The high interconnectivity of our world and challenges related to nature and its well-being spawned the rise of ESG consciousness. It stands for environmental, social, and governance criteria in the professional environment. Even companies that have nothing to do with fossil fuels are implementing ESG strategies. That includes FinTech. Why is that important and what is ESG tech? How can both worlds benefit from cooperation?
What is ESG?
ESG is realized through a set of standards that apply to the company’s operations. It’s a guideline that allows screening potential investments, current business operations, materials used for construction, etc. Factors like air pollution and deforestation play part in what companies are doing on the market and why. The answer to these challenges comes in a form of choosing the right products, and subcontractors, as well as proper customer operations and community relations.
All this plays a different role than a mere PR stunt. Companies are increasingly focused on their environmental impact. Also, on the set of good practices that ultimately turns into good business and competitive advantage. It’s important because consumers push for purchasing products and services from companies that are “sustainable”, instead of those who just make money through production or service. There are numerous of them in the wild. Those who care make all the difference. At least in the eyes of consumers.
By implementing key drivers behind every “green” criteria, companies are in the driver’s seat for growth and good marketing and customer experience. They decide the narrative. They create the future. They can sell more by showing they are responsible for the common good. Can FinTech contribute to a global economy?
What is ESG tech?
Yes, actually. As we have shown a year ago in the article about green finance, the level of consciousness in the FinTech world is rising. It’s not only about showing zero carbon emissions if someone cares about it. It’s about responsible and balanced business operations. Here’s how FinTech can contribute:
- through the creation of entirely new software or software modules to measure the environmental impact of the company’s assets
- by channeling investors’ funds toward sustainable investments
- by developing platforms that monitor compliance with ESG criteria
- by providing feedback in manufacturing through the use of the internet of things (IoT)
- through the creation of app modules that recommend individual investors’ stocks of “green” companies
- through managing financial risks from environmental hazards, resource depletion, natural environment degradation, and social issues
- through the promotion of financial transparency in ESG reports, and economic activities
A lot can be done in Fintech. Customer-oriented FinTech is already going “green” and implementing at least some of those recommendations. ESG technology can be dedicated software but sometimes is just a spawn of major products. A functionality that measures or displays data by the way.
Since ESG is often discussed in a single context with corporate social responsibility (CSR) companies are going all the way to make sure their company goals are aligned with what the market is expecting of them.
Benefits of ESG tech for FinTechs
There are many bonuses for “going green”. For starters, it helps reduce operational costs. According to research by McKinsey, savings can reach as high as 60%. That’s a substantial amount no one can take for granted.
Second of all, ESG tech can make a FinTech company, especially a startup, attractive to investors. According to Statista, the value of global ESG assets, at least at the beginning of 2022, reached $378 billion globally. In its article, Reuters called the last 12 months “the year of ESG investing”. A side bonus is that, according to McKinsey, a higher ESG score equals a 10% lower cost of capital.
The main aspect, however, comes from building long-term relations with customers. They want and can appreciate businesses having a positive impact. PwC reported that 76% of consumers are willing to drop products or services of a company that treats the environment or their employees in the wrong way. That’s a powerful statement.
ESG’s impact on FinTech
There are multiple companies and platforms that embrace ESG. Cooler Future, an investment platform provides wealth management services with a positive climate impact. Good Money, which promises that clients’ deposits will not be invested in fossil fuels or rainforest destruction. Other companies feel the market pressure to steer in the direction of responsibility and transparency and venture capital, as well as private equity sectors, take notice.
It’s not only millennials who are interested in this new venue. Various managers are incorporating their ESG strategies to build value for customers and shareholders. One of the most prominent examples of that is BlackRock. The fund made sustainability a central point of its new integration project, which means bringing good practices (and projects) from the market that can really make a difference. As BlackRock says in their statement:
„Our approach to ESG integration focuses on identifying financially material sustainability insights – those that we believe may impact the financial performance of clients’ portfolios – and including those insights into the broader mix of traditional financial information used to manage those portfolios.”
We can expect more actions like these in the upcoming future. Changes will require FinTech companies to look at their business models more closely in terms of ESG compliance if they wish to get a slice of the impact-investing cake – or simply emerge from a due diligence process without turbulence.
The state of ESG tech
Not everything is gold here. International markets have to develop standardized entity identification methods in ESG reporting. Also, pay close attention to cases of greenwashing and false PR statements.
The International Financial Standards Reporting (ISFR) Foundation created the International Sustainability Standards Board (ISSB). The goal is to deliver a “comprehensive global baseline of sustainability-related disclosure standards that provide investors and other capital market participants with information about companies’ sustainability-related risks and opportunities to help them make informed decisions.”
The problem is that without standardization, ESG reports will lose value. We need a way to evaluate performance indicators, as well as various jurisdictions. There are too many local differences, and guidelines to even the playing field.
The Legal Entity Identifier (LEI) addresses this challenge, providing a standardized system for finding, comparing, and consuming ESG data globally. This is a unique, 20-character code that’s created for a legal entity. It provides clarity about identity and ownership. It’s a global standard, therefore anyone can be globally recognized and trusted. By tagging companies with LEI, we can assure comparability among companies and their subcontractors.
Some of the successful implementations of LEI:
- The Sustainability Accounting Standards Board (SASB) recommended the use of the LEI in non-financial reporting in Europe in its XBRL Taxonomy. This is crucial for assessing physical and transaction risks.
- A project by OS-Climate incorporates LEI datasets made available in the Amazon Sustainability Data Initiative (ASDI). The goal is to broader and speed up the development of climate-aligned financial applications.
- The LEI was included in the Greening the Financial System’s (NGFS) progress report on bridging data gaps for linking financial and non-financial information. The report states that investors can profit by using LEI to map identifiers like Business Identification Code (BIC) and International Securities Identification Number (ISIN) for searching and linking financial-related data.
Both regulatory institutions and companies alike are yet to capitalize on possibilities created by ESG technology. The symbiotic partnerships created by these entireties and collaboration among firms used to create value for users will enable the market to create even more changes for responsible growth.
However, addressing ESG guidelines is one thing, creating thriving FinTech application is another. You need an experienced team to do the job. Mobile app development should be run by experienced product managers and developers that understand the FinTech vibe. If you need these services or are in the market for API development, contact us.
We are available for more than mere development. We can advise on your business as well. ESG included.