For many fintech firms, the environmental element of ESG isn’t necessarily on their radar because it can be hard to measure the carbon footprint of a payment
Sustainability has become the talk of the C-suite, but fintech firms aren’t as good at addressing the environmental aspect of ESG as they are the social and governance.
Fintech companies are far more likely to promote diversity and offer mental health support than have a net zero carbon plan in place. This is according to research by ESG_VC, a UK industry initiative backed by venture capitalists that highlights the ESG challenges faced by early-stage businesses.
Fifty-seven percent of fintech startups scored one out of four stars for environmental metrics, while 36% earnt two stars. The other 7% were rated three out of four.
For comparison, 11% scored one star on social metrics with 32% scoring two. Forty-seven per cent received three stars and the rest four. As for governance metrics, only around a quarter were marked one or two stars. Fifty-eight received three stars while 16% were awarded full marks.
Fintech performing poorly on ESG
Overall, fintech performs far worse when it comes to the E in ESG than their startup counterparts in ecommerce, software-as-a-service and manufacturing.
A major reason environmental metrics aren’t on the radar of many fintech firms is because the resources required are typically directed towards other core functions such as business development, marketing and research, says Carlo Maria Capè, CEO at global management consultancy, BIP.
“Given their size and the nature of the industry, they tend not to be heavy emitters, so environmental impact may not be considered a strategic focus,” he adds.
Fintech founders might also be deterred from ploughing time and effort into ESG by the technical jargon and the perceived complex processes used to capture data.
“It can be challenging for fintechs to get a handle on environmental metrics and reporting because, after all, ESG is fundamentally about data – gathering and reporting it in a structured way,” says Faith Frank, head of ESG and social impact at Payoneer. The cross-border digital payment services provider is a public company that is scaling globally and is planning to put in place the infrastructure to capture ESG metrics from country to country.
One of the key questions facing fintech startups is how to track the carbon footprint of their products and services when they’re “not as tangible as a manufacturer’s or food company’s”, Frank adds. “What’s the environmental impact of a payment?” she asks.
“The supply chain for most fintechs is almost entirely digital. Their staff are often remote or partly remote, and their product or service is often hosted on the cloud,” says Manuel Antunes, venture investment manager at Triple Point, a purpose-driven early-stage venture capital firm. Its portfolio includes Credit Kudos, which was acquired by Apple earlier this year for a reported $150m (£122m).
“Of course, delivering a product or service via the cloud does come with an energy cost – it’s just less visible.”
How fintech firms can reduce their carbon footprint
There are steps fintech firms can take to address the E in ESG. These include using a carbon-offsetting platform to balance their footprint and at the same time make a pledge to reduce emissions. They can also work with partners that are committed to decreasing fossil fuel financing.
Another way fintech startups can reduce their environmental impact is by prioritising using suppliers and vendors that are socially responsible by screening them for their own sustainable practices.
Globally, measuring environmental metrics is still largely optional. This has meant that fintech firms can struggle to understand what data is available and relevant and how it should be captured. Frank points out that if fintech companies are unable to build the capacity in-house, they should engage an external organisation that can assist them in the measuring and reporting.
Things are starting to change. As of 6 April this year, 1,300 of the largest UK-registered companies and financial institutions are subject to TCFD (Task Force on Climate-related Financial Disclosures) reporting. When ESG reporting becomes mandatory for companies of all sizes, it should become clearer to fintech firms how they should be measuring environmental metrics.
This will be a good thing. Not only does reporting accurate data help to guide internal efforts, but transparency is key in winning the trust of external stakeholders. It’ll also be crucial for securing future funding.
The role of investors
The research from ESG_VC shows that startups tend to get slightly better at addressing the environmental aspect of ESG the more funding they raise. Fourteen per cent of series A companies scored three out of four stars compared to 20% for those that had gone through at least a series C round.
This suggests that investors are playing a part in bringing about change. And an area that investors are increasingly interested in is climate fintech – those startups that are keen to drive the green economy. Venture capitalists invested $1.2bn in the cross-cutting sector in 2021, according to CommerzVentures. Carbon accounting and climate risk management were the two sub-sectors that drew in the most money, with $410m and $304m respectively.
An example of a climate fintech is Novus, the UK’s first B Corp-certified sustainable neobank. It donates a portion of fees collected from transactions made on its debit cards to green causes. It’s also embedded indirect carbon emission data into its app so users can monitor their spending’s footprint.
“Investors are consistently looking for solutions to fill unmet needs in the market,” says Novus co-founder and chief growth officer Shruti Rai. A solution that addresses an environmental challenge, while demonstrating a monetisation strategy, generally wins the race for funding.
“It doesn’t matter how attractive or forward-thinking a climate fintech is, though, investors will want to see beyond the brand and are looking at the people behind it,” Rai stresses. “Investment in the right people is critical.”
Frank agrees: “Getting the data right is one thing, but equally important is having engaged leadership and employees. ESG is about a company’s impact, and that’s something that touches everyone who works there.”