Maria Lupse
Finance Innovation
Many so-called sustainable or impact FinTechs have emerged in recent years, sharing the ambition to support financial players in their environmental transition and contribute to the reduction of their ecological footprint.
From an external point of view, differentiating these multiple players and discerning their particularities or specificities is particularly difficult, as the French ecosystem of FinTechs focused on sustainable development or environmental impact, is illegible to a neophyte. There are two main reasons for this.
On the one hand, it is an ecosystem where competition is fierce, with a multitude of players positioned in the same market segments, making it difficult to read. On the other hand, the sustainable finance field is emerging, characterized by a lack of harmonization of processes, standards, and methodologies.
This situation opens the way to many actors and approaches, making the ecosystem all the more complicated to decode.
So-called “green” or “impact” FinTechs cover a wide range of areas, including but not limited to the analysis of the sustainability of assets or activities (carbon footprint, life cycle analysis, etc.), extra-financial reporting (CSRD, SFDR, etc.), the collection and analysis of extra-financial data, the decarbonization of financing and payments, the distribution of green investment portfolios, etc. and the study and prediction of climate risks.
Let’s take a few examples to illustrate our point:
- Calculating the carbon footprint is a valuable tool for assessing and reducing a firm’s environmental impact. Many FinTechs offer an analysis of the carbon footprint of investments, assets, or financing. (To name a few: Greenly, Sweep, Carbo, Cabometrix, Traace, Sami etc.) However, there are many points of disagreement between them. Whether it is the calculation methodologies used (Greenhouse Gas Protocol, Task Force on Climate-related Financial Disclosures, Science Based Target initiatives, etc.), the assumptions that are sectioned (in cases where data are not available, for example), or the estimates made.
We can, therefore, legitimately ask ourselves the question: How do we find our way around this multitude of actors and methodologies.
- Another notable example that corroborates our remarks is extra-financial reporting. This segment of sustainable finance is probably the one that has been targeted the most by FinTechs (we can mention Greenscope, Sweep, Fingreen.ai, Apiday, Namr, Sustainsoft, Simpl etc.), and it also attracts many other players such as consulting firms. This can be explained by the regulations that have been imposed on financial players (CSRD, SFDR, European Taxonomy), which require them to report information on environmental, social, and governance (ESG) aspects, but can also be explained by a growing demand from investors for reliable and comparable ESG information.
The extra-financial reporting market is crucial for assessing and comparing the sustainability of companies, but it is surrounded by controversy due to the complexity, lack of standardization, and variable quality of the data reported. Indeed, there are many non-financial reporting standards, some mandatory (CSRD, for the European companies concerned), others are not but become essential, such as the ISSB (International Sustainability Standards Board), the CDP (Carbon Disclosure Project), the GRI (Global Reporting Initiative). All these standards provide guidelines for structuring the collection and processing of the various data that will form the non-financial report. However, the latter do not retain the same classifications and levels of detail, a notable example concerns the analysis of double materiality (double materiality underlines that the two dimensions, financial and impact, are interdependent and must be considered together), which is only required by the CSRD and the GRI.
In addition, the many players positioned in this segment, each or almost each claim specificities in the typology of players or assets analyzed. Some deal only with listed/unlisted companies, others focus on funds, and still others only on infrastructure assets.
Once again, the lack of standards and harmonization, coupled with a multitude of players positioned on the market, creates considerable complexity, both for companies subject to this reporting, in their choice of methodology and partners, and for individuals, when it comes to comparing two institutions/companies fairly.
- A third and final example of what we are talking about is the extra-financial data market. Vital for the financial sector, ESG data not only makes it possible to report and comply, but it also improves transparency, decision-making, risk management, attracting investors, and communicating commitments.
ESG data is essential to develop and manage a sustainability strategy, but it can be very complicated to capture and compare. First of all, there is a vast plurality of non-financial data providers. Indeed, the latest “ESG data mapping” carried out by the Louis Bachelier Institute includes more than 180[1] “data providers.” Some of these data sources are public, others private, and some only deal with primary data or climatic, satellite, physical risk data, etc. Furthermore, the level of granularity between the different data providers is not the same, thus opening the door to differences in interpretation of the same asset/company, depending on the data provider chosen.
This translates into the fact that the companies subject to it use many data providers at the same time, thus inflating the budgets dedicated to non-financial data.
Again, this brings complexity and a difficult reading of the sustainable finance sector. On the side of companies, the question of the choice of data providers arises, the individual can legitimately wonder if the data reported is transparent and reflects reality.
In conclusion, the sustainable finance market is booming, France is a promising country, where many players and many to come. This field has been driven by awareness coupled with strict regulations and a growing demand for ESG transparency. FinTechs play a key role in this, providing advanced technological solutions to automate, standardize, and streamline regulatory obligations and sustainability analysis while providing innovation in processes.
However, the field remains young and under construction, with many fundamental debates, disagreements, and differences of interpretation that persist. There are many entrepreneurs who want to take up the subject and the opportunity. The combination of all these factors makes sustainable finance a difficult field to grasp.
The lack of clarity of the sector, and its cognitive complexity should not limit its development. This is why it is necessary to promote dialogue, harmonization, and interoperability between the different solutions in order to meet the challenges of sustainable finance, which are numerous and complex.
[1] https://www.institutlouisbachelier.org/cartographie-donnees-esg/
