Fintech for good: how industry is addressing ESG concerns
ESG is a hot topic within the fintech sector as new initiatives and fintech policy continues to look toward green and sustainable finance, in addition to the long-time lauded positive social impact by many fintechs.
There are many ways in which fintechs are addressing these important topics – by the way they act, the way they operate or the fundamental purpose of their business and proposition.
In this article we take a look at some examples of the way in which fintechs are demonstrating positive change in society that addresses or solves social injustice, and the steps UK government, regulators and fintechs are taking to ensure a greener future for the financial services sector.
Of course, fintechs have no monopoly on supporting positive ESG initiatives and significant activity by the very largest asset managers and financial institutions to adapt to ESG principles are to be hugely welcomed.
How are fintechs having a positive social impact?
Millions of people and small businesses in the UK are – or have been – financially excluded or vulnerable, finding themselves without access to mainstream financial services or forced to pay a poverty premium for essential goods and services. Prevailing socio-economic conditions in the UK will exacerbate this.
There are numerous examples of fintechs helping individuals and small businesses who have traditionally been underserved by the financial services system. Open banking is a key driver of financial inclusion, which gives consumers more choice and flexibility when it comes to managing their finances and payment choices.
Other ways fintechs are helping financial inclusion or providing alternatives include:
- increasing choice, and reducing the cost, of money remittance and payments including to friends and family overseas
- providing solutions to allow migrants (new to the country), the young (new starters) or those who have experienced debt issues (new beginnings) to get a foot on the financial ladder – helping build positive credit history and access to the mainstream financial system
- making credit more accessible to small businesses and consumers – not just sub- or near-prime solutions, but decisions based on better data and automated decision-making that legitimately expands lending opportunities
- savings and investment apps have made it easier for people to access savings and investments products – leading the way in “micro-saving” and giving access to product types that might otherwise be unaffordable (such as robo-advice rather than financial adviser services)
- financial management tools to help household budgeting
- helping those with limited financial knowledge and addressing financial illiteracy by creating interactive online educational add-ons, gamification and non-consequential money management add-ons
Generally speaking, improvements in the availability and accessibility of financial data and data analytics is also an important development hand-in-hand with fintechs; for example, the use of financial data to help government and others better understand the impact from the current cost-of-living crisis and other macro-economic developments.
Perhaps one of the bigger impacts of innovation by fintechs is the “spur effect” it has had on incumbent providers innovating and developing digital and other solutions to improve service delivery and add-on services. Incumbent providers are achieving innovation by partnering with fintechs and white-labelling the very best fintech propositions to consumers and small businesses.
Steps towards a greener financial services sector
The UK government's Green Finance Strategy, published July 2019, recognised the role of the financial sector in delivering global and domestic climate and environmental objectives, and sets the approach to “greening” financial systems. The government is currently considering responses to its call for evidence made earlier in 2022 in order to update the Green Finance Strategy. The key objectives of the Green Finance Strategy are:
- capturing the opportunity of green finance
- mobilising finance for the UK’s energy security, climate an environmental objectives
- greening the financial system
- leading internationally
We have seen the Financial Conduct Authority (FCA) take positive action towards a greener financial system by introducing its Green Fintech Challenge, where financial innovation can help overcome some of the challenges impeding the movement to a net-zero economy.
The industry is taking steps too. The mining of cryptoassets has often been criticised for its hugely significant carbon footprint. In a great step forwards, Ethereum, the blockchain platform with its native cryptocurrency Ether, has slashed its energy consumption by 99.95% by changing its blockchain protocol from Proof of Work (“PoW”) to Proof of Stake (“PoS”). The PoW protocol is where any number of validators can attempt to be the first to verify a transaction and add a verified transaction to the blockchain in return for a reward for their speed and accuracy. The new PoS protocol adopted by Ethereum means that a limited number of validators who verify transactions on the blockchain will be chosen at random to get the reward coin after staking their own Ethereum, thereby reducing the number of validators and total energy consumption. Some actors in the space had already adopted PoS, and no doubt others will follow.
About the authors: Martin Cook and Matthew Loader are both members of the fintech law practice at independent UK law firm Burges Salmon. Between them, they specialise in technology, fintech and privacy law. Cook, who is the firm's Head of Fintech, is a highly regarded lawyer with a wealth of experience both in-house and in private practice.
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