ESG is a hot topic in the fintech space.
The ESGFinTech100 list 2023 recognised 100 of the world’s most innovative ESG companies offering solutions for the financial services industry.
And the The Payments Association launched an ESG toolkit in November 2023 to support payments industry companies in adopting sustainable ESG strategies.
However, achieving a top score on ESG trackers requires effort.
In this blog, we unpack what exactly ESG is and why it's important for fintechs.
ESG (Environmental, Social, and Governance) is a type of framework that establishes criteria for a company’s behaviour.
The standards encompass a company’s leadership, environmental impact and its relationships with:
ESG is also an increasing area of focus for investors. Those who are environmentally and socially conscious are very likely to be looking for fintech businesses that clearly display credible ESG credentials.
While the term ESG is relatively new, it started as a CSR (Corporate Social Responsibility) initiative launched nearly 20 years ago by the United Nations.
Worldwide search interest in ESG has been steadily trending upward since 2017, with the topic reaching peak popularity in September 2022.
It is now firmly a part of the fintech industry's commonly-used terminology.
ESG vs CSR
Although ESG and CSR are both concerned with the impact a business makes on society and the environment, they are not the same thing.
CSR (Corporate Social Responsibility), is a self-regulated business model where companies acknowledge and address the impact they have on wider society, the environment, and the economy.
By contrast, ESG is a set of measurable criteria that investors use to assess whether a company is worth investing in, whilst supporting a more sustainable economy.
Like many industries, financial services plays an important role in the achievement of ESG objectives – whether that be climate-related issues or net zero pledges.
In recent years, fintechs often have a stated purpose that elevates them above simply making money. Those with a legitimate ESG focus are finding they have an advantage in attracting investment capital that supports growth as well as their environmental and social agenda.
The interest from venture capital in fintechs with ESG policies has surged.
A recent report from Mastercard showed that venture funds deployed 2.5 times more equity into ESG fintechs in 2020 compared to what they invested the year prior – rising from $700 million to $1.8 billion. This trend is expected to continue.
And according to McKinsey & Company the magnitude of investment suggest that ESG is much more than a fad or feel-good exercise. A strong ESG proposition can create value.
Furthermore, fintechs can leverage ESG to attract customers who care about how businesses interact with people and the environment.
This is important as 83% of millennial consumers want brands to align with their values. Customers as well as investors want businesses to do well commercially by doing right by society.
ESG is measured through an ESG score – a quantifiable measure of how your fintech business is performing in a range of environmental, social, and governance topics. It allows you to internally assess and analyse your company’s ESG performance.
A third-party organisation, such as an agency or research and analyst firm, will evaluate your business. They will determine your ESG score based on your ESG performance and will typically compare you against your competitors.
Sustainability Magazine has compiled a list of 10 of the leading environmental, social and governance platforms for gathering data and visualising global impact.
These include the MSCI ESG Indexes as an example of one way to measure a company’s performance.
Your ESG score shows your board members and stakeholders their ESG liability, where business risks and opportunities lie, and how their business is performing against competitors and the wider sector.
ESG is made up of three components – environmental, social, and governance.
The environmental aspects include:
These five categories will help you evaluate the environmental impact your fintech may have as a consequence of its operations, and how you can manage these factors.
As part of this, you will need to consider how your operations may contribute to greenhouse gas emissions, how you manage waste, and how your business complies with relevant regulations.
One obvious element is the cards themselves. Did you know that banks and fintechs issue over six billion plastic cards annually? This creates a significant carbon footprint.
Aspiration has used its ESG strategy to combat this while incentivising the use of its card. With their zero credit card, every time their customers make a payment, they plant a tree. Each month when cardholders use their card and plant sufficient trees to achieve carbon zero, they are rewarded with up to 1% cashback on all their card purchases.
The social factors of ESG includes internal aspects such as employee safety, gender equality, and living wages.
It also extends to a glocal level, reinforcing the importance of human rights, workers’ rights, and gender equality.
When implementing the social element of your strategy, make sure to consider:
Governance standards ensure your company is transparent in its accounting methods, strives for integrity and diversity, and holds itself accountable.
It’s all about your logistics and the process of running your business.
Investors will take this element into serious consideration when deciding whether to invest in your business. They’ll consider the following:
Like most types of accreditations, creating and deploying an ESG policy comes with its advantages and a lot of time-consuming work.
Study after study shows that companies with ESG at the forefront of their strategy are likely to stand out more to investors and lenders than their competitors. This is due to the growing public concern about many of the topics that ESG covers.
Fintech start-ups are likely to have a greater need than most to secure seed funding and investments, so ignoring ESG could impact growth into a developed financial services company.
Implementing an ESG policy can help boost brand awareness and even promote loyalty if your views and beliefs align with those of your customers.
Being social conscious is attractive to customers and clients who want to do business with you. It would also give you plenty of content for your social media outreach.
Through your fintech’s ESG score, you can track key metrics such as your company’s energy and water consumption.
These metrics allow you to implement programmes that will improve your efficiency, leading to reduced costs in energy and water usage – meaning less exposure to fines and penalties, and better risk management.
A common issue businesses face when defining their ESG policy is agreement.
In a diverse organisation, employees and stakeholders may share different beliefs about what they consider important environmentally and socially. This could lead to discord within the company as it strives to agree its ESG policy.
Brian Armstrong, Coinbase’s CEO, caused a stir on a similar topic by stating the only way to achieve a company’s mission is to steer clear from engaging in social activism.
While many companies would agree that being involved in activism may be going too far, it could be in scope for a fintech with a strong disruptive agenda.
Despite making claims of social responsibility, many companies fail to live up to their promises. They use ESG as a cynical marketing tactic to create positive associations with their brand.
You may be interested to read our previous blog about ‘greenwashing’ in marketing.
When creating and reinforcing an ESG strategy, it’s important to make sure that your fintech stands by its stated beliefs and that your actions reflect those.
Don’t forget that you will have to provide figures and disclosures to prove your ESG claims. However, there is currently a lack of universal standards (similar to ISO, for example) that apply to environmental and social practices.
Having, or claiming to have, an ESG policy will put your company’s behaviour under greater public scrutiny. Being exposed as an ESG fraud, or even not living up to your stated standards, is likely to go viral on social media, causing huge damage to your brand and reputation.
Although, socially responsible investments are an increasing focus for investors, the sustainability and financial performance of your business must remain at the heart of your efforts.
If done correctly, establishing your ESG will take up time and effort. Don’t shift all your focus and resources onto ESG-related activities as it may be at the expense of your business performance.
There really is little point in having an ESG strategy if you don’t tell people about it.
ESG marketing involves promoting the environmental, social, and governance attributes of a company’s strategy to its potential customers, investors, and other stakeholders, ensuring that it aligns with its purpose and mission.
A company’s ESG marketing message helps builds its brand identity, brand equity, financial performance, and social impact.
Showcasing your businesses bests practices, brand values, and initiatives will help you to build internal and external credibility and trust, as well as build a rapport with your target market.
Young people are more likely to give up returns on investments to invest in ways that support causes they care about, new data from shows.
Younger generations are more likely to invest in socially responsible brands, with two-thirds of Gen Z investors wanting to allocate their portfolios in a way that supports the causes they care about.
Shape your brand identity and policy around your ESG strategy, refine your central values and mission statement to match.
Make sure you measure your brand’s ESG success and don’t be shy. Share your progress with investors and buyers in your marketing and communication materials.
Through content marketing campaigns, showcase more depth into your ESG story. Find ways to build it into your content strategy with educational infographics, videos, or blogs to ensure your customers and stakeholders understand why your endeavours are so important.
When incorporating ESG into your marketing, make sure you communicate authentically and accurately. Ensure you don’t exaggerate or mislead your customers about your ESG and its impact – you don’t want to overpromise and underdeliver.
Like all marketing messages, make sure your ESG-related social media posts are properly balanced with other topics.
Fintechs and most other industries will usually connect their ESG polices to their products/services.
A great example of this is mobile payment app, Alipay. Coinciding with its ESG policy, it launched an initiative called ‘Ant Forest’, encouraging users to carefully consider how they can lower their carbon footprint through their spending behaviour on the app.
The user’s reduction in carbon emissions is recorded, and through gamification, users are rewarded with ‘green energy’ points – which can be used to plant trees that can be monitored through satellites.
Since launching in 2016, it has enabled over 600 million users to plant more than 326 million trees.
There has been increasing awareness and focus on ESG (Environment, Social, Governance) across multiple industries, including fintech.
Not be confused with CSR, ESG is a set of measurable standards to monitor the behaviours of a business. ESG is more formalised in structure than CSR. It will often require hiring a specialist agency to evaluate and develop a meaningful framework for your business.
If there is sufficient time and budget available, fintechs and especially start-ups should consider ESG as a way to attract investors and customers. As well as doing the right thing for the planet.
However, while an ESG policy could offer advantages and help differentiate your business in the market, implementing a framework for your business takes time, hard work, and a long-term commitment.
Undertaking an ESG project without understanding these commitments is likely to waste time and money while diverting your resources away from achieving its business goals.