Focusing on ESG initiatives not only benefits the environment and local communities, but also helps fintechs attract venture capital and gain substantial profits
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ESG stands for environmental, social, and corporate governance. Every modern company has to regularly report on its ESG achievements to stakeholders and investors. The corporate data regarding CO2 emissions, sustainable initiatives, charity causes, personnel diversity or workplace inclusivity directly impacts the business’s reputation and prospects.
How fintechs help solve ESG challenges
The fintech industry plays an important role in reaching global climate goals. As you may know, major businesses and government institutions worldwide are committed to halving global emissions by 2030 and reaching net zero by 2050. Some companies plan on reaching their individual targets even earlier.
In this rush to cut negative impact on the environment, fintech innovations may be used at every stage. For instance, they can facilitate and bring transparency to ESG data collection, reporting and sharing across the ecosystem. Financial technologies can become a base for carbon trading infrastructure. Besides, blockchain technology may potentially enable the traceability of power use, product origins, and energy efficiency.
Often, communities or businesses agree to switch from fossil energy sources to renewable ones. Such projects are expensive and often fail, being underfinanced. Fintechs can facilitate this transition with innovative financing models such as crowdfunding, green bonds, transition bonds, mobile loans, etc. Additionally, bonds and loans could set environmental targets and pay investors a premium if the company falls short of that target, making transition financing more lucrative.
Besides, fintech solutions contribute to the rise of financial inclusion which is a crucial part of the “social” component in ESG. Including more people in the national financial system gives them more credit and investment opportunities. Thus, both customers and payment providers can generate more profit.
For instance, mobile money has become an important facilitator for financial inclusion in Sub-Saharan Africa, particularly, for female citizens. People in the region lack access to traditional banking and often don’t have enough documents to access routine services. With the help of fintech startups, they can seamlessly open a mobile money account and use it for payments, saving, and borrowing.
Financial incentives ESG focus brings
Fintech startups, as well as traditional financial service providers, with strong ESG orientation receive additional fundraising opportunities. The unique combination of financial technologies and sustainability has attracted increased investor interest in recent years. Over 80% of institutional investors in the US and Europe plan to increase their funding of ESG products over the next two years.
According to Mastercard’s recent report, the amount of VC investments into ESG-focused fintechs has doubled between 2019 and 2020, reaching over $1.8 billion per year. Moreover, the average deal value has also surged to $450 million, while the deal count was lower. That trend indicates increased confidence in the profitability and resilience of socially and environmentally conscious businesses.
Not only VC funds but also private investors, as well as large banks and financial institutions join the investment rounds for fintechs with clear ESG goals. In total, the sector received almost $6 billion in funding from various sources last year. Furthermore, KPMG forecasts that total annual investment in ESG-fintech space will double in 2023, further rising to $14.1 billion in 2024 and $28.8 billion in 2025.
Furthermore, ESG-focused companies see greater customer retention levels. Clients are drawn to their environmental and social missions, inclined to switch financial service providers if they don’t show enough care for the common good. More highly-motivated customers lead to a profit increase as well.
A report published by global accounting firm Moore Global last September illustrates that companies intent on supporting ESG principles enjoyed higher revenues and stronger profit growth, along with greater access to finance. Namely, companies that highlight their commitment to ESG solutions have seen profits rise 9.1% and revenues grow 9.7% over the past three years.
Benefits of ESG for banking
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Traditional legacy banks may have a halo of credibility, but a younger consumer demographic, who is currently the main user of banking services, wants its financial service providers to also show their leadership in environmental causes.
Challenger banks do not only diminish their environmental impact by the absence of brick-and-mortar branches and paperless onboarding, but also may engage their customers with ESG-focused practices.
For instance, the US-based Aspiration Bank offers a ‘Spend and Save’ cash management account where the deposits are guaranteed not to fund any oil and gas projects. Meanwhile, customers shopping with its zero-carbon footprint credit card are proud to know that the fintech will plant a tree every time a purchase or roundup occurs.
Additionally, clients may track and improve their environmental impact score in a banking app. The given tools turn routine banking into an exciting and meaningful experience, bringing customers a sense of making a change every day. For businesses, Aspiration offers a range of high-quality carbon and reforestation programs to offset their impact. It’s no wonder the bank has already attracted over 5 million customers, being one of the top US neobanks.
Another eco-focused fintech startup TreeCard offers a similar initiative, planting a tree with every $50 spent by its cardholders. The debit cards offered by the fintech are made of sustainably sourced wood and recycled plastic bottles. Besides, TreeCard’s spending and money management app includes a fun game that lets users visualise their individual eco-impact.
Besides banking as a service, fintechs now also provide ESG Investing-as-a-service tools, helping banks and wealth managers meet the growing demand for sustainable investing. Such innovative solutions integrate third-party services into financial institutions’ open API, enhancing their ESG proposition.
Sustainability focus in lending
Debt financing landscape is already reshaped by green bonds and sustainability-linked loans. Approaches to ESG in lending have become increasingly sophisticated, with a variety of innovations serving to encourage better and more sustainable practices.
There are several dedicated ESG lending platforms and products for individuals such as Goodleap and Mosaic Inc. which help finance energy-efficient home improvement projects.
More initiatives are available for businesses aiming to transit to net zero operation models and improve their daily practices. For instance, Generate, a sustainable infrastructure company, launched a dedicated credit business to provide flexible financing solutions to technology companies and project developers in areas such as renewable power, energy efficiency, microgrids, energy storage, electric mobility, hydrogen, wastewater, waste management, and sustainable agriculture.
Although green finance remains in its infancy, Accenture estimated that sustainable-linked lending skyrocketed from $5 billion in 2017 to $120 billion in 2020. The analysis also forecasts significant demand for sustainable lending will evolve in years to come.
ESG-related loans enable borrowers to illustrate their ESG commitments to external stakeholders, who want transparency when it comes to firms’ responsible investment practices.
How payments facilitate ESG goals
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Innovative payment apps offer a range of analytical and statistical tools that may help customers shift their spending patterns to more sustainable products and services. Digital tools can potentially allow individuals to calculate and limit their CO2 impact based on their payment history, track the product components to find out about the impact on local communities, assess the sustainability of the packaging used, check brand recycling patterns, and more.
Tools like that are highly sought-after by the eco-conscious customer cohort. At the same time, fintechs providing ESG-focused payment solutions reap their rewards too. These offerings help climate-oriented companies attract a key demographic segment and sustain their transaction revenue by arranging financial transactions in line with ESG goals.
An example of a fintech catering for measurable ESG impact is British neobank startup Novus which gives its customers a choice of initiatives they want to support with their responsible spending. These include saving endangered animals, protecting oceans, fighting hunger, supporting gender equality or human rights, and reducing emissions. Through the dedicated app, one can keep track of the impact they’ve generated on both an individual and collective level.
Regtech and ESG risk analysis
The two specific categories of financial technologies that underpin measuring and sharing sustainability data are regtech and risk analysis.
Regtech has a very strong value proposition for ESG-focused activities. It helps automate voluntary and mandatory disclosures of corporate ESG practices, providing enhanced data for financial sector decision-making. It is particularly useful for potential investors, as they can verify the entity’s ESG efforts and achievements, as well as check on supply chain data and insights, avoiding “greenwashing” initiatives.
Risk analysis is a climate fintech category which focuses on measuring business practices’ risks for the environment and community, and estimating transition risks for companies on their way to sustainability. Companies that work in that space use satellite data, AI, machine learning, and Internet-of-Things (IoT) connectivity to collect and analyse ESG data.
The sector players include Turnkey Group, which provides risk management services for consultancy firms and environmental management software. RegASK platform uses AI to monitor, anticipate and report updates or changes in ESG-related regulations and policies.
Conclusions
The fintech sector plays a vital part in promoting the ESG agenda and facilitating the transition to a more sustainable future. Fintechs that place their social and environmental missions above all gain in many ways. They have better customer retention and engagement levels, more investment opportunities, increased profitability, and highly-motivated employees. Therefore, ESG focus in fintech is not only good for the planet, but also beneficial for the business itself.
