To meet these challenges, climate fintech—the innovative use of financial technology tailored to combat and adapt to climate change—is fast becoming a means of helping organisations to reduce their carbon footprints, decarbonise supply chains, and improve their sustainability efforts.
Climate fintech bridges the gap between financial innovation and environmental responsibility. A subcategory of fintech, it uses digital innovations, data analytics, and financial tools to address challenges related to climate change, promote sustainable practices, and support the transition to a low-carbon economy. And today, a number of startups are operating in this space to develop a range of services and tools from green financing to blockchain based carbon markets.
The opportunity vs. commercial reality
At this point in time, it appears that the conditions are right for the climate fintech sector to gain traction: there is an acute need for businesses to account for their climate impact as well as pressing regulatory demand for more transparent sustainability reporting.
However, a recent report from early-stage investors in green innovations Tenity reveals how the landscape of venture funding for climate fintech is complex. While early-stage climate fintech startups saw steady investment (UK startups attracted $180 million in 2023), the sector is up against certain challenges, specifically in the form of later stage funding.
In 2023, early-stage startups raised 48% more than their later stage counterparts. And when Tenity looked at first half of 2024, it found a complete absence of deals at the Series C and D stages (based on a sample size of over 750 companies), which reveals the fact that growth capital is currently in short supply.
The experimental phase
The reticence of investors to put up later-stage funding is not unique to climate fintech, it is also reflected across the entire venture capital sector where backers are increasingly cautious.
The evolving nature of climate fintech itself is also part of the reason why later stage funding is less forthcoming. While the sector is gaining momentum, there is still a significant amount of experimentation when it comes to the various business models and solutions. While they may have established product-market fit at earlier stages, they have yet to prove their revenue generating potential. For this reason, investors are reluctant to commit further capital before they can see stronger financial returns.
With the majority of climate fintech startups in the validation and revenue-building phases of the start-up lifecycle, many venture capitalists are biding their time and waiting for proven business models before committing to larger investments.
Despite this slow-down, while the fintech sector funding contracted in 2024, climate fintech attracted a larger proportion of investments, reflecting a strategic pivot towards sustainable and environmentally conscious financial solutions.
At this still relatively early stage, climate fintechs that are focused on data analytics, which are critical to the development of climate-fintech solutions, are drawing the most investment. In fact, the eventual market leaders are likely to be large, data-driven firms given the regulatory requirement to measure and evidence progress against ESG goals.
Market opportunity gaining momentum
Despite the investment challenges, the market opportunity for climate fintech looks promising.
This is in large part being driven by the regulatory environment fueling demand for climate fintech solutions which can be used in support of tracking and reporting an organisation’s carbon footprint.
Nowhere is this more apparent than within the EU where regulations like the EU’s Cross Border Adjustment Measurement are increasing the need for granular carbon footprint data, and companies are increasingly requiring their supply chain to report on environmental impact.
And as extreme weather events become more ubiquitous, climate fintech is set to play a vital role in mobilising capital for green projects, enabling the flow of funds to renewable energy, sustainable agriculture, and climate-resilient infrastructure.
By aligning financial technology with sustainability, climate fintech accelerates the transition to a low-carbon, inclusive economy, empowering businesses, governments, and individuals to achieve ESG objectives more effectively and efficiently.
As the fintech funding environment expects to become brighter in 2025 as macroeconomic issues lessen, politics in G20 countries stabilises, and interest rates fall, we are likely to see climate fintech at the vanguard of financial innovation.
