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Banking on Climate Change

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I am a New York-based freelance journalist interested in energy markets. I write about energy policy, trading markets, and energy management topics. You can see more of my writing...

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Fintech is among the most popular buzzwords in the startup ecosystem. It aims to reinvent the staid and conservative world of financial services with the speed and efficiency of technology. In the climate change and energy industry, the tech intervention has taken the form of neobanks and a growing number of banking startups are latching onto the trend of investing driven by environmental, social, and moral concerns.

Atmos Financial says it will use your banking deposits to fund clean energy projects and utility-scale solar. California-based Aspiration, which is backed by the likes of Leonard DiCaprio and Orlando Bloom, has similar ambitions. In addition to funding clean energy projects, it will plant trees, calculate your personal impact score, and offer cash back ranging from 3% to 10% on products from a “conscience coalition” of companies it has cobbled together. Across the pond, Germany-based Tomorrow bank is funding biogas plants in Vietnam and helping economies move towards a net zero carbon goal.

The aura of environmental, social, and governance good at these banks is matched by relatively generous savings rates. Most banks offer paltry rates for savings accounts. For example, my bank, Citibank, offers savings rates of 0.04% for deposits below $10,000 and 0.1% for deposits from $25,000 to $99,999.

Atmos has a savings rate of 0.41% to 0.51% and it ups that figure to a 0.11% bonus on donations to climate nonprofits on its platform. Meanwhile, Aspiration has savings rate of 1%. As if that wasn’t enough, costs for these services are low or non-existent. Atmos and Aspiration do not charge fees for traditional banking services. Aspiration even offers a “Pay What You Wish” facility. In other words, you can choose to avail of their services for free for a lifetime or pay as little as a dollar for them.

The ESG Sheen

If all of this sounds too good to be true, then it is.

For starters, these so-called banks are not really banks in the legal definition of the term. They are licensed broker-dealers, which means they are authorized to take money from individuals and invest it on their behalf. They invest bank deposits into ESG funds and partner with small FDIC-insured community banks to ensure that customer funds have the agency’s insurance protections.

For example, Atmos works with Arkansas-based Evolve Bank &Trust. Aspiration is partnered with Coastal Community Bank, which is based in Washington. Besides the marketing, there is actually nothing wrong with this approach. Several Silicon Valley startups like Stripe and Square have formed partnerships with the same banks to market financial services to millennials.  

But the ESG sheen on these banks may be a thin one. Before the pandemic hit, Andrei Cherny, Aspiration CEO, commuted daily from his home in Phoenix to Los Angeles, where the company’s offices are located. No prizes for guessing the impact his commute had on the environment. The company’s funds, the ones that are supposed to make you feel good about doing good, are not exactly ESG-friendly either.  

Here’s an example. The biggest holding in Aspiration’s Redwood fund is Reynold’s Consumer Products, a manufacturer of consumer packaging. Last year, ratings agency Moody’s wrote that only approximately 43% of its products sold in the United States were compostable, recyclable and/or made from recyclable material. The company’s corporate governance risk is also high, according to Moody’s, because more than 50% of the entity is owned by corporate investor Graeme Hart. That stake comes with certain advantages, such as determining composition of the entire board.

Another holding of the company’s fund is Mohawk Industries, a flooring company that was sued by the Public Employees' Retirement System of Mississippi for engaging in fraudulent schemes to misrepresent its financials from April 2017 to July 2019.  

No F(r)ee Lunch

The absence of fees at these startups might be an enticing reason to put money into them. Indeed, free services is one way that tech startups attract users to their platform, bulking up their user base before selling them off to established firms.

The problem is that there is no such thing as a free lunch. Someone, somewhere is always paying the bill (monetary or otherwise). In this case, it is venture capitalists and investing partners bankrolling these startups. At some point, they will want to cash out or need proof of profits. Aspiration, possibly the oldest of these startups, has already run into such problems earlier. Back in 2019, it had to lay off 15% of its staff and stop vendor payments after it failed to raise $200 million funding at a valuation of $1 billion. According to Crunchbase, the company has raised $185 million since then. New investors include Robert Downey Jr.’s Footprint Coalition.

Discussions
Craig Polk's picture
Craig Polk on May 4, 2021

Interesting article. The trend of celebrity backing continues to grow in many sectors in telecomm and Fintech. It is a sigh of the times how social presence and branding play key roles in technology development.

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