Fintech
What ESG challenges do FinTech companies face?
Now, with a focus on social and environmental impact, the term “fintech for good” has evolved from its initial meaning of charity. But it doesn’t stop there. This July, we’re on the hunt to discover how the fintech sector is doing “good” for local communities and the world, revealing current and future plans to make changes.
Green washmisinforming the public about a company’s ethical and environmental impact has been one of the biggest challenges that fintechs have faced at one point. There was a lack of transparency in the past, however, in the last couple of years, this has been severely addressed, resulting in more accurate news being shared about ESG (environmental, social, governance) and how they are achieved.
However, challenges persist, so we spoke to the industry to find out what challenges fintech companies still face.
Don’t forget the “S” in ESG
When it comes to ESG, it is very easy to get caught up in environmental impact. However, organizations need to ensure they also focus on social and governance aspects, according to Sunbathing Patellaco-founder and CEO of Havana Companiesfinancial technology that drives social and environmental change.
“One of the biggest challenges is measuring social impact. It’s important to be deliberate in collecting data and be clear about what action or activity your company can take to create and measure social or environmental impact. Another challenge many companies face is getting an entire company to align social impact with business goals if profit has been the primary motivator for years.
“As a leader, it’s important to understand that changing minds by thinking about both profit and purpose takes time and resources. Using existing frameworks like united nation‘S Sustainable Development Goals (SDGs) can help operationalize impact measurement and alignment. While it can be difficult to implement SDGs into initiatives, they ultimately contribute to business success.
“A third challenge business leaders face is trying to achieve too many SDGs at once and then struggling to maintain them. Leaders need to tackle the SDGs and social impact goals one step at a time. For fintech companies, consider the ones that best align with your company’s mission, such as financial inclusion.
“You just have to start somewhere: think of ESG or SDG goals as a continuum. It can be overwhelming trying to set big goals all at once. It’s a journey that requires conscious effort, so approach the tasks slowly and deliberately. Eventually, the company will have met and changed course to prioritize social impact and profit.”
Authentic values must be the foundation of a company
Francis TerraceGlobal Head of Structuring at DemicThe supply chain finance platform points out that many companies would not have so much difficulty integrating ethical values if they incorporated them into the company’s core business.
“Fintech companies often seek to raise funding for specific projects that will only become profitable after a certain number of years.
“In this context, the short term can be tempting. ESG considerations can take a lower priority and corporate decisions can ‘cut corners’: having software developed in countries without adequate social protection or creating a work environment that promotes internal competition and short-term gains by recruiting people with similar backgrounds.
“To stay relevant and grow rapidly, fintechs need to establish a strong set of genuine values as the foundation of their vision. Fast-growing fintechs are more diverse and have strong values, which allows them to see opportunities faster and be more agile in implementing them with highly motivated employees. Corporate values and culture that incorporate ESG principles will attract and retain talent, customers and investors.”
Ensuring a good reputation
Scarf Carpenter, President and CEO, Stock Alertthe stock app, also stresses the importance of establishing an ethical culture. However, it also goes on to note how data privacy and security can be challenging.
“Despite the potential benefits, fintech companies face challenges when implementing ESG initiatives.
“A big problem is that there are no same rules and ways to communicate numbers. ESG encompasses many different things, so without clear guidelines, companies find it difficult to measure their performance and compare themselves fairly with others.
“Data privacy and security are also very important. Fintechs use a lot of data, so keeping it private and secure is a must. Any breach can damage trust and reputation, so balancing data use with stringent security measures is very important.
“Furthermore, keeping pace with technology and regulatory changes is a challenge. Fintech companies must continuously adapt to new laws and public expectations, which requires regular investment and adaptability.
“Finally, creating an ESG-focused culture can be difficult. It involves shifting from the pursuit of quick profits to the goal of long-term sustainability, a shift in thinking that takes time and dedication.
“Overall, while fintech can bring about major positive changes for ESG, it is important to overcome some challenges. By addressing these challenges head-on, the industry has the opportunity to lead the way in creating a more sustainable and responsible financial future.”
Maintaining customer trust while achieving ESG goals
Erik House of severityFounder and CEO, Bloom FilterA company that specializes in AI-based process analytics for software development, has found that as companies try to find the perfect balance between profitability and being “good,” other concerns such as data privacy and security emerge.
“When it comes to ESG issues, fintech companies face many challenges. The lack of uniform ESG reporting and analysis frameworks is a big problem. It is difficult to consistently track and talk about ESG performance without shared rules that everyone must follow. As a result, stakeholders get confused.
“It is not easy to incorporate ESG factors into current business models while still making money. Many fintech companies struggle to find the right balance between earning profits and acting ethically. The desire to show quick financial gains often works against the long-term goals of investing money in ESG. This makes it difficult to find a good balance between these two aspects.
“Data privacy and security are now very big concerns. As more and more fintech companies use AI for ESG projects, it is very important to ensure that customer data is used correctly. Effective data protection measures are very important to prevent breaches and abuse, which keeps customer trust intact and also helps to advance ESG goals.”
Regulatory obstacles
While data privacy and security are some key challenges, Pat PatelExecutive Director at ElevatingThe company that offers programs and forums in the financial technology sector, highlights why regulations can create obstacles and how training is needed to overcome them.
“Fintech companies face a range of ESG challenges, including regulatory hurdles, technological barriers and resistance to change. The regulatory landscape can be complicated and vary widely across jurisdictions, making compliance a real challenge. Technological barriers are another issue, especially in regions with limited internet access and lower levels of digital literacy.
“To overcome these challenges, significant investments in education and infrastructure are needed to make technological solutions accessible to all. Additionally, there is often resistance from organizations and stakeholders accustomed to traditional methods and who may be skeptical of new technologies. Addressing these challenges is critical to the successful implementation of ethical fintech solutions.”
Energy sources, inclusion and regulations
Roman Eloshvilifounder and CEO of XData Groupa B2B software development company, analyzes every aspect of environmental, social and governance, explaining the challenges that arise in each area.
Environment
“Data Centers and Energy Consumption: Fintech companies handle large volumes of data, which requires significant computing power and consumes significant energy. Data centers require constant cooling and power, which can result in high carbon emissions. Managing the environmental impact of this energy use is a major challenge.
“Renewable Energy Sources: While adopting renewable energy sources is a desirable option, they can be expensive and may not always be available in all locations, leading to reliance on non-renewable energy to maintain operations.
Social
“Financial Inclusion: Ensuring that fintech services are accessible and affordable to diverse populations is a significant challenge. Many underserved communities lack access to traditional banking services. Fintech companies must design inclusive products that meet the needs of diverse demographics.
“Security and Privacy: Protecting customer data and preventing fraud are other critical concerns. Fintech companies must implement robust cybersecurity measures to safeguard sensitive information from breaches and cyberattacks.
Government
“Regulatory Compliance: Navigating the complex and ever-changing regulatory landscape is always a major challenge for fintech companies. Regulations are constantly evolving, with new areas being regulated and existing regulations being updated. Fintech companies must stay informed and compliant with these changes to avoid heavy fines and maintain operational integrity. The cost of mistakes in this area can be extremely high, both financially and reputationally.”