addition, financial inclusion and financial literacy should be fostered to help individuals make informed and more sustainable financial decisions.