As a global firm, Headline has the privilege of intimately observing systemic changes to policy, buying behavior, and societal values across our four core markets (the United States, Europe, Latin America, and Asia) and how those changes impact the venture landscape. Within the Headline’s Fintech team, we’ve seen the rise of companies addressing pressing climate change issues through the lens of fintech across the globe. We’ve also witnessed increasing interest from investors in this emerging category, particularly as global risks associated with climate change come to the forefront.
Based on our conversations with numerous founders building in this space, as well as other investors, we define climate fintech as the intersection of climate, finance, and technology. In theory, these companies leverage technology to create financial products and services that support the transition to a low-carbon, sustainable economy. When we look at the data, Europe is clearly leading in these efforts to support this subset of fintech; European Climate Fintech startups raised nearly 1.5x more VC funding than their American counterparts in 2023 (Climate Fintech Database). This reflects Europe’s strength and first-mover advantage when it comes to sustainability and is mirrored at Headline, where our European team has backed companies like Monta and Carbonfact.
As we evaluate startups building at the intersection of fintech and climate for Headline’s North America-focused early stage fund, we’ve discovered that this category appears moralistic yet fuzzy – ironically, as undefined as American policy is toward climate change. While founders building here share similar concerns around climate change posing a global existential risk, unfortunately, climate impact in itself does not appear to be enough of a business incentive for the majority of companies or customers yet.
We've noticed that it can be challenging in this space to answer foundational questions about how B2B products will both benefit customers in a tangible way and create value from a climate perspective. When we compare other fintech sub-verticals, such as CFO solutions or B2B payment solutions, there is a clear and tangible impact for customers who buy these products. Whether it enables customers to increase the bottom line through efficiencies from technology consolidation or human labor reduction, or grow revenue opportunities, the ROI is clear; but with climate fintech, that still has yet to be as clearly defined.
Our conclusion from speaking with many North American startups is that, at least today, climate impact and sustainability are more cosmetic for companies in the fintech realm rather than a core business objective. The hard sciences, deep tech, and agtech sectors (i.e. technologies that convert CO2 into a more useful resource) represent a more tangible investment category for climate-related products short-term. Despite ample content highlighting climate fintech fundraising trends, there is a lack of clarity on how these fintech products themselves actually advance the climate movement or how financial services innovation pushes the United States towards improved sustainability.
Despite the dominant trend (understandably, given the nascency of this category) we have seen a handful of companies make strides to initiate impact.
Flow of Funds Startups
A strong majority of these startups sit in the “flow of funds” or facilitate financial incentives toward ESG/climate impact. For example, Ethic is a software platform that enables RIAs to build SMAs (separately managed accounts) for their clients that align with their ESG values. By facilitating increased flow of funds towards companies that prioritize sustainable business practices, Ethic directs financial support to assets that reduce, remove, or offset carbon emissions. However, given that “ESG'' definitions are highly subjective and unregulated, there are still questions about the net impact.
We have also seen multiple platforms that try to tap into the flow of funds to redirect spending to “green” companies and reward “climate-friendly” spending. Some of these platforms, like Future, attempt to capture carbon savings tied to purchases to calculate the carbon reduction and its resulting climate impact. We have observed in diligence that quantifying climate impact is incredibly complex, opaque, and largely unregulated, and therefore somewhat subjective. It is unclear whether these companies move the needle forward on climate change or benefit from using eco-consciousness and sustainability as a branding strategy to acquire users – which, on its own, could at least push societal values forward. We’d like to see startups prioritize developing robust frameworks for accurately quantifying and reporting climate impact as we see a massive opportunity here.
EV Financing Startups
In response to the growing electric vehicle (EV) ownership in the United States, we see more fintech platforms that offer EV financing as an embedding lending product. As OEMs try to push out dealerships and move towards direct distribution, the platforms see an opportunity to partner with car brands to embed directly into the flow as their financing partner. They further incentivize “green spending” because of their sole focus on EVs, which makes them eligible to tap into green banks and government incentives, resulting in dramatically lower rates.
Although tighter regulation can help create category-defining companies (e.g. SoFi using student loans as a wedge in a low-interest rate environment), it can be precarious and subject to political change. Depending on the 2024 U.S. election, there could be meaningful changes in government-led incentives like tax credits for both personal and business use that either accelerate or undermine financial motivation to make “green” purchases. (The question of whether EVs are actually "more climate-friendly" given the environmental impact of lithium production is a separate issue, but it illustrates the complex and varied definitions of ESG and sustainability). What excites us about this category is the potential for companies to stand out by focusing on their unique financing solutions (rather than sustainability messaging) and communicating this to customers—Tenet sets a great example in this regard, offering affordable and convenient financing for EV purchases and creating a win-win for consumers and the environment.
Carbon Credits Startups
Many companies operate in the world of carbon credits, which are financial instruments that price carbon emissions to incentivize reduction efforts. Unfortunately, the carbon credits system is generally murky in the United States due to the lack of a unified national system, different rules across regions, and inconsistencies in monitoring and verification. Companies like Patch primarily focus on the voluntary carbon market where they offer a software platform that allows buyers to discover, purchase, and manage their climate impact. Many of Patch’s customers have secured a B-Corp certification, which requires them to demonstrate high environmental performance, ensure governance and accountability to key stakeholders, and provide operational transparency. While there’s no direct business benefit to securing B-Corp status – most companies pursue the certification to differentiate their brands, attract talent, build trust with consumers, and appeal to investors. The certification was created by a global nonprofit called B Lab as a way for companies to set themselves apart from the traditional business governance philosophy centered on shareholders.
Essentially, B-Corps balance purpose and profit. B Lab enforces its own set of standards through its certification process and is not beholden to any mandate or regulation. Given these dynamics, we are particularly excited to see companies that monitor and report on compliance around carbon credit offset projects – providing true accountability to where, why, and how funds are directed to produce carbon-neutral offsets. One example is Veritree, which has created a platform to facilitate, measure impact, and increase transparency of tree planting, a major source of both carbon offset credits and CSR goals.
We’re eager to continue meetings with founders in the space and to find companies that truly address climate challenges through the lens of fintech, such as the ones mentioned here, while also delivering substantial business value to their customers. As we track these companies over extended periods, we are excited to observe how their market presence, products, and branding evolve – and of course how they are able to demonstrate a quantifiable impact on climate - whether through regulatory change or consumer behavior in the United States.