How Can Fintechs Tackle the E in ESG?

Firms are not placing their ESG goals at the front of their focus, because of difficulties measuring the carbon footprint of a payment.

While sustainability has been at the forefront of managers’ and executives’ conversations, it looks like fintech companies are not as good at confronting environmental issues within their ESG standards as they are with the social and governance sides.

What this means is that fintech firms are a lot more likely to promote diversity and inclusion in the workplace, and extend mental health services, rather than put a carbon zero plan in place.

This is what research conducted by ESG_VC, a UK industry initiative supported by venture capitalists, which aims to underline the ESG issues early-stage businesses are confronted with, has shown.

According to their research, 57% of fintech start-ups achieved 1 out of 4 stars for environmental qualities of ESG, 36% scored 2 out of 4, and the remaining 7% earned 3 out of 4 stars.

This is in comparison with social aspects of ESG, in which 11% were rated 1 star out of 4, 32% scoring 3 stars, and the remaining firms earning 4 out of 4.

Again, the governance side largely outruns the environmental metrics, with about a quarter of firms rating 1 or 2 stars out of 4, 58% of firms achieving 3 stars and 16% awarded full marks.

Generally, the research makes it clear that fintech companies are fulfilling the social and governance side of ESG significantly better than the environmental aspects in comparison to their start-up equivalents operating in e-commerce, software-as-a-service and manufacturing.

Fintech firms just do not have environmental factors at the top of their radar, and this is because the resources and work which is required to address environmental issues are usually directed to other key parts of a business, such as business development, marketing and research, according to Carlo Maria Capè, CEO at global management consultancy, BIP.

Capè adds that due to the “size and the nature of the industry, they tend not to be heavy emitters, so environmental impact may not be considered a strategic focus.”

Fintech firms might also be pushed away from delving into their environmental impact by the perceived technical processes used to capture that kind of complex data.

This remains a key question for fintech start-up founders.

Namely, how can fintechs keep a track record of the carbon footprint of their products and services when they are “not as tangible as a manufacturer’s or a food company’s,” asks Faith Frank, head of ESG and social impact at Payoneer, the cross-border digital payment services provider.

In other words, “what is the environmental impact of a payment?”, adds Frank.

For many fintechs, the supply chain is almost entirely digital, staff work semi or wholly remotely, and a typical fintech product is usually hosted on the cloud, according to Manuel Antunes, venture investment manager at Triple Point, an early-stage venture capital firm.

But, Antunes adds, “delivering a product or service via the cloud does come with an energy cost – it’s just less visible.”

However, there are steps fintechs can take in an effort to fulfil the environmental side within their ESG standards.

These include implementing a carbon-offsetting platform in order to balance their carbon footprint while fulfilling a pledge to reduce emissions or working alongside external partners who are devoted to decreasing fossil fuel financing.

Fintechs can choose suppliers and vendors who are socially responsible by carrying out screening processes for their own sustainability practices. However, keeping track of your environmental impact remains largely optional.

This has put many fintechs in the dark about the most relevant available data and the ways in which it should be captured.

Given this uncertainty, Frank suggests that fintechs should build the capacity to address sustainability by engaging with external organisations which can help them with the measuring and reporting of this data.

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