What the EU's Sustainable Finance plans mean for start-ups

The EU wants to be climate-neutral by 2050 and is also turning the financial world upside down to achieve this. This seems tailor-made for start-ups, but creative solutions are often still lacking, a stocktaking.

The EU has set itself ambitious goals. It wants to become climate neutral by 2050. Above all, this requires an economy that completely rethinks production methods and supply chains - and that requires a lot of money. As early as January 2020, the EU Commission calculated that the "Green Deal" would require investments of 260 billion euros per year. It is also counting on financial service providers for this. In the future, there should be many more investment opportunities in sustainable projects to support the economy.

So in addition to a restructuring of the economy, a restructuring of the financial world is also on the agenda. New ideas are needed. The EU's plans seem to be made for start-ups, but at least in the field of sustainable finance, little has happened in the start-up world so far. The hurdles are still great, but the potential is much greater.

A good 30 percent of all start-ups in Germany can be defined as green last year, according to the Green Start-up Monitor

, which the Borderstep Institute produces annually in cooperation with the Federal Association of German Start-ups. To do so, they must make significant contributions to ecological sustainability in addition to their economic success. Although this is nine percent more than still for 2019, their share is still vanishingly small, especially in the area of fintechs. Just two percent of all fintechs are green startups, according to the study.

Great opportunities for fintechs?

"Other sectors are still the main focus of sustainability," Alexander Schabel, Borderstep Institute responsible for Sustainable Business Development, explains the low percentage. "So far, there have mainly been many green start-ups in areas such as food or mobility." However, Schabel assumes that this could change soon. "When it comes to insurance or investment, consumers - and ultimately founders - have not yet thought in terms of sustainability," he says. But with the so-called EU taxonomy soon to define exactly what is green and what is not, the financial world will also have the clarity it needs to offer sustainable products. "This offers a great opportunity for fintechs in particular, which can develop solutions faster than the big banks," Schabel estimates.

Professor Christian Klein, head of department at the Institute of Business Administration at the University of Kassel and an expert on sustainable finance, also sees great potential for start-ups in this area. "I'm a little surprised that not many more fintechs are focusing on Sustainable Finance yet," he says. That's because the demand, especially among young people, is already there, he says. "More and more investors want to know what happens to their money or deliberately put it into very specific sustainable projects." Sustainability banks could already hardly save themselves from demand. Their problem: "Due to the low-interest phase, they hardly make any profit with their customers," says Klein.

Blockchain technology could prevent greenwashing

That may also be holding back some fintechs, Klein estimates. They should rather think in a slightly different direction, Klein says. A sustainable finance robo-advisor, for example, is one such possibility. There, customers could click together according to which criteria and with which risk they would invest money sustainably, and the robo then puts together an investment strategy. "We did a survey to try to find out what sustainability meant to customers and it turned out that everyone understood something different about it," Klein says. "It was impossible for us to read customer groups from that." Fintechs should therefore create products that allow them to respond as flexibly as possible to their customers' wishes.

Klein also sees a lot of potential for startups that want to link blockchain with sustainable investing. "In the end, this technology allows you to specify exactly where the money is invested," says the expert. In this way, fintechs could credibly assure that they really do invest the money invested through them specifically in individual projects. "The danger of greenwashing could be avoided in this way," says Klein.

In addition to the low interest rates currently affecting the financial sector, there is another major hurdle that has apparently made founders hesitant in the area of sustainable finance so far: There is still a lack of seed money for green start-ups. According to the Green Start-up Monitor, every second green start-up has problems raising capital. This also affects founders who want to build a fintech.

With venture capitalists apparently too hesitant, half of green startups would like to see the creation of a "sustainability" funding line with targeted funding offers, according to the study. "This could be, for example, a kind of High-Tech Gründerfonds, only for green start-ups," says Alexander Schabel of the Borderstep Institute.