Christine Lagarde made waves when she got chosen as the first woman president of the ECB. Now she is making waves with her push for climate conscious monetary policies.
In her new role as the ECB president, she is hitting the ground running with some amazing policy work around climate change. The vision is to make sure that the ECB considers climate change as a ‘mission critical’ priority. Some say, she won’t achieve it. But few have even tried it before.
Lagarde is keen to ensure that the ECB will start focusing more on Green assets (green bonds for example), and unwinding assets in their portfolio with high carbon footprint.
The COP25 climate conference is happening in Madrid this week. Just before it kicked off, the European parliament declared a climate emergency. On the contrary, the FED chose to dig its head into the sand, and stressed that Climate change was a political issue and not an economic/financial one.
I disagree with the position of the FED. Top down recognition of where we are with climate change, is very critical to get to a sustainable world for future generations. Climate change is not just a political issue, it is not just an economic issue, it is an existential issue – both literally and philosophically.
So what needs to be done bottom up? A lot.
Let us take an example of how climate change affects all of us at the grass root level. Forget extreme weather conditions for a bit. Forget rising seas and melting ice.
I was at the Sustainable finance event on 04/12, in London, hosted by Finextra and Richard Peers. We had several interesting discussions, but there was one story that came out in the discussions that hit me hard was this.
Last year, several Scandinavian countries became net importers of corn, from being net exporters. This was largely due to dry weather and a fall in crop production, that they hadn’t really planned for. As a result, countries like Sweden had to import Corn from other parts of the world, as customer demand for the crop had to be met.
When they tried to scale the import activities, they found that, they didn’t have enough port capacity for the ships that carried corn – they hadn’t planned for that. They hadn’t planned for the logistics around getting the crops integrated into the country’s distribution network.
All this meant additional costs to get the crops to supermarkets and as a result, the price of the crops and products based on the crops went up.
When such sporadic occurrence happens at scale, we see a systematic risk leading to inflation – and then perhaps the FED will start looking into it. This is also an example of how climate change can affect global trade balance, which is another key economic issue that the FED can’t ignore either.
The BoE on the other hand has already planned to integrate climate risks into the stress testing framework for banks. It is good to see that the UK and Europe are moving in the right direction – they often have.
That’s the top down work that is ongoing and more needs to be done. Let’s look at how Fintechs can help the bottom up push. There are several use cases where they can help. Some of my favourite ones are are,
- A climate rating startup for corporates – like an Experian for credit
- Climate risk calculators using alternative data
- Trade and supply chain data capture – to identify climate efficiencies and spot pain points
- Crop insurance that triggers claims when there are climate anomalies
- An IoT based data capture mechanism that will give retail customers climate points – that they can cash out or use for borrowing
.. and I haven’t even scratched the surface with that list. We should see more such Fintechs starting to become main stream in the near future.
I have touched upon ET Index – a startup based out of Level 39 in London before. We will need more such firms to gather data about corporates and how green they were. We also have firms that are looking at climate credits – however, we will now see some of them going big.
On supply chain and trade finance – startups can add a lot of value by capturing and sharing climate data across the value chain. Data captured need to be validated and validated data could be used as a credibility score for different stakeholders in the supply chain. It could be everything from how green the manufacturing process was, what the carbon footprint of the logistics was, usage of plastics, water footprint etc.,
These are all pretty basic use cases that can add value for future generations. The key question is, will startups see these as major opportunities? And if they did, will the innovation ecosystem be supportive?
Now, as the bottom up tech driven initiatives ramp up in the next few years, we should ideally see a point of convergence with top down climate policies. A massive challenge and an opportunity to get there – may be that’s the next big thing in Fintech.