Signals Q1’23: The onset of carbon offsets

Hey Fintech Friends,

Amid bank runs, an AI frenzy, and a shifting venture landscape, one concept quietly drew attention from fintech investors in Q1: Carbon credit markets.

For new readers, Signals is the premium subscriber edition of TWIF designed to get you away from the headlines and to explore the larger trendlines. Each quarter, we break down four key questions on fintech activity:

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Fintechs raised a total of $12.1 billion in Q1, over half of which was comprised of Stripe’s nail-biting, employee-RSU-triggering Series I. Excluding Stripe from the dataset, fintech funding decreased by $114 million, or 2%, from the prior quarter.

Meanwhile, the S&P 500 ticked up 7%, Bitcoin climbed 70%, and public fintechs investors seem to be refocusing their attention from high revenue growth to profitability:

Let’s dive into fintech activity in Q1.

Funding was relatively even across rounds as fintechs closed chunkier late-stage deals, with Series D and Series E round sizes ballooning by 98% and 183% respectively over the prior quarter. Notably, Rippling notably pulled off an emergency $500 million Series E in twelve hours to cover payroll for 50,000 employees whose incoming funds were frozen overnight during SVB’s collapse.

Areas that saw the highest activity were:

A few concepts received notable funding, including:

Here’s an unsurprising chart:

Banks led acquisition activity, with bank runs driving UBS’ takeover of Credit Suisse, New York Community Bank to snap up Signature Bank, the acquisition of Silicon Valley Bank by First Citizens, and of SVB’s UK division by HSBC for a symbolic £1.

LevelField acquired Burling Bank in a bid to become the first full-service, FDIC-insured, chartered bank offering crypto services nationwide– though given the forced shut-down of Signature, regulators seemingly aren’t keen to bless new crypto banks anytime soon.

Venture funds launched in fewer numbers, but with a resounding focus on early-stage platforms:

In reaction to the bank drama, digital business banks and banking infrastructure providers like Mercury, Crescent, and Unit* all unveiled higher FDIC insurance limits on deposits.  

In business financial management, the race is on to ship AI features. Tribal Credit launched its GPT-powered Cash Copilot solution; similarly, Navan (fka TripActions) previewed ChatGPT-enabled expense reporting with a renewed focus on taking down SAP Concur. Brex launched (non-AI-powered) travel expensing, because apparently the race is also on to compete with SAP Concur.

In payments, entering card details is out; card autofill is in, with Google launching single-use virtual cards and Adyen’s card-on-file checkout feature. Apple’s payments arm also threw its hat in the consumer financing ring with the long-anticipated launch of Apple Pay Later.

* Former employer of yours truly 👋🏼.

While venture funding dampened across the board, one concept quietly gained momentum in Q1: Carbon credits. Of the $12 billion in funding that went to fintechs, 2% went to carbon credit platforms, with Xpansiv, Carbonplace, Senken, Renew West, Alcove, Carbonable, Agreena, and HeavyFinance racking up a total $238 million in equity financing.

Despite having been around for over 25 years, carbon credit markets are still notoriously opaque, with studies finding that up to 90%-96% of carbon credits offered by the leading issuer don't actually reduce emissions to any meaningful degree. Meanwhile, companies' appetite for carbon credits is set to grow by a factor of 15x and attain upwards of $50 billion in value by 2030.

Theoretically, carbon credit markets would efficiently match carbon offset projects with funding from companies looking to buy high-quality credits. In reality, the market’s lack of transparent standards has scared buyers away from providing liquidity and left legitimate carbon offset projects struggling to raise money.

New standards are emerging to bring greater transparency to carbon credits, and if successful, there's a major opportunity for platforms to unlock liquidity in a space that until now has been largely inaccessible to mainstream financial markets.

Carbon credits trade in two markets: 1. Regulated markets, in which a government imposes a cap-and-trade system forcing companies emitting carbon above a certain threshold to buy carbon credits from companies that emit below the threshold, and 2. Voluntary markets, wherein companies– as the name implies, voluntarily– buy carbon offsets to help achieve environmental impact targets (think: Google's "carbon neutrality" commitment, or airlines letting you tack $20 onto your airfare to "offset" the climate impact of your flight).

Regulated carbon markets exist in 34 jurisdictions today, including the EU, Canada, China, and eleven US states. In certain regulated markets, companies can substitute carbon offsets for government-issued carbon credits.

There's a lot of criticism surrounding the fact that carbon offsets don't actually, you know... offset any carbon. In absence of transparent ways to measure carbon credits' impact and in the face of low price availability (75% of credits trade OTC, so there's little volume on exchanges to indicate market values), investors are staying on the sidelines. In Europe, speculators hold less than 1% of open positions in the carbon credit market.

International governance bodies like the Integrity Council for the Voluntary Carbon Market and Voluntary Carbon Markets Integrity Initiative are working to restore trust by creating universal rules and transparency mechanisms. If successful, this would lay the groundwork for carbon credit markets to route a lot more funding to high-quality carbon offset projects.

Some key opportunities for tech platforms:

Calls for transparency in carbon credit markets are bringing about a new dawn for the industry. Assuming that the transparency & oversight standards emerging in the coming months (years?) manage to restore trust, tech platforms are positioning themselves to let companies, investors, and carbon offset projects harness the full potential of this space.