The financial industry is undergoing a remarkable evolution as the confluence of technology and sustainability is picking up pace. In India, green financing has gained prominence as a necessary tool to solve environmental issues whilst encouraging growth. This is especially true for micro, small and medium enterprises (MSMEs), which are the backbone of the economy contributing to employment, exports and rural development in large numbers.
Many MSMEs find it hard to put green practices into existence due to the high costs of financing. This is where the synergy of AI and fintech is changing the dynamics of green finance, facilitating the shift of SMEs towards green business practices.
Nevertheless, many MSMEs find it hard to put green practices into existence due to the high costs of financing. This is where the synergy of AI and fintech is changing the dynamics of green finance, facilitating the shift of SMEs towards green business practices.
The role of AI & Fintech in green financing
Small and medium-sized enterprises are benefiting from the use of artificial intelligence and fintech in the green finance space due to advanced data analytics, machine learning, and blockchain technologies. These solutions are breaking some of the existing barriers which have prevented many small businesses from embracing and practicing sustainability, for instance, huge capital requirements and lack of credit. The financial institutions’ financial risk and investment evaluation capabilities in relation to green investments are boosted by the use of artificial intelligence or data-driven strategies. Therefore, such financial products can comfortably be adopted in a conventional-oriented framework, which in essence, is an enabler of the adoption of sustainable ways of doing business.
For instance, fintech systems leverage data analysis in the assessment of businesses’ Environmental, Social, and Governance (ESG) practices. Integrating ESG measurements in credit assessments implemented by fintech companies supports SMEs to sustainably orient their operations by offering preferential financing rates, thus encouraging more enterprises to adopt eco-friendly practices. This gave birth to innovative financing models, such as deep-tier supply chain finance, which provides visibility into the ESG performance of suppliers, thus encouraging responsible business practices across supply chains.
Enabling access to capital for rural & semi-urban SMEs
Most small and medium enterprises (SMEs) still encounter difficulties in obtaining affordable external financing, especially in rural and semi-urban areas where traditional financial service providers have limited outreach. Nonetheless, AI and fintech are overcoming these challenges, and they are turning to digital means of capital mobilisation through the use of technology. Such platforms utilise alternative data sources, including mobile transactions, satellite imagery, and IoT sensors, to assess the creditworthiness of borrowers who may not have formal credit histories. In this manner, they also enable small entrepreneurs to obtain funds for green initiatives like solar power systems, energy-saving appliances, and eco-friendly infrastructure upgrades.
Moreover, predictive analytics using AI technology assists banks in recognising risk factors that green investments may pose, thus improving portfolio management. Such an approach decreases the expense of project funding for small and medium enterprises while also guaranteeing that the available resources are directed toward the most beneficial projects in terms of environmental preservation. Thanks to artificial intelligence (AI), real-time project tracking is possible, enabling the lenders to exercise their discretion and modify the loan damages where it is appropriate to do so, hence improving the efficiency of the green finance initiatives.
Supporting sustainable supply chains
Businesses owe their sustainability endeavours primarily to supply chains and especially the incorporation of the tenets of green finance in these chains, which can also bring about substantial environmental benefits. AI, as well as fintech solutions, are enabling SMEs to enhance the sustainability of their supply chains by providing tools to monitor and optimise environmental performance. For example, systems built on AI algorithms can manage suppliers’ carbon footprints, detect any shortfalls, and recommend what actions to take in order to redress the negative influence. This helps SMEs to align with global sustainability standards and meet the growing expectations of customers and investors who prioritise eco-friendly products.
Another innovation that relies on the use of data analytics to provide insight into the sustainable efforts of suppliers is deep-tier supply chain finance (DTSCF). This enables financial institutions to assess ESG compliance across the entire suppliers’ network, facilitating the application of green finance considerations in the procurement process. Consequently, small and medium enterprises (SMEs) with a good track record in ESG are able to obtain more advantageous borrowing rates, encouraging the integration of sustainable practices throughout the entire supply chain.
Addressing the financing gap through innovative solutions
The need for effective funding for green initiatives dwells, particularly in developing countries. Available statistics state that one trillion dollars will be required to accommodate and mitigate climate change in the Indian region by the year 2030. Here’s where AI and the fintech industry can close the gap by reducing costs and improving the efficiencies of the funding mechanisms. Solutions like digital lending and financing through smart contracts mitigate the time and money spent on traditional lending processes. Such improvements make it possible to finance numerous smaller environmentally sound projects, thereby promoting the shift into a decarbonised economy.
For instance, a digital platform that estimates the viability of solar rooftop systems via satellite imagery and structural design can easily issue customers with results and even carry out the whole funding process in just a few days. Such efficiency is critical for increasing the uptake of renewables in off-grid and semi-urban settings, which have faced operational barriers and high costs of green investments in the past.
Driving sustainable growth & development
Artificial intelligence, in conjunction with financial technology, plays a significant role in supporting green finance. It is not limited to making financial transactions alone, and it encourages socio-economic growth over time. By allowing small and medium-sized enterprises to get the funds they need for sustainable improvements, the technologies are creating new jobs, improving rural development, and aiding in environmental conservation. As more enterprises embrace environmentally friendly methods, the climate change resilience of rural and semi-urban regions is enhanced, facilitating economic growth that is both sustainable and equitable.
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AI also enables companies to forecast the evolution of given environmental trends and risk factors, aiding them in making proactive decisions to protect their businesses from climate impacts. This alleviates business risks and encourages the need to build better and more resilient communities.
Final words
AI and fintech have begun to change the green finance landscape for Indian SMEs encouraging sustainable development in rural and semi-urban areas. These systems facilitate easy access for small businesses to financing that promotes green practices and sustainable business operations. Hence economic and environmental development is at a new height. However, the quest for a sustainable future requires more innovations and collaborations within the financial ecosystem to tackle more existing barriers in the practice. As the usefulness of AI and fintech in green finance keeps on opening up, its application should always have the limitations of building solutions bearable to all small businesses and their environments.
Guest contributor Ankit Verma is the Business Development Lead at Air8 Finance, a company that unlocks new sources of capital for SME suppliers, bridging the trade finance gap. Any opinions expressed in this article are strictly those of the author.
