Sustainable finance is an integral part of the economic future. In recent years, it’s been on the radar as the European Commission set out to achieve the Green Deal. The new directive is designed to reduce carbon emissions and limit environmental impact. Green finance can accelerate the process by redirecting investments to sustainable initiatives and raising awareness.
Since the start, ROCKIT - Fintech and Sustainable Innovation center, has been shedding light on the challenges and opportunities of green finance. At the Fintech Inn conference, ROCKIT gathered experts from different financial fields to discuss and showcase the possibilities and possible growth of sustainable finance.
In the current economic climate, it’s crucial to bring green initiatives and projects to the table. Unlike traditional, sustainable finance considers ESG (environment, social, and governance) when making investment decisions, limiting the negative effect on the environment and people. While there are many opportunities for sustainable fintechs to take, sustainable finance is still in its infancy, putting many obstacles ahead of the road.
Green finance opportunities start with data analytics
Although investments in green finance are growing, the majority of sustainable finance projects are in the data field. Dominykas Stankevičius, an Investment Associate at Launchpad Capital, a venture capital firm, sees the current sustainable fintech as a technological enabler for future sustainable finance.
“The clear trend is that the majority of Europe’s sustainable finance companies work in data analytics. They help commercial banks and corporations to become more sustainable by using open data and other sources of information that can be found in the market,” he explained.
There are great opportunities for other more sustainable businesses to emerge. Based on data, sustainability is becoming a crucial factor in newly launched VC funds. They need now to attract the general public’s attention, and one of the ways, according to Mr. Stankevičius, is to offer high risk-high reward opportunities.
“I believe that the next big test for sustainable fintech is breaking into the retail investment market. But retail investors are usually attracted to the possibility of high yields in short periods of time. Just look at Bitcoin – it is a very volatile market, but volatility also makes investing in Bitcoin engaging. So green fintechs should provide retail investors with similar opportunities of high risk and high return,” Mr. Stankevičius explains.
According to Tee Pruitt, Head of Partnerships at Doconomy, a data service provider for environmental good, sustainability already plays an important role in investment decisions and is a driving force for future investment decisions.
“Sustainability is a huge vector for finance. The change is accelerated by the market draw around ESGs as well as consumer pressure. Also, the impending regulatory structures like the EU’s green regulation will force financial institutions to understand their exposures and do something about them. Financial firms have a dual mandate to get their own internal operations in shape while helping their existing clients and partners to be more sustainable as well,” Mr. Pruitt says.
The lack of regulations - an obstacle or an opportunity?
However, the lack of regulation becomes a limitation when it comes to the local governments in Lithuania or other Baltic states. “Funding for sustainable fintechs is now just starting to emerge, and what is holding us back is regulation,” says Rosvaldas Krušna, Chief Investment Services Supervision Specialist at the Bank of Lithuania. ”The taxonomy of green activities has not been fully adopted yet, so green investments are still a bit of a guessing game. As the regulation progresses, I believe that green investment is going to be as popular in Lithuania as in Western Europe.”
The lack of regulatory guidelines deters many potential projects because it’s risky to start a sustainable business in the finance field without clarity. However, according to Akvilė Bosaitė, Partner and Co-Head of Banking & Finance Practice Group at COBALT Legal, like in any other field – novelty comes before regulations.
“Fintech companies strive to conquer their market share, so sustainability and compliance with ESGs are usually not on the top of their agenda. But there are plenty of examples in the market of fintechs that feel the need to be sustainable without regulation. Ongoing conversations and more green initiatives on the political level will force more financial companies to think of how they are meeting sustainability standards in reality, not just on paper,” believes Ms. Bosaitė.
On the other hand, investors see regulation as an additional risk in an already risky field. “I think that’s a big reason why most sustainable finance companies work in data. Because this way they can’t be regulated, they just help other companies make better decisions. Regulation is necessary for clarity, but it’s not necessarily good for VC investment,” said Mr. Stankevičius.
Mr. Krušna second and added that a clear standard for what is a sustainable financial business has to be defined. “As of now, there are no standards. You can just go and issue sustainable bonds tomorrow without much trouble.” But a solution to this problem, according to him, can be simpler than we think. “It’s possible to solve it just by having as much freely available public information as possible. Public information could help differentiate what’s actually sustainable and what’s not,” said Mr. Krušna.
Panelists agreed that we would see more initiatives emerging in the next five years, but for them to successfully establish, the market needs some changes. There have to be third parties involved to prevent greenwashing, guidelines should be simplified to accommodate everyone, as well as changes in the way we manage open data. But one thing is clear – sustainability will continue to become a paramount part of finance and investments.
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