Why fintech lags behind when it comes to cutting carbon

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.”