Green fintechs may have been under the radar for a while but they are now becoming key players in environmental, social, and governance (ESG) investing, buoyed by digital technology, decentralization, thematic investing, and investor demand.
What makes green fintechs different from traditional fintechs is that they are focused on using digital technology for research and data generation, production of ESG indices, and ESG-related exchange traded funds/products (ETFs/ETPs).
Until recently, ESG research and data generation, as well as ESG indexing, was the domain of big players like Bloomberg, MSCI, and S&P Dow Jones Indices, but over the past year a number of green fintechs have quietly entered the market.
One such company is Indxx, which started in 2005 by developing indices that serve as internal benchmarks for investment funds. In 2020 it launched its ESG index series and benchmark index. Indxx was founded by PK Sen Sharma, a co-founder of Dutch fashion brand Mexx. The company now has offices in New Delhi, New York, Miami, and Prague. Total assets under management (AUM) of ETPs tracking Indxx indices have exceeded US$10 billion.
Another example is iClima, an open-source data provider founded only two and a half years ago by three GE Capital alumni including Shaila Khan Leekha, who established the ESG practice of a leading data and indexing company before helping set up iClima. Leekha felt frustrated with how ESG scores were used by existing data and index providers, and this led to the creation of iClima.
The company has two US-listed ETFs. The iClima Global Decarbonisation Enablers UCITS ETF, launched in March 12 2020, now has about US$70 million in AUM as of December 31 2021. The iClima Distributed Renewable Energy Transition Leaders ETF, launched on July 20 2021, manages assets of about US$3 million.
Short time frame
The common denominator for Indxx and iClima that allows them to generate ESG-focused data, build ESG indices, and launch ESG-themed ETFs within a relatively short time frame, is their ability to leverage digital technology.
Gabriela Herculano, iClima co-founder and chief executive officer, says green fintechs leverage digitalization and decentralization of financial information to generate data, build indices, and launch products more quickly and in a more innovative manner.
“There are two Ds – digitalization and decentralization. This is decentralized finance in a democratic way. That’s what we think these digital companies are doing because now we have the technical ability of doing that,” Herculano tells The Asset in an interview.
“In Europe, we have challenger banks (digital banks) that are disrupting the incumbent players. The user experience of the digital banks is so high and they give us what we want by banking with our phones, which is completely different from opening an account with a traditional bank, for example.”
In the case of iClima, she says, its open-source data base allows third-party users to examine, modify, and enhance the data, which in turn enables the company to generate data faster and more efficiently than the traditional approach.
“The new players or green fintechs identify problems and they come up with solutions in a very agile way with a lot of transparency in a very democratic way,” Herculano says. “We are open-sourced. It’s a lot of work, we share the research. This is our data in a very democratic way with products that are very price-competitive. It’s a step up from incumbent players.”
Indxx does not use an open-source platform, but it seeks to redefine the global indexing space by delivering innovative custom indexing and calculation solutions based on a thematic approach.
“Investing in the future indicates the rise of thematic funds is showing no signs of slowing down, especially those that are tech-focused,” Rahul Sen Sharma, managing partner of Indxx, says in an interview with The Asset. “Investors should expect to see growth in funds related to ESG, new technologies such as blockchain, cryptocurrencies and metaverse.”
“Technology-themed investments have been a favourite among investors globally. Another emerging theme gaining popularity is decentralized finance. In 2021, Indxx Developed Markets Fintech & DeFi Index was licensed by ETF Securities Australia for an ETF and listed in Australia in October. Another fund is launching in the first quarter of 2022 in the United States tracking our Indxx US Fintech and Decentralized Finance Index,” Sharma says.