• cgajariamba2022

Why Fintech will (Quite Literally) Save the World!

Updated: Mar 25

Editor's Note: The thesis presented in this article was validated just 16 days after publication when Enfuce (a Finnish start-up offering banks the ability to provide carbon footprint calculation tools to its customers) raised €7M in a Series B funding led by Tencent.


By Chinmaya Gajaria (LBS MBA 2022)


In November 2019, Angela Strange, Partner at Andreessen Horowitz provocatively exclaimed that Every Company Will Be a Fintech Company. Almost a year and a half later, perhaps its time to raise the stakes and suggest that Fintechs democratizing carbon offset purchases will (quite literally) save the world!


Carbon Offsets – a Primer


The Oxford Dictionary defines a ‘carbon offset’ as “a way for a company or person to reduce the level of carbon dioxide for which they are responsible by paying money to a company that works to reduce the total amount produced in the world, for example by planting trees”.


While companies (such as Amazon, EasyJet, and Kering) purchase offsets to compensate for their operations’ emissions, individuals (like you and me) have more difficulty. Two reasons: (1) awareness: can you calculate the size of your carbon footprint?, and (2) trust: even if you could, how do you ensure the offset seller uses your funds in legitimate carbon reduction projects?


The Solution


Enter carbon offset start-ups! New businesses are pioneering unique approaches to democratize offset purchases and make them more accessible to individuals. The premise is simple: the company allows users to purchase carbon offsets, earns a commission from sale proceeds, and takes responsibility to deploy funds in bona fide projects (planting trees, providing clean cooking fuels etc.).


And investor appetite is growing! Wren recently raised $1.5m from Union Square Ventures. Yayzy, who was recently running a $260k crowdfunding campaign on Seedrs blew past its limit; as on date, it has already received commitments of $740k+. Perhaps the most eye popping fund raise comes from Klima, a Germany-based app, that recently completed a whopping $5.8m seed round, valuing the company at a cool $19m. Impressive stuff for a start-up still in beta mode!


The Models


What’s interesting is the different business-models companies are adopting to win a slice of the offset market. Some offer direct purchases, others subscription plans, and some even trade ads for trees:


1. Direct purchase: as the name suggests, users simply purchase offsets from the company.

Cool Effect (a US non-profit since 1998) offers a nifty tool to calculate the dollar amount of travel (flights, driving, cruise, and even hotel accommodation). When you pay, over 90% gets deployed in identified projects such as reforestation in Uganda or renewable energy in rural India. Bottom line: it claims to have reduced 1 million tonnes of carbon emissions!


Ecologi, a UK start-up, offers 3 default plans based on an average citizen’s carbon footprint ($6.5 to $25.75/ month to plant between 12 to 48 trees every month).


It also offers family and business plans. It retains 12.5% for operational and marketing costs with 87.5% deployed in climate projects. It has also gamified tree plantations through leader boards on its website incentivising users to plant more trees for bragging rights.

2. The ‘Spotify’ playbook: just like Spotify offers tailored recommendations, start ups adopting this model estimate individual carbon footprints and then offer customised offset plans with monthly payments. Wren (mentioned above) and Klima (the one which raised THAT seed round!) are two prime examples.

Klima deploys 70% of funds in select projects, 20% in education and marketing efforts, and 10% as running costs. Wren, on the other hand, deploys 80% in projects, 17% in operational costs, and 3% in transaction fees to their payment partner. Another value add is that both provide users with real time (Klima) or periodic (Wren) updates quantifying the impact of their spends.


This model has seen the most venture capital funding action, perhaps as it allows companies to harvest invaluable user data when making personalised recommendations.


3. Ads for Trees: Yet another model I came across doesn’t even expect users to pay. Treeapp, a mobile app, allows users to plant 1 tree for free every day. How? Through sponsorship revenue earned from companies advertising their products and services in the mobile app.


Having used Treapp myself, I find the process ridiculously simple: log in, watch an ad for < 60 seconds (usually about eco friendly products), select location (today, it was Nepal), and boom! The app also has a neat feature quantifying my impact.


The Holy Grail: the ‘Fintech Hack’ Model


Apart from the models mentioned above, some companies are using (what I call) the ‘Fintech Hack’ in the carbon offset market.

In a nutshell, these apps: (a) connect securely to your bank, (b) track spends to generate a carbon footprint report, and (c) allow you to immediately donate to verified carbon offset projects and become carbon neutral.


Think of a trip to purchase groceries from the supermarket: you use your bank card on public transport and at the store, the app reads the spends, quantifies the emissions linked to such trip and purchase, and gives you an option to immediately offset such emissions.


I’ve come across four start ups using this model. 2 in the UK: Yayzy and NetZero and 2 in the US: Joro and Drive Zero.

Make no mistake, this model is the Real Deal!


Why? Three reasons:


1. Seamless: From all the models identified above, the Fintech one requires minimal user effort. Some apps require questionnaires while others require inputting travel details into online calculators to estimate carbon footprints. The Fintech offset app runs quietly in the background, all the while auto calculating emissions linked with every spend.


2. Scale: Integration into a seller’s online store (asking customers checking out whether they will offset the emissions associated with their purchase) will lead to faster adoption amongst individuals. Integration into an ecommerce giant (say Amazon, Deliveroo) should skyrocket adoption and the company’s growth.


3. Real time: This model offers users their real time dynamic carbon footprints, updating with every spend and every offset purchased. Compared to static footprints or ones updating monthly only, this is a far more appealing data proposition to users.

Stretching my Imagination: an Environment Score


The next-frontier Fintech offset players could explore is the ability to compute what I call an ‘environment score’.


Think of it as a credit score: whereas a credit score evaluates creditworthiness, an environment score evaluates carbon neutrality. Whereas a good credit score leads to attractive mortgage rates, a good environment score could (perhaps) lead to subsidised electric vehicles (EV), discounted EV charging, and if governments play ball, reduced taxes or public transport subsidies. The possibilities then become immense!


If my thesis about venture capital preference for subscription models is correct, then I expect the next wave of big ticket venture capital funding in offset start ups operating the ‘Fintech Hack’. A real time model, better data, and the ability to do so much more with the data, all make for a compelling investment case!


A Critique


1. Papal indulgences: Perhaps the single biggest criticism against carbon offsets are that they are akin to papal indulgences sold for the forgiveness of sin. Greenpeace even argues that direct emission reduction is the way, carbon offsets are a distraction. In my view, carbon offsets are one piece of the climate puzzle. While we wait for better technologies to drastically cut emissions, it is better to compensate for our inevitable current carbon footprint.


2. Accuracy: The Fintech Hack uses bank spends as a proxy to carbon emissions. Obviously, this is not perfect. But it is certainly a more accurate measure than questionnaires, averages, and guesstimates. Increased data and analysis should (theoretically) improve the algorithms’ accuracy.


An Alternative Approach – B2B Conservation-as-a-Service (CaaS)


Another approach that fintech players could adopt would be to offer banks the ability to provide such carbon offsetting services to the banks’ customers (something I cheekily call, conservation-as-a-service). This will help solve any privacy concerns that individuals may have linking a third party fintech to read their card payments.


This could also serve as an alternative revenue stream for banks who could keep a commission for every offsetting transaction undertaken by its customers while outsourcing the carbon footprint calculation and carbon offsetting actions to the fintech players.


I have come across 1 start-up in Finland, Enfuce, offering similar B2B services to banks.



Concluding Thoughts


The voluntary carbon offset industry (valued at $320 million in 2019) has been on something of a tear with a 2 year compounded annual growth rate (CAGR) of 48%. The majority has been thanks to corporate spends. Yet, the real growth has not even started as consumer interest and spends are both now picking up.


This is hardly surprising given the times we live in, and the challenges we face! According to Vox, global youth climate strikes led by Greta Thunberg, a UN report highlighting that climate change’s best case scenario is rapidly slipping away, and natural disasters from Australia’s wildfires to US hurricanes have all renewed interest in carbon offsets. In fact, Cool Effect reported a 700% increase in individual carbon offset purchases from May to December 2019.


With companies now making carbon offset purchases easily accessible, they are literally empowering individuals to save the planet with their clicks!


Chinmaya Gajaria is an MBA Candidate at London Business School. Previously, Chinmaya worked in the investments team of a growth equity fund in India investing in private businesses. Prior to that, he was a corporate lawyer at India's pre-eminent law firm firm. Chinmaya received a law degree from Government Law College, University of Mumbai.