ESG is a hot topic in the fintech sector as new initiatives and fintech policies continue to look towards green and sustainable finance, in addition to the long-term positive social impact of many fintechs.
There are many ways fintechs address these important topics – in 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 fintechs are demonstrating positive change in society that addresses or solves social injustice, and the steps the UK government, regulators and fintechs are taking to ensure a greener future for the financial sector.
Of course, fintechs do not have a monopoly on supporting positive ESG initiatives, and significant activity by the very largest asset managers and financial institutions to adapt to ESG principles is to be hugely welcomed – that’s for another time!
How fintech has a positive social impact
“Financial exclusion remains a significant challenge for the UK in the 21st century, which prides itself on being a global leader in financial services.” – Financial Inclusion Commission
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 many examples of fintechs helping individuals and small businesses that have traditionally been underserved by the financial services system. Open Banking is a key driver of financial inclusion, giving consumers more choice and flexibility when it comes to managing their finances and payment options.
Other ways fintechs help financial inclusion or provide alternatives include:
- increase the range, and reduce the cost, of money transfers and payments, including to friends and family abroad;
- offer solutions to allow migrants (new to the country), young people (newbies) or those who have experienced debt problems (new beginnings) to get a foot on the economic ladder – and help 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 expand lending options;
- savings and investment apps have made it easier for people to access savings and investment products – leading the way in “micro-savings” and providing access to product types that might otherwise be unaffordable (such as robo-advice instead of financial advisor services);
- financial management tools to assist household budgeting; and
- by helping those with limited financial knowledge and addressing financial illiteracy by creating interactive online educational supplements, gamification and non-consistent money management supplements.
Generally speaking, improvements in the availability and accessibility of financial data and data analytics are also an important development hand in hand with fintechs; for example, the use of financial data to help governments and others better understand the impact of the current cost of living crisis and other macroeconomic developments.
Perhaps one of the biggest consequences of fintech’s innovation is the “spill-on” effect it has had on established providers who innovate and develop digital and other solutions to improve service delivery and ancillary services. Establishing providers achieve innovation by partnering with fintechs and white-labeling the very best fintech propositions for consumers and small businesses.
Step towards a greener financial sector
The Government’s Green Finance Strategy, published in July 2019, recognized the role of the financial sector in delivering global and domestic climate and environmental targets, and sets out the approach to ‘greening’ financial systems. The government is currently considering responses to its call for evidence from earlier in 2022 to update the green finance strategy. The main objectives of the green finance strategy are:
- capturing the green finance opportunity;
- mobilizing funding for the UK’s energy security, climate and environment goals;
- greening the financial system; and
We have seen the FCA take positive action towards a greener financial system by introducing the Green Fintech Challenge, where financial innovation can help overcome some of the challenges hindering the move to a net zero economy.
The industry is also taking steps. Crypto asset mining has often been criticized for its hugely significant carbon footprint. In a major step forward, Ethereum (the blockchain platform with its native cryptocurrency Ether) has reduced 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 verifying transactions on the blockchain will be randomly selected to receive the reward coin after staking their own Ethereum, thus reducing the number of validators and overall energy consumption. Some players in the space had already adopted PoS, and others will no doubt follow suit.
This article was written by Martin Cook and Matthew Loader, both members of Burges Salmon LLP’s fintech practice, and was originally published in Fintech Magazine.
