How Fintech can Help ESG Standards and Reporting

The rise of fintech and ESG are happening in parallel, but these two emerging industries could prove to be mutually beneficial as many businesses work towards net zero.

ESG standards and reporting, alongside the growth of fintech, are transforming the financial sector and proving to be mutually beneficial. While ESG creates openings for socially conscious fintechs, those same companies can create the new business models and data management capabilities which will be crucial if the financial sector is to satisfy emerging regulations and do its part to work towards the goals of the Paris Climate Accords.

The move towards ESG

2022 is the year in which the financial sector is forging ahead towards the implementation phase of its plans around environmental, social and governance (ESG). New regulations are coming into force around the world. The EU’s Sustainable Finance Disclosure Regulation (SFDR) applies to financial firms, products and advisers. In the US, the Biden administration plans to make climate reporting mandatory, while China is partnering with the EU on taxonomy classifications.

Meanwhile, in the UK, the prospect of further regulation is prompting the vast majority of financial institutions to look into hiring ESG specialists. Nevertheless, the challenges are vast. Structures are needing to be transformed, reporting is being overhauled, business models are changing, and companies are having to grapple with data to provide more insights and transparency into their operations, as well as how they are aligning with ESG standards.

Fintech’s role in ESG

In making this transition, fintech can play an integral role. According to a report by Medici, there are four main areas in which fintech can meet ESG:

Products and services: Fintechs are producing business models which are increasingly orientated towards ESG initiatives such as some neobanks that plant a tree for every dollar round up at a customer’s end, or a robo-advisor focusing on ESG orientated funds.

Impact investing: Individual and institutional investors are increasingly looking for socially responsible funds to invest in. Fintech can help them search for the funds that match their investing criteria.

Financial inclusion: With large parts of society facing financial exclusion, innovative solutions are coming to market which drive greater social inclusion such as companies offering affordable credit to people who have no formal credit history. Another example are data solutions that provide a more in-depth analysis of a person’s credit score, thereby potentially providing more widespread access to financial services and credit.

Data and rating: The collection of ESG data is becoming increasingly important to demonstrate environmental and social impact to customers and regulators. For example, digital platforms are becoming increasingly common – these allow companies to calculate and measure their carbon footprints.   

Thanks to technology, companies are becoming more transparent, agile and responsive to emerging trends and keeping up with ESG standards. Demand from customers and investors, coupled with a regulatory environment that is continuing to evolve, means businesses need to move more quickly to stay up to date with the demands coming at them from various sources.

Technology and its ability to create new business models, will continue to inject agility into systems and shed light on operations, therefore empowering corporations to make faster and more effective business decisions.