FintechAI-driven solution for climate risk management & adaptation finance
About the Client
YAPU Solutions provides digital tools to support financial institutions in developing countries targeting the most vulnerable populations, as well as micro, small, and medium enterprises.
The solution we created for YAPU enables them to act as a social fintech entity, actively addressing climate-related issues while helping businesses in developing countries, such as farmers or micro and small enterprises, to adapt to the evolving challenges of adverse climate impacts.
YAPU works with partners to identify social, climate, and nature-related financial risks and addresses them with dedicated loan products. YAPU also collaborates with investors to ensure a comprehensive and verified view of the impact of their investments.
Problem Statement
Over USD 1.5 trillion has been lost due to climate change in the last decade alone. By 2050 climate change-related losses are projected to reach yearly levels of USD 1.7 - 3.1 trillion.
Financial institutions in regions such as Latin America and Africa often struggle to manage climate risk due to limited capacities and methodologies. As a result, they often reject loan applications from climate-vulnerable companies and populations, leading to reduced competitiveness and profitability in the industry due to an artificial market limitation.
- Financial institutions in developing countries do not know how to deal with climate risks.
- High credit risks associated with agricultural lending due to lack of data.
- Companies prioritize risk prevention over an evidence-based return on adaptation investments.
- Lending decisions are not informed and do not include climate resilience.
- No straightforward way to assess the climate risks to prioritize loans.
- By failing to manage climate risks proactively and overlooking important opportunities, companies lose potential income.
Tech Stack
Solution
Integrate and mainstream climate risk management and adaptation finance into standard banking and financing operations. International framework agreements, which have emerged dynamically over the last months, focus on providing clear international management frameworks. Sharm Adaptation Agenda outcomes or the Race to Resilience metrics provide relevant inputs, as do the task forces on Climate- and Nature-related financial disclosure.
During our ongoing collaboration, which has included 3 years of active development and 2 years of product support, HW.Tech has delivered a complex project aimed at Microfinance Institutions (MFIs) to foster financial inclusion and ecological transformation in regions like Latin America and Africa.
Technological Challenges
Recognizing that mere digitization of MFIs’ operations does not guarantee efficiency and rapid results, we emphasized three key elements to differentiate our solution:
- Security Maintaining high-security standards for rapid approval from bank IT departments, coupled with integrations with core banking systems, ensured the complete digitization of financial institutions in just a few weeks.
- Flexibility: The no-code configuration allowed us to onboard and digitize financial institutions three to four times faster than the competition, while closely aligning with existing business processes.
- Efficiency: Implementing a proprietary risk management model with geospatial climate risk data to optimize processes for sound lending decisions, enhancing reliability in in-field workforce management and digitization efforts.
Credit Lifecycle Management System
The first module we built was a digitization solution, which included web and mobile applications that enabled MFIs to digitize loan processes, conduct risk analysis, and make data-driven decisions. Key solution elements:
- Digital front office enables loan officers to collect data in the field, includes secure login and user control, and supports debt management, reducing paperwork.
- Digital team management tool enables small and medium banks in Latin America and Africa to better utilize their human resources, monitor and improve field operations, engage with farmers, and underwrite loans.
- Digital loan decision module is used to standardize and align your loan decisions. Define rules for automated and transparent loan decisions and organize virtual credit committees for collaborative decision-making.
AI-Driven Credit Risk Assessment
A digitized credit management tool used as a foundational layer allowed us to gather and process data for AI and big data solutions. This helps mitigate climate risks for financial service providers and finance more projects to make farmers resilient:
- Credit risk assessment reporting based on credit ratings, sector and activity risks, physical climate risk estimates, and cash flow projections enables data-driven decisions.
- A recommender agent provides effective recommendations to increase the resilience of farmers to climate change by using data from all implemented climate risk adaptation and resilience projects in the region.
- A taxonomy framework for green investment categorizes global initiatives and utilizes a software module to certify loans. It includes spot checks and audits to verify that funds for green resilience projects are used as intended.
Results
YAPU's digital solutions are driving global change by enabling financial institutions to manage the risks associated with climate change while gaining a competitive advantage through improved risk management and decision-making:
- Small and medium banks in developing countries could process 25% more loan requests and disburse 25% more capital without increasing expenses or team size, resulting in a significant increase in revenue.
- Flexible, no-code workflow integration enabled full digitization of financial institutions, integrating seamlessly with the core banking system within 2-12 weeks.
- YAPU partnered with eminent global businesses like BNP Paribas, UN Environment, and CIAT.
- They are involved in international climate adaptation and sustainable finance projects such as The Scale for Resilience initiative, MEBA, and ECOMicro.
- The company also secured an Inter-American Development Bank grant for a South American climate change mitigation platform.
- YAPU Solutions was recognized as a leader in innovative financing models for private sector investment in nature-based solutions for adaptation by the Global Commission on Adaptation.
- The company facilitated $200M USD in resilience finance and is on the path to accelerated growth, aiming to link capital markets to the most vulnerable.
YAPU and HW.Tech appreciate the relevance of climate risk management for standard lending operations – and explore the replication of their solution in markets in the Global North.
Next Steps
A lot of businesses focus on climate resilience, staying environmentally friendly and taking climate risks into consideration when making decisions or implementing changes.
Since the YAPU project saw success in developing countries like Latin America and Africa, the next step is to enter the European market. The technical task would be to alter the adaptation finance solution to the needs of European companies. The prototype is ready to be implemented and adjusted to fit the needs of the customers with considerations of local peculiarities.
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