Kaan Akin of tenity says regulation is driving interest in climate fintech startupsTenity
How on earth are the world’s large corporations going to clean up their collective act? As regulations tighten and net zero deadlines loom in the near distance, there’s still a huge amount of work to be done around reducing emissions, decarbonising supply chains and, crucially, providing accurate data on progress and milestones.
That’s where climate fintech” comes into play. A subset of the financial and green technology sectors, climate fintech startups are developing a range of tools aimed at helping financial services businesses, corporations and public sector bodies operate more sustainably. In practical terms, that could mean providing a means to measure emissions, manage carbon offset initiatives or report on ESG programs.
On paper, this should be a rapidly growing sector. As the world struggles to limit increases in global average temperatures, there is a clear need for solutions that enable businesses to account for their climate impact. That, in turn, should provide opportunities for climate-fintech innovators.
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So how does that play out in the real world? Well, a report published this month by Tenity suggests that investment into European climate fintech has been holding steady, with most of the capital directed at early-stage businesses. As things stand, later-stage funding rounds are thin on the ground.
The figures look like this. Much of the report focuses on full-year comparisons between 2022 and 2023 and, on the face of it, investment is still flowing in, despite a difficult economic backdrop. For instance, early stage U.K. startups attracted $180 million in 2023, accounting for 36% of the global total and just slightly down (6%)on the previous year. German startups enjoyed rising investment. Although the figures were swollen by two so-called mega-rounds – Integrity Next and Enpal – adjusted figures showed an overall increase of 11% year-on-year. While investment in France did fall, the overall picture could be characterized as steady as she goes.
There are, however, some storm clouds on the horizon.
A Shortage Of Late-Stage Deals
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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, suggesting that growth capital is currently in short supply. The survey covered more than 750 companies.
So, was this merely a blip at a time when later-stage finance is proving more difficult to secure in just about every sector? Or is there a problem emerging that is specific to climate vintech? To find out more, I spoke to Kaan Akin, Managing Partner and Chief Commercial Officer, based at Tenity’s London Office.
Established in 2016, Tenity is an early-stage investor and also runs open innovation programs for financial services sector partners. As Akin explains, climate fintech is seen as a growth market. That’s partly because regulations are being tightened around the world, putting pressure on businesses to improve their analytics and reporting. In addition, while fintech in the wider sense often addresses local markets, with the scope for global sales limited by regulatory differences, climate fintech is not so constrained. Akin cites Environmental, Social and Governance solutions – very much part of the climate/fintech crossover. – as an example. “ESG is not limited in that way because most of the cases don’t require local licenses, so there is better scalability.”
What’s Behind The Bottleneck?
So, what explains the finance bottleneck when startups get past Seed and Series A? Well, as in the wider fintech universe, later-stage funding has slowed. “We are seeing the same thing in climate fintech,” Says Akin. “Most of the money is going to earlier rounds.”
This is partly down to caution. Climate tech companies have proliferated but many have not yet demonstrated their ability to generate revenues. “Pre-Seed and Seed are about validation, Series A is about revenue. A lot of VCs – us included – are a little bit cautious. They are trying to see more revenue before doubling down,” says Akin.
There is at least one factor specific to this sector. “Climate fintech is not super new,” he adds. “But there is still a lot of experimentation. Maybe in time consolidation will start and then we will see those companies growing faster and we will see the follow-on funding.”
Does this mean that when all the experimentation has been done, a relatively small number of players will become dominant as others are bought up or drop away? Akin thinks that might be the case. “It is generally the data analytics companies who are raising the money,” he says. “And as in the SaaS sector, what you tend to see is companies buying each other out and one, two or three of them becoming victorious. In the end, there could be a few giant climate fintech companies.”
However, the market opportunity is sizable. I recently spoke to Matthew Blain, a Principal at the newly opened London office of Voyager Ventures, a U.S.-based, climate focused VC fund that invests on both sides of the Atlantic. He confirms that regulation is fueling demand for new accounting and analytics solutions. He points to the European Union’s Cross Border Adjustment Measurement. “This requires companies to have a granular understanding of their carbon footprints,” he says.
This extends beyond the four walls of individual companies. “ What we are seeing increasingly is the importance of carbon-product footprints for procurement. More and more manufacturers are asking suppliers for carbon footprint as they procure materials,” he says. He cites the example of portfolio company Carbon Chain as a player in this market.
Looking at the wider climate tech market, he is bullish about Europe’s potential to establish a leadership potential. European climate startups and scaleups attracted $5.6 billion in the first half of 2024. As extreme weather events rise in frequency, the need for solutions will grow. Climate Fintech will doubtless be a part of the mix.
Cre: Trevor Clawson
