CommerzVentures, the independent fintech venture capital specialists backed by the German banking giant CommerzBank, recently published the H1 2022 Climate Fintech Report on the sector, indicating that climate fintechs are working towards net-zero and attracting large amounts of VC funding.

Reflecting on the conclusions of the research, managing partner at CommerzVentures, Paul Morgenthaler, spoke to Finextra on the future of funding for climate fintechs in the lead up to Finextra’s fifth annual SustainableFinance.Live conference and Hackathon on the 29th of November.

CommerzVentures’ research included data from 528 climate startups based both in Europe and the US. Findings from the report revealed that climate fintechs raised $1.8 billion in the first six months 2022, which is already one and a half times the funding raised during the entirety of 2021. The report found that fintechs in the subsectors of carbon accounting and carbon risk management attracted the most funding.

Morgenthaler observes that carbon accounting has been experiencing significant growth because it is a key step in the transition towards net-zero. Fintechs which focus on carbon accounting track and analyse emissions, promoting low-carbon lifestyles and encouraging complete transparency in depicting carbon footprints. In order to be transparent on the sources of their carbon emissions, it is essential that companies build on their basic short-term carbon accounting infrastructure.

Commenting on the impact of greenwashing, Morgenthaler emphasises that it is not a victimless crime and that companies need to promote a culture of transparency, accountability, and compliance. He adds: “On paper, ESG is already common practice within many financial institutions. However, the reality often does not live up to the green PR and storytelling. Focusing on the ‘E’ in ‘ESG’ is key, as it is here where the toughest trade-offs between short-term profitability and long-term sustainability of an organisation need to be made.”

Noting the increased interest in decarbonisation-focused climate fintechs, Morgenthaler believes that more companies will emerge in the biodiversity space in the future. He adds: “We need to find a way to value and pay for the ecosystem services that nature provides to us, and a new breed of climate fintechs is poised to do just that.”

On the topic of decarbonisation, which has become a staple for sustainable development goals for companies, Morgenthaler insists that “decarbonisation needs to become a core KPI that managers are being measured against.” He continues: “An internal carbon price that needs to be paid by business units to the corporate centre would be another important step.”

The significant boost in investment in climate fintech from 2021 indicates that ESG goals will be a definite focus for financial institutions going into 2023, and sustainability will be more than a trend in a sector, it will be an essential factor for the future.

Open finance and APIs have become more significant among financial institutions as they work towards their EGS goals. Morgenthaler expresses that open finance is critical to analysing ESG data, stating: “Payment transaction data can be used to establish a company’s or an individual’s environmental footprint. It is important to bear in mind that financial data can only be used to get an approximation. In the future, we need to find ways to precisely measure the impact of individual products that underpin a financial transaction.”

Research from the report found that Europe in particular was seeing growth in climate fintechs, almost three and a half times more VC funding in three more financing rounds compared to the US. French startups attracted the most funding in 2022 at $733 million, with the UK following at $426 million. Other countries that accrued notable funding for climate startups included Denmark, Finland, Germany, Sweden, Estonia, and the Netherlands.

On whether he predicts an upward trend in the funding of climate startups in the future, Morgenthaler states: “Climate fintech is one of the fastest growing categories in the venture ecosystem, but it is still early days for most of the companies in the space. We expect a large number of Series A and Series B rounds to be raised in the coming twelve months, which will contribute to continued growth of funding volumes.”

More experts will discuss the future of sustainable finance at Finextra’s fifth Sustainable Finance Live conference and hackathon is scheduled to take place on the 29th of November. For more information and to register for this event, please visit the event page here.