Due to the times we live in, sustainability has become a crucial factor within the FinTech sector with many scaleups and startups putting it at the forefront of their strategies and goals. Some ways this can be seen is through AI (artificial intelligence) innovations like green finance, not to mention the implementation of environmental social governance (ESG). In this week’s blog post we take a glance at different ways FinTechs could go about being sustainable and weighing out each option.
A subsection of FinTech that has recently been taking off is climate FinTech which primarily focuses on the impact it will have on the environment and how to reduce emissions. Ways in which climate FinTechs would do this is by incorporating more sustainable procedures such as carbon accounting; which closely helps keep track of the amount of greenhouse gas emitted by one’s organisation. Another vital method used by climate FinTechs is carbon offsetting. This is where an organisation would contribute money towards a cause of reducing carbon emissions to essentially counteract their own carbon footprint, and although this method is becoming quite widely used some would argue that it is not the most effective in ensuring sustainability.
Although similar to sustainable finance, green finance tends to focus solely on the environmental side of things rather than the whole ‘environmental social governance’ (ESG). The practices within green finance mainly involve firms promoting the use of renewable energy sources as well as ensuring that company finances are used on environmentally friendly projects rather than carbon-intensive ones. In the long run, green finance has its advantages as it is primarily in favour of reducing carbon emissions, pollution and making use of natural energy sources.
Sustainable finance generally relates to environmental social governance (ESG) as a whole meaning it’s not just limited to focusing on environmental or financial outcomes. This approach is derived from the sustainable development goals set up by the UN which focus on the aspect of financial inclusion; in the sense that their goals intertwine with everyone being able to have access to the same business and education opportunities through sustainable finance methods.
Over the years as the ESG focus has grown more prominent amongst FinTechs, there has been more of an initiative to lean towards the use of ESG reporting. ESG reporting mainly consists of measuring a company’s practices against its ESG strategy; however it has both negative and positive effects for organisations within the FinTech sector. Some advantages of a FinTech using ESG reporting and implementing an ESG strategy could be beneficial in the sense that they would be able to improve their financial performance as well as company efficiency. Despite this, some risks posed to FinTechs going down this route is the value as most FinTechs already have ESG notions already implemented within their values and frameworks, in addition to the cost. Ultimately time will tell on whether ESG reporting and strategies really help FinTechs in the long run.
From exploring the numerous ways in which FinTech’s strive to be sustainable it is clear that some sustainability methods prove to be slightly more effective than others. Whilst some sustainability measures such as green finance which actively reduces a company’s carbon emissions, others such as carbon offsetting simply rely on putting money towards a cause in the hope that it would do so instead. Nevertheless, these sustainable methods encourage FinTechs to go about different ways of working towards a future of more sustainable banking and the measures that are in practice so far are definitely a promising start.