The Rise of ESG and Ethical Investment in Fintech

In recent years, the fintech industry has witnessed a significant shift towards Environmental, Social, and Governance (ESG) principles and ethical investment practices. 

This movement reflects a broader trend in the financial sector, where sustainability and responsible business practices are becoming increasingly important to investors, consumers, and regulators alike.

We analyse this shifting trend and ask what good ESG and ethical investment practices mean for the fintech space. 

Understanding ESG in Fintech

Of course, ESG is a wide term applicable to a broad range of use cases for the promotion of sustainability, ethical behaviour and good governance. For fintech companies, this often involves developing products and services that support sustainable finance, promoting financial inclusion and implementing robust governance structures.

Jesper Diget, Chief People Officer at emagine says: “ESG is booming and maturing every day, so it's a difficult task to keep up with continuous developments. As a team, you should be regularly analysing the ESG landscape and beyond that, attending webinars, reading articles and leaning on professional networks.”

It’s clear that ESG is dynamic in nature, and one of the key areas where fintech is making a substantial impact is in green finance. Many fintech firms now offer products designed to support the transition to a low-carbon economy. 

These include loans tailored for carbon reduction and renewable energy projects, as well as personal savings accounts that direct interest towards environmental initiatives.

As the importance of ESG has become all the more apparent, ethical investment – also known as socially responsible investing – has seen a remarkable uptick. 

Morningstar Global Sustainable Fund Flows reports as of March 2024 that there is approximately US$3tn invested in the ESG market across 7,643 funds, underscoring the growing appetite for investments that align with ethical and sustainable principles.

Mary Beighton, Director of People and Culture at Zuto, emphasises the importance of ESG to stakeholders: “Customers, your team, partners, suppliers and investors now review companies' values through a magnifying glass before deciding to do business with them.

“Ensuring the commitment to local community, employee wellbeing and the environment is quantifiable and engrained into business operations is a challenge. 

“Whatever ESG initiatives a business decides to implement must be given the same priority as any other aspects of the organisation, with strict goals, metrics and accountability in place.”

Benefits and Challenges of ESG in Fintech

It’s clear adopting ESG principles can bring numerous benefits to fintech companies, serving as a powerful differentiator in a crowded market. 

Jesper highlights the business advantages: “Incorporating ESG initiatives into sales pitches can be attractive to potential clients and having strong values can be essential for potential candidates.”

This, in turn, can help attract more investment, as Mary evidences: “ESG credentials are very important to Zuto’s current investor Scottish Equity Partners (SEP), and they supported us through the B Corp certification process. 

“There is a Zuto case study in SEP’s 2021 ESG report, which suggests we are a point of reference from their perspective of what 'good' looks like.”

SEP report comments on Zuto: 

The SEP report says of Zuto: “Committed to building sustainable businesses, we believe our technology growth equity strategy aligns well with a responsible approach to investment.

“We encourage all our portfolio companies to promote a rewarding, responsible and inclusive culture for growth, believing this can form a strong platform for value creation opportunities, including access to new markets, brand enhancement, new product development and employee engagement.” 

While Zuto serves as a good example, successfully implementing ESG initiatives does not come without its challenges. Good ESG may be slightly different for each fintech – there is no silver bullet for all. 

Jesper acknowledges the difficulty in keeping up with evolving standards: “It can be challenging because some movements in the ESG space are not set in stone and can therefore be open to interpretation. 

“We come across new standards and trends each day which can be overwhelming but it's about prioritising what is important to your team and the business.”

Another significant challenge is the risk of 'greenwashing'. To combat this Mary highlights the importance of showcasing genuine commitment: “Building ethical practices into day-to-day operations must start by creating policies and a company culture that aligns with your ESG objectives. 

“Committing to this was one of the reasons we decided to go for B Corp Certification back in 2021. With this stringent, independent validation, there is no way to greenwash. You need to prove the steps you say you are taking, and continuously measure them.”

How to measure your ESG impact

Finding ways to measure ESG is crucial for fintechs looking to take a serious approach to ESG. 

Jesper shares emagine’s approach: “It can be difficult to quantify but we look at the social elements including our engagement, the number of people who recommend us and consultant ratings to measure our impact. 

“If other people are understanding our impact, we know we are doing a good job. We also have sustainability-linked loans so it's fairly visible to measure the success of our ESG initiatives. If we hit our goals, we save a lot of money on interest rates.”

Indeed, successfully financing and implementing the right ESG approach requires engagement with shareholders. 

For Zuto, internal impact groups have been integral to its B Corp framework, and, as Mary says this has “enabled the employee voice to drive our ESG approach and share our strategy around wellbeing, planet, inclusivity and communities”.

She continues: “As a Manchester-based business, this has led us to participate in various charity and community projects. Our Forever Manchester 'Make A Difference' fund supports local grassroots community groups, both financially and with willing volunteers from Zuto.”

The Future of ESG in Fintech

As we look to the future, it's clear that ESG and ethical investment will continue to play an increasingly important role in the fintech industry. 

Jesper emphasises the importance of continuous improvement: “It's easy to have a policy that just sits there but to make it worthwhile you need to continue to grow and develop it to make sure it aligns with the business. 

“As an HR team, we made it our mission to involve everyone in the process so that they can help us continue to update our policies. It's important to future-proof policies.”

Mary highlights the impact of regulatory changes driving this trend: “We welcome the impact of the Consumer Duty which came into force in July 2023, where the Financial Conduct Authority (FCA) set out rules and guidance requiring firms to put their customers' needs first. 

“It provides an opportunity for financial services companies to audit and review processes to make sure that good customer outcomes are considered at every step and flow through every part of the business to guide our decision making.”

To read the full story in the magazine click HERE

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