Revamping fintech in a warming world

A new digital wave for a climate-resilient future

Digital economies in Latin America, Africa, and South/Southeast Asia are at an inflection point, bursting with new opportunities. For example, internet and mobile broadband connections in Africa have rapidly grown while digital solutions for critical sectors like agriculture have increased exponentially. Simultaneously, these geographies are the most climate vulnerable, with climate impacts intensifying rapidly, for instance, raging wildfires in Algeria, torrential rains in Nigeria, flooding in the Democratic Republic of Congo, and landslides in Colombia.

There is a compelling opportunity to build on the growing digital wave in emerging markets while tackling the challenges of climate change. Historically, financial products, such as mobile money, and climate products, like climate advisory services and adaptation decision-support tools, have stayed in their own lane. However, it has already been shown that bundled products that integrate information and services from multiple sectors (e.g., finance, climate, and health) have the highest impact on the world’s most vulnerable. The time for accelerating fintech-enabled climate “smart” product innovation is now.

Introducing the Climate-Smart Innovation Hub

The Climate Innovation for Adaptation and Resilience (CIFAR) Alliance began to articulate the opportunity at the nexus of climate and fintech through their Digital Finance for Climate Resilience (DF4CR) action framework. This framework outlined the landscape of pioneering solutions, including insurtech, online marketplaces, digital loans, and digital payments that build resilience to climate change and help households adapt. 

Now the CIFAR Alliance is stepping up this work. With support from the Mastercard’s Center for Inclusive Growth, the Alliance is launching a Climate-Smart Innovation Hub (CSIH), helping to catapult fintech products into the climate space.  Joining forces, the CSIH will be co-led by Mastercard Center for Inclusive Growth’s Director for Knowledge and Insights, Ali Schmidt-Fellner, and BFA Global’s Climate Economist, Tyler Ferdinand. The Hub’s primary goal will be to carry out a learning agenda to help establish the climate-smart product field, showcase innovators at the local level, develop a gallery of climate-smart products as proof of concept, and co-create a toolkit to facilitate product managers’ climate journeys. 

But what is a climate-smart product?

While there is no clear definition of a “climate-smart” product, iDE has defined these as “…technology that boosts profits and is good for the environment.”  Bio<code has also said that “…Climate Smart food products have their life-cycle climate impacts actively tracked and reduced according to the emission reduction goals set in the Paris Agreement.”

Yet, these definitions remain high-level and/or very industry specific. To provide an actionable overarching framing, we can pull from what the non-climate product management field has already learned as best practices and translate this into the climate space. For example, digital products have three dimensions in the product management triangle: business, technology, and design. Technology determines feasibility, and the business dimension and user design determine desirability and impact. More recently, the data dimension has been integrated, referring to data-driven products that learn and evolve based on user preferences and needs. What if we added a climate corner into the product management triangle to create a product management diamond? 

Building from Dan Olsen’s definition of product-market fit, the product-climate fit would mean that you have built a product that creates significant value for climate-vulnerable ecosystems and the communities that rely on them. This means that your product meets real planetary needs (e.g., Sustainable Development Goals or the Paris Agreement) and does so in a way that is better than available alternatives.

The Climate-Smart product problem and solution space

Beyond climate-product fit, we can begin to explore the problem space – what specific pain points the product could solve for – and the solution space, i.e., how the product will actually achieve it. 

For a fintech-enabled climate-smart product, the problem space would focus on increasing financial health while encouraging greenhouse gas emission reduction, building resilience to climate impacts (e.g., floods and droughts), and alternative/more sustainable livelihoods. Climate-smart products offer the potential to provide the much-needed finance for adaptation and building resilience in the communities that need it most. 

For example, a soon-to-be-released BFA Global study shows that 70% percent of the most climate-vulnerable municipalities in Mexico have very low levels of access to financial services. Without financial inclusion, these communities may be part of the estimated additional 130 million people that will be pushed into extreme poverty by 2030 or the 2.3 million people a year that will perish in poor countries due to climate impacts. Additionally, a recent study shows that financial inclusion in Bangladesh and Nepal is important for adaptive capacity, allowing vulnerable populations to diversify their livelihoods, access climate-resilient tools and services, and build weatherproofed infrastructure. 

In the solutions space are products that purposefully integrate climate considerations into digital products and vice versa. There are many exciting models in waste, solar energy, blue carbon, e-mobility, agriculture, insurtech, aquaculture, wearables to combat extreme heat, cold chains, and many others powered by pay-as-you-go systems.  The DF4CR articulates the solution space in its framework for action. The voluntary carbon market (VCM) is an excellent example of a segment of the solutions space for innovators. Estimated to be worth USD 50 billion by 2050, the voluntary carbon market can provide additional income to suppliers of carbon credits (e.g., farmers integrating trees into fields or seaweed farming). Products that assist in these nature-based solutions and are climate savvy can plug into the VCM, using income from credits to help subsidize implementation costs and make unit economics work for small projects. 

Why now?

COVID-19 showed how important financial inclusion is for economic resilience. Similarly, financial health will be necessary for macroeconomic climate resilience. Climate change is a crisis multiplier, exacerbating natural resource depletion, food insecurity, and conflict. Fintech products that integrate climate considerations can encourage sustainable resource use, resilient supply chains, and conflict mitigation.

Therefore, climate-smart fintech products can help create ecosystems and economies resistant to climate shocks. 

Climate fintech companies raised over $1.2 billion in 2021, a three-fold increase from the previous year. Seventy-five percent of these companies are at an early stage (i.e., they have received USD 10 million in corporate capital). This indicates that the opportunity for building climate-smart products is ripe. 

Impact-driven startups (i.e., focusing on purpose and profit, tech for good, social impact, etc.) are steadily multiplying, with entrepreneurs eager to deliver planet-positive products while increasing economic value for customers. Such approaches are smart for increasing product appeal and stickiness. At the same time, there is a growing emphasis on implementing policies that internalize climate externalities like climate-related disclosures, environmental, social, and governance indicators metrics, and the new sustainable financial disclosures, pushing entrepreneurs to rethink how climate is integrated into product design and outcomes. With more and more users affected by climate change, their capacity to adapt will be essential for their survival and economic growth, and products that don’t address this reality will risk becoming irrelevant.

Building a better future through climate-smart product management

With a focus on adaptation and resilience in emerging economies, COP27 in Egypt made it clear that there is no time to lose in making a case for building a stronger nexus between climate, finance, and digital solutions. The power of the CIFAR Alliance is that it brings under one roof many, if not all, of the types of enabling actors required to inform the emerging fintech-enabled climate products space and translate ideas into action for meaningful and sustainable solutions. With the launch of the Climate Smart Innovation Hub, we are paving the way for a climate-resilient future built on courageous collaboration and cutting-edge innovation. 

The CSIH will host fellow venture launchers, builders, investors, innovators, entrepreneurs, universities, think tanks, NGOs, and other ecosystem players. If you want to join us in this journey, explore our website and follow us on LinkedIn and Twitter. If you have content that you want to share with the CIFAR community, please submit your article, publication, report, initiative, event, or opportunity for consideration through this link. Together, we can build a climate-resilient future.