Long reads

The Green Fintech Taxonomy: an industry response

Hamish Monk

Hamish Monk

Reporter, Finextra

On 29th November 2021, the Green Digital Finance Alliance (GDFA) and the Swiss Green Fintech network unveiled the world’s first green fintech taxonomy. By issuing a classification, the GDFA intended to further stimulate the green fintech market – giving policy makers, investors, and other market actors access to the firms more easily.

The taxonomy, however, was only preliminary. Upon its release, the GDFA called for industry feedback on the document, with the aim of arriving at a final, improved iteration by the first quarter of 2022.

In response to this invitation, Finextra and ResponsibleRisk founder, Richard Peers, conducted a survey of financial services players from around the world – including the Bank of Spain, ESG nature data analytics platform, NatureAlpha, green regtech, Greenomy, environmental consultant, Ecosulis, and environmental data company, Connect Earth – to source an international perspective on the taxonomy. The following editorial summarises the findings.

Does the taxonomy use the best categories and descriptions?

Here are the green fintech categories proposed by the GDFA:

  1. Green digital payment and account solutions
  2. Green digital investment solutions
  3. Digital ESG-data and -analytics solutions
  4. Green digital crowdfunding and syndication platforms
  5. Green digital risk analysis and insure-tech
  6. Green digital deposit and lending solutions
  7. Green digital asset solutions

Most organisations interviewed by Finextra and ResponsibleRisk felt this classification closely reflected the innovation currently underway within the space. A ‘colour-coded’ line, however, could be drawn between that which is ‘greening finance’ and that which is ‘financing green’.  

Vian Sharif, founder, NatureAlpha, noted it is important to recognise that many green fintechs will not fall into just one of these seven categories; they may offer solutions that span several. Carbon footprint calculator, Connect Earth, for instance, sits in the ESG data and analytics solution category, as well as the payment and account solutions category.

Paul Jepson, head of innovation, Ecosulis, felt the category titles could be clarified: “For instance, is ‘green digital payment and account solutions’ the same as ‘impact accounting services?’” he asked. “It currently covers technologies which enable people to account for their carbon footprints. In the future it may be able to account for people’s nature positives, also.”  

Jepson suggested other title alterations, namely: “Automated green investment advice” instead of “digital investment solutions” and “green finance analytics”, as opposed to “digital ESG data and analytics solutions.”

Ultimately, the question is whether the categories are for those already steeped in the world of finance, or whether they should be made more comprehensible for those outside it.

Are the categories missing any elements?

There are at least three missing elements:

1. Regulatory reporting

Alexander Stevens, CEO, Greenomy, commented that while the taxonomy was “mutually exclusive and collectively exhaustive,” it would benefit from bringing out “regulatory reporting” – a key issue within the ESG-data and analytics solutions segment.

“On the one hand you have voluntary ESG reporting, and on the other you have mandatory ESG data, for the purposes of compliance," he said. "There are different methodologies to track each, and green regtechs to streamline the process."

Incorporating regtechs was suggested by Connect Earth, too. Indeed, regtech has a definite green dimension – particularly as directives like SFDR come to the fore.

“I believe there will soon be an increasing number of regtech-specific products that are purely dedicated to educating businesses on expected regulatory impacts,” predicted Alexander Lempka, co-founder, CEO, Connect Earth.

It is true, there is limited information on how sustainability regulations will impact businesses – from supply chains, to transport, to logistics. The regtechs poised to bridge this knowledge gap should be given a greater acknowledgement in the taxonomy.

2. Sharper dividing lines

Lempka also argued that the digital asset solutions category is somewhat ill-defined. “It depends on what it actually covers,” he argued. “When it comes to deposit and lending solutions, we all know what links to the data of companies, but if you look at asset solutions, they could link to anything – reward systems, offsets, data incentivisation schemes, and so on.”

“Firms in the crypto space, for instance, could sit in both the digital asset and the payments bucket,” added Nicolas Carmont Zaragoza, co-founder, CTO, Connect Earth.

In short, a strong contrast between the categories and their descriptions – to reflect the full range and scope of crypto and DeFi potential – would reinforce the taxonomic breakdown.

3. Eco blockchains

The digital asset solutions category may also benefit from a reference to ‘eco blockchains’, which are just emerging, and are environmentally conscientious about their energy sources, noted Jepson. “You can't buy a green solution on an unsustainable blockchain,” he said.

Looking ahead, this area is likely to oversee the tokenisation of entire populations of animals, and swathes of land. The development, already underway, could be referenced in the GDFA report. 

Summarising the overall approach, Andrés Alonso, financial innovation division, Bank of Spain, said that the taxonomy should get more specific about the technologies.

“I would like to see a mapping between the technologies and the categories, not just the databases and the categories,” he commented. “Internally, we don’t think along business lines, we think about the technology first, from a supervisory and regulatory perspective, to ensure it doesn’t become a barrier.”

Should the databases be outlined, or should the report focus on the taxonomy?

The GDFA report parcels off a portion of its real estate to mapping the databases that are leveraged by each category of green fintech. The theory is that if made accessible, these databases will drive further innovation.

The types outlined are as follows:

  • Trade and company databases
  • Science and policy databases
  • Earth observation data
  • Asset self-reported data and registry data
  • Company databases

Most firms surveyed by Finextra and ResponsibleRisk agreed this was a useful section, in that it highlights the scope of the universe – in terms of the types of data out there – but contended that if included, the groupings should be tightened and structured.

Jepson argued that the data categories could be more specific, such as: “observation data”, “modeled data”, “self-reported data”, and so on. In other words, include phrasing that suggests quality.

Sharif agreed: “It's difficult to know where the quality is on the vast data landscape. Often, you're in a network situation, where someone has referred you, and that's how you make the connection.”

As such, the database overview should only be left in if accompanied by a data veracity ranking – thus streamlining the discovery process for nascent green fintechs.

Could anything be added to the database overview?

Two potential additions were raised by interviewees:

1. Directories, aggregators and repositories  

Greenomy's CEO suggested the section could go further by listing portfolios of datasets and putting them into a directory – as opposed to simply categorising them.

“Additional private data sets could be inserted, in order to provide a green fintech-specific API list that you can search through, based on key terms and jurisdictions,” Stevens said. “This would enable start-ups to pick and choose what is best suited to their business models, thus saving time when it comes to information sourcing.”

Other interviewees, including Connect Earth and Ecosulis, called for an overview of data aggregators, such as OS Climate. The firm pulls together public and private ESG datasets, and provides tools for use on the carbon side of sustainable finance.

“Some guidance as to how to combine different datasets would also be useful,” added Zaragoza. “The way you combine them often leads to very different figures.”

Exploring the idea further, Jepson suggested that the GDFA’s database section could also refer to public data repositories – such as the Global Biodiversity Information Facility’s – since “the ways in which aggregators ‘connect’ with them likely impacts the ultimate quality of the product.”

This comes into play for the “Digital ESG data and analytics solutions category,” in particular.

2. The consumer side

More data for the consumer side would be helpful, Stevens claimed. “Doconomy data, for instance – which has a credit card that determines the footprint of its owner’s purchases – could be used by banks to distribute such a card, and receive the information on their app.”

Feeding into this, Connect Earth’s CTO raised the possibility of incorporating private Life Cycle Assessment (LCA) databases – such as ecoinvent’s – which are not based on sector averages. Instead, they're based on “a bottom-up approach, whereby you look at one product, instead of looking at the mass number of products in one industry, which can be too general.”

Essentially, this granular information emerges from supply chain systems – where organisations may have been running traceability for other forms of regulation – and facilitates more specific emissions data for products, thus empowering carbon accounting.   

How significant is the taxonomy and what impact will it have?

The clearest consensus among interviewees was that the GDFA’s green fintech taxonomy has landed at the perfect time, and has plenty of utility. Finextra and ResponsibleRisk found that the industry expects it will boost visibility, as well as foster collaboration and standardisation within the sector.

“Anything that is focused on how fintech can play a role in the transition to a more sustainable world, is invaluable,” commented Sharif.

“We’re all tackling the same goal – climate change – so we need to know who's doing what, so we can work together and avoid duplication of work,” said Stevens.

Implicit in Greenomy’s appraisal is that gaps in the market will be highlighted, and developments will flood in to bridge them. Lempka agreed: “Even though there will be a lot of wiggle room for fine-tuning the taxonomy, there are still points around which customers and investors can tap in – particularly now that the rules have been defined.”

“VC tech funds could use maps like this to determine what else could be built – and then provide funding to entrepreneurs to build them,” added Stevens.

Ecosulis’ Jepson recommended that the aims and expected impacts of the taxonomy be clearly signalled in the introduction of the report: “Taxonomies are not inert tools – they influence market development," he argued. "Specifying the purpose of the document from the start is crucial, because it provides a steer as to how the framework may be used.”

In addition, Jepson noted there should be some recognition that this taxonomy is only reflective of how the sector stands today. The last several years have proved to us that more categories may, and do, emerge. As such, "a brief roadmap for how the sector may unfold in the coming years would be a welcome addition."

On the impact of the taxonomy, Sharif commented: “It'll be interesting to see how the taxonomy starts to shape foundational infrastructures that are already driving our world – such as FNZ’s wealth management platform.”

How can the GDFA stress test the taxonomy?

The overriding message from financial players was that in order to stress test the robustness of the categories, the GDFA should continue to canvass the market on the taxonomy, as well as ‘sandbox’.

“The GDFA should be a convener; a thought-leader; a committee for helping green fintechs understand where they sit in a broader ecosystem,” argued Sharif. “The space moves so fast that it can be challenging for nascent firms to see where they sit. How do they get distribution? Where do they plug in? Start-ups are looking for big fintechs – and big fintechs are looking for solutions often found with start-ups. Those pieces of the puzzle need to be connected. The start-ups in this space today are going to be the Amazons and Facebooks of tomorrow.”

Greenomy’s CEO agreed, arguing that the GDFA, having established the taxonomy, should set up channels within the sector to facilitate further collaboration.

However, the clincher, Alonso pointed out, will be how green fintechs are vetted to ensure whether they are, indeed, sustainable. While this may fall outside the remit of the taxonomy, it is an issue the sector will have to address soon. If investors lose trust, they can’t take risks, and if they can’t take risks, they can’t allocate capital.

“Somebody should be the judge, somebody should be validating the business lines, the metrics, the KPIs of the firms,” Alonso said.

Closing reflections

The GDFA’s green fintech taxonomy is a long-awaited spotlight on the transformative power of sustainable technology. Despite being a modest niche in the wider financial services ecosystem, it is evolving rapidly – on a wave of new solutions, datasets, and commercial applications – unlocking more green finance and better aligning existing financial flows with green objectives.

Speaking to Finextra on the feedback collected, Marianne Haahr, executive director, GDFA, said: “The taxonomy is first and foremost intended to be a useful tool for fintech innovators and financial service institutions. We looked to the market to stress test the taxonomy, and to challenge us on the seven categories. All of the feedback and comments gathered will be assessed by our taxonomy design team and will inform the final version of the green fintech taxonomy – due to be launched at the end of February.”

Serving to democratise access to the green fintech sector, the taxonomy – Finextra and ResponsibleRisk find – is strongly supported by the financial community, as it eagerly awaits a final iteration.

Comments: (0)