Contributor: Kelvin Tan, co-founder and Chief Investment Officer (CIO), GTR Ventures
Sustainable financial assets under management currently exceed US$30tn worldwide, boasting an impressive 500% growth over the last ten years, according to Bloomberg. The lending sector took an arguably long time to adjust its practices to incentivise sustainability, but it now appears to be on track. A Linklaters report points out that sustainability-linked loan volumes have risen tremendously over the past few years, reaching US$43.2bn in 2018. These loans, which tie pricing to the borrower’s sustainability performance, do not set criteria on how proceeds should be used. This sets them apart from green loans or bonds, which can only be used for green projects. Sustainability-linked loan volumes are expected to reach US$81bn in 2019.
But sustainability is a broad term, and there is little standardised criteria to assess performance. Additionally, rating the sustainability of a loan associated to a supply chain requires collecting enormous amounts of data at a granular level. This is where technology can shine. In recent years, many solutions have emerged to improve the traceability of products throughout their supply chains: track-and-trace software to collect product data from QR or barcodes scanned at different stages of the production process; sensors added to factories and warehouses to monitor and adjust conservation conditions; and increasingly, tools to measure water and power usage, greenhouse gas emissions and waste disposal practices.
Fintechs as the keystone of sustainability-driven financing
To reach a tipping point in corporate sustainability, green targets must be met with financial incentives based on accurate data — and fintech is the bridge between these elements. In 2017, the Banking Environment Initiative (BEI) published a report to catalyse fintech for sustainability. At the time, Amine Bel Hadj Soulami, Chair of the BEI’s Fintech Taskforce, noted: “In recent years, considerable progress has been made in the areas of both financial technology (‘fintech’) and sustainability. However, up to now, these two areas have rarely come together.” The report listed 10 recommendations to help design collaboration between multinationals, financial institutions and start-ups in order to harness fintech to help solve sustainability challenges in the real economy. These mainly focused on ensuring that relevant stakeholders be involved in innovation rounds, plain language be used and solutions be designed with practical implementability in mind.
The same year, the Swiss Finance and Technology Association launched the Sustainable Fintech Initiative, an organisation aiming to initiate a shift towards innovation in the financial sector that supports the advancement of the UN’s Sustainable Development Goals (SDG) and climate goals. The initiative works by bringing together a community of experts, lobbying for policy-making that fosters the development of sustainable fintech, and supporting innovation through hackathons and other events.
Collaboration picks up pace
If 2017 was the year of awakening around the role fintech has to play in the path to sustainable trade and supply chains, 2019 is the year awareness has turned into action, with collaborations between fintechs, large corporates and financial institutions becoming commonplace. In September, the Cambridge Institute for Sustainability Leadership announced Trado, a consortium of international banks, corporates, fintech startups, an NGO and a research institution, all behind a new model for blockchain-enabled sustainable supply chain finance. The proposed structure aims to use technologies like blockchain and smart contract to monitor sustainability and social standards, in turns rewarding well-performing corporates with preferential access to trade finance. It was piloted in Malawi, with the production and shipment of tea by smallholder farmers to Unilever, with financing from BNP Paribas. Fintechs Halotrade and Provenance were instrumental in gathering sustainability data and converting it into working capital finance discounts.
In another development this year, Arviem, an IoT company focusing on real-time cargo tracking and monitoring, as well as carbon footprint reporting, launched “IoT-enabled working capital solutions” in March 2019, leveraging the information collected through sensor devices to make goods in transit financeable. And in November, it announced a partnership with Erste Group on a new inventory financing solution that the European banking group will offer to its corporate customers. While the partnership makes no mention of Arviem’s carbon footprint reporting solution, this capability will make it that much easier to link financing to borrowers’ sustainability targets, when the day comes.
And in the consumer space, consumers in Finland will soon be able to see the true carbon footprint of their purchases upon payment, thanks to an app developed by payment services provider Enfuce. The app does not require any input from buyers, instead combining data from credit cards and banks with data from retailers to calculate a purchase’s impact on the environment. Enfuce is working with Amazon and Mastercard, amongst others, on the project, which should be available by March.
In Asia, Singapore leads the way
Singapore, home of the Asia Sustainable Finance Initiative — an organisation gathering industry, academic, and science-based resources to support financial institutions in implementing Environmental, Social, and Governance (ESG) best practices — has been extremely active in encouraging developments in this area.
Over S$6bn of green bonds have been issued in the country so far, and in 2019, the Monetary Authority of Singapore (MAS) expanded its green bond programme to include social and sustainability bonds. At the Singapore Fintech Festival in November this year, the MAS also announced the granting of US$2bn of funding to asset managers committed to deepening green finance activities in Singapore, as part of a US$100mn placement in the Bank for International Settlements’ Green Bond Investment Pool.
In fact, sustainable finance was top of the agenda at the Fintech Festival, with sessions covering ways insurers should include climate change in their forecasts, and ideas for how fintechs can help measure climate risks, assist funders on sustainable investment decisions and come up with sustainable financing tools.
One of these Singapore-based fintechs is HeveaConnect, which focuses on sustainably-produced rubber. The company is creating sustainability standards to secure procurement of natural rubbers and ensure farmers’ livelihood, taking targeted steps to digitalise the industry and working with NGOs on the ground to modify smallholder farmers’ behaviours through training programmes. Further in the production process, HeveaConnect has also placed IoT devices inside factories to automatically monitor things like greenhouse gas emissions and water recycling.
But there are many others, particularly in the agricultural sector. For example, one of the winners of the Grow Asia Hackathon held in July 2019 is Chektek, an SaaS solution with a mobile-first strategy that focuses on helping farmers measure and improve workplace safety, health, environment and sustainability practices.
GTR Ventures and our role in sustainable fintech
As you can see, initiatives involving fintech partnerships to foster sustainable supply chains are increasing in number and in scope, and each one of them confirms what a pivotal role fintech can play in achieving sustainable development goals. Of course, these developments are recent, and it will take some time to be able to measure results. But the momentum is there, and so is climate urgency — so this is an ethical transformation there should be no going back from.
Venture capital funds like GTR Ventures will be instrumental in enabling fintechs to have the most meaningful impact possible towards the UN’s Sustainable Development Goals. Through our laser-focused early-stage investments in digital trade finance startups, we support the sustainable growth of the sector and steer the direction of our investment recipients towards an ever-more environmentally conscious strategy. Visit gtrventures.vc for more information.
Contributor: Kelvin Tan, Global Trade Review
