The fintech factor: Why financial technology firms should care about ESG reporting

by Ruth Wood

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Unless your fintech is on the frontline of the climate crisis, you may not be paying much attention to the rise of corporate sustainability reporting. 

Perhaps you’re thinking only big brands file Environmental Social and Governance (ESG) reports – big brands with big carbon footprints and big reputations built up over decades.   

Your fintech, by contrast, may well be an early-stage business with low overheads and a small team of hybrid workers. Your offering is probably in the cloud, not a physical thing that needs to be reduced, reused or recycled. Your supply chain is probably digital. It’s unlikely you’re a major emitter of greenhouse gases. So why bother to share your sustainability story? 

Well, for starters, ESG reports are about more than environmental matters. Many fintechs have great stories to tell around their approach to governance or their contribution to social inclusion matters. By focusing on the S and G factors, even the smallest fintech can punch above its weight and shout about its ESG credentials.  

The G factor: building trust 

Having jumped through the regulatory hoops to become a financial services provider, your company has already worked hard to establish trust. And trust is key to governance – the ‘G’ in an ESG report. 

As relative newbies, fintechs have an ideal opportunity to distinguish themselves from the traditional providers tarnished by the 2008 financial crisis. Yet a 2020 report by global trust barometer authors Edelman found that consumers had reservations about fintech. Fear of the unknown and of handing over personal data were the main reasons cited, as well as concerns that technology is evolving too quickly for regulators to keep up.  

Scandals such as the collapse of German fintech Wirecard due to corrupt management and incompetent auditing can also cast a shadow over the whole sector, the report found.  

It just goes to show the importance of transparency. If your fintech has high ethical standards and strict controls around data security, compliance and risk management, it’s worth communicating that to your customers, investors and employees.  

The importance of good communication is echoed by a 2021 survey of 4,400 US consumers by global decision intelligence company Morningstar. It found that, while three out of 10 respondents generally distrusted fintechs, almost half had no opinion because they didn’t know enough about them. In contrast, when actual users of fintech apps were surveyed, their trust levels were much higher and on a par with trust in traditional brands. In other words, the problem is not so much a trust gap as an awareness gap. You can address this by reaching out and engaging your stakeholders. Show them who you are and what you stand for, whether it’s through a friendly social media post or a governance chapter in an ESG report. 

The S factor: building community 

If your company makes life better for people without harming wider society, then you are adding social value – the S in ESG.  

Fintechs tend to excel at this, simplifying and democratising access to financial services in innovative ways that reduce inequity. They are often values-led organisations with great stories to tell about app accessibility, employee wellbeing and community engagement.  

Reaching people marginalised by traditional financial services is fintech’s forte. Gigwage provides a financial “safety net” for workers in the gig economy, for example. Lemonade Finance allows Africans in diaspora to send money to their families back home with no hassles. And digital bank Monzo has found a way to support vulnerably housed people by adding a QR code to the Big Issue so that readers can pass the magazine onto friends who can then scan the code and boost the profits of the original vendor. 

Financial inclusion is not just about minority groups. Nutmeg is on a mission to get more women investing, while GoHenry’s pre-paid debit card is empowering kids to start managing their money. 

Gen Z, the financially fragile cohort that has grown up between the Great Recession and the global pandemic, is the biggest generation on earth. Not only are these digitally savvy consumers the group most likely to need and embrace fintech, they are also the most socially responsible generation ever. Deeply connected to the world via social media, Gen Z consumers tend to support brands that put people and planet on a par with profit. Fintechs that treat people with fairness and respect, be it their customers, staff or wider society, have everything to gain by communicating it. 

The E factor: building a future 

Even the leanest fintech will have an impact on the environment – the ‘E’ in ESG.   

Cloud storage is usually more energy-efficient than on-premises data centres. But together they still consume 1.8% of the electricity produced in the United States, generating huge emissions. 

Exposés about the carbon footprint of cryptocurrency ‘mining’ have further undermined fintech’s environmental credentials. Bitcoin, for example, uses more electricity annually than Argentina, according to an analysis by Cambridge University, though blockchain enthusiasts argue that the technology also has the potential to drive renewable energy adoption. 

Fintechs can expect to come under increasing consumer and regulatory pressure to publicly account for their computing power emissions and to mitigate them. Likewise, as major consumers of IT equipment, they will be expected to reduce their e-waste and adopt circular economy principles.  

Firms that are upfront about their sustainability journey and set clear goals to improve are likely to win consumer trust. Online shopping platform Klarna is among the trailblazing fintechs disclosing its emissions through ESG reporting and committing to climate action targets. And in the UK, Revolut, Starling and Wise are among the fintechs signed up to the TechZero charter committing them to accelerating progress to net zero. 

Of course, there’s also a breed of ‘climate fintechs’ set up explicitly to fight the climate crisis. Last year, US and European start-ups in this category raised $1.2 billion – triple all previous years combined, according to specialist investor Commerzventures. Much of this is driven by the need for accurate data for ESG reporting. UK-based start-up Emitwise, for example, has developed an AI-powered carbon accounting platform that specialises in tracking the tricky-to-measure emissions buried in supply chains. Other climate fintechs are focusing on carbon offsetting or trading, supply chain analytics, climate risk data and more. 

The fintech X factor 

Whatever their impact on people and planet, it’s inevitable that all companies will one day be compelled to make ESG disclosures just as they are compelled to disclose financial information. As innovators comfortable with big data and AI, fintechs are perfectly positioned to get ahead of the curve, capturing and communicating the required data and helping other companies do the same. Disruption is what you do, so why sit on the sidelines of the biggest disruption facing humanity? 

Find out how we can help you tell your ESG story. 


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