Fintech webinar: What ESG spells out for the future of fintech

And there are significant market opportunities in the ESG (Environmental, Social and Governance) field, as the corporate world places a stronger focus on its wider contribution to society.

The webinar – As easy as ABC? Why ESG is Vital to Scotland’s Fintech Future – heard pressure on businesses to show meaningful commitment to ESG was intensifying, both from consumers and regulators.

However, speakers said there was still a lack of agreed common standards to identify which organisations were taking ESG seriously –and which might be accused of engaging in “greenwashing”.

Caroline Stevenson, head of the financial services regulatory team at legal firm Burness Paull, warned that a business that made statements about ESG credentials which later proved false could be in trouble. She said: “If a firm has badged an investment fund as particularly green in some way [because they know it’s what customers want], and says it’s sustainable and if it transpires that it’s not, there’s definitely the potential for a mis-selling claim.”

And Professor Gbenga Ibikunle, chair of finance at the University of Edinburgh, said it was hard for investors to identify clearly which businesses were genuinely pursuing ESG goals across their business. “There is a lack of coherence around standards for measuring ESG and reporting is also poor,” he told the webinar.

However, he went on to say that this opened up “great opportunities for fintechs to provide information on how ESG-compliant different investment portfolios are”.

Jo Freeman-Young, a manager and specialist in ESG at EY, reported that there has been a “big acceleration of activity around ESG”, and some large financial services players are starting to set targets and embedding ESG across their activities.

But she also noted “a wide range of maturity”. Market leaders, she observed, are driving the ESG agenda from a board level in a strategic and coherent way and engaging customers around ESG through new products.

She added: “That requires a lot more data, and a lot more innovation and digitalization, and that’s where the opportunity really starts to come in for Scottish fintechs.”

Freeman-Young identified two potential growth areas for fintechs, saying: “There is a real lack of ESG information on unlisted companies and a lack of metrics to show how organisations are doing in terms of their biodiversity impact, as well as their climate impact.”

She agreed that an absence of common standards was a problem: “There are a lot of challenges around ESG data and not a lot of trust. There can be as little as zero correlation between ESG ratings providers, and that makes it difficult to get behind the data and use it for investment decisions.

“There is talk of a standardised framework but we haven’t got an answer yet. Some ask if we can have that when so much ESG is so specific to the firm.

“One financial firm might need a different score to another one… so it’s difficult for the regulator to really step in when there isn’t consensus.”

Burness Paull’s Stevenson agreed, saying: “It’s really difficult to work out who’s market-leading when it comes to ESG, because it’s so very subjective. There’s no real benchmark and I think part of the struggle is the fact that regulators aren’t really sure how they can regulate this, or supervise this, without clear goalposts.”

Nicola Anderson, chief executive of FinTech Scotland, said the financial services and fintech communities have to take a lead in defining standards. She added that harnessing available data and using it effectively is crucial in making ESG standards meaningful, and said she felt Scotland has a real advantage here because of its great strength in data-driven innovation.

She explained: “We know there’s real power in financial transactional data, and the insights you can get from that. But if we couple that with other types of datasets [such as space and satellite data] and aggregate that, we start to put some of these greenwashing questions on the table and think about innovations to help us build confidence in the ESG claims businesses are making.”

The panel thought that large financial services organisations showing real leadership in terms of ESG is crucial.

Kirsteen Harrison, environmental manager at cryptocurrency wallet business Zumo, told the webinar: “This agenda is moving very rapidly and there will be a ‘cascading down’ of ESG from large financial services institutions. This is coming fast down the supply chain and firms can’t afford to wait.”

Anderson agreed and said the fintech community was well-placed to take advantage. She highlighted clear evidence of greater collaboration between large financial services firms and young fintech businesses, that could provide technology solutions in areas where larger institutions needed to make processes quicker and more efficient.

“There is a real change in culture and mindset [towards ESG],” she said, stressing that this would only accelerate.

Anderson praised the new partnership between the Royal Bank/NatWest Group and the Edinburgh Climate Change Institute, and its potential to create climate change leaders across the business community.

The University of Edinburgh’s Ibikunle highlighted his institution’s work with financial services organisations, and noted NatWest was working with CoGo, a firm set up to measure carbon footprints. This is part of a wider trend towards sustainable finance, he said, adding: “Climate change-related economics and finance is definitely one of the key areas right now, which of course corresponds to the first letter in ESG. There is a great deal of enthusiasm among fintech start-ups, as well as established financial services companies, to get involved and take the lead in addressing climate change by developing new technological applications and exploiting the explosion of transactional data in the global economy.”

Zumo’s Harrison said that her firm had embedded ESG goals right from its launch, and this made things easier as it was tougher to ‘retrofit’ ESG. “Young fintech businesses must make ESG part of their culture; staff and customers will thank them for it,” she said, adding that ESG culture was “imperative” for young fintechs looking for investment as investors would increasingly demand it.

However, Ibikunle said the link between ESG investing and good profit margins is still weak: “A lot of the investment in ESG now is because there are investors keen on contributing to society in a positive manner, rather than being driven by economic factors.

“The overlap between the doing good part of ESG, and the need for profit is still way too small for ESG to be meaningful [in investment decisions] at this time.”

Agility in adapting to change

Nicola Anderson told the webinar that the 180-plus fintech firms in Scotland are working across a wide variety of fields.

The head of FinTech Scotland highlighted wealth management, payments, regulation, capital markets, personal finance and serving the SME community as strong growth areas.

“I’m very proud of the way that fintechs have stepped up to the mark,” she said, adding that firms in the sector have been agile in adapting to change at a really difficult economic and social time.

There has been strong international engagement, too, Anderson said, with about 25 per cent of Scotland’s fintech community having international bases of operation and around half planning to sell overseas.

Caroline Stevenson of Burness Paull pointed out that fintechs have benefited from more people exploring financial technology for the first time during the Covid-19 pandemic.

She said: “Fintech is going to have an upward trajectory and, certainly from our experience, it continues to be really investable.”

However, she sounded a note of caution around delays at the Financial Conduct Authority (FCA). “A number of fintechs engage in regulated activities and need authorization from the FCA.

“The increased workload of the regulator means there are huge backlogs of work, so in areas such as the authorizations team or change of control, we are seeing huge delays and this is having real cash flow issues for some fintechs.

“They might have some really amazing technology that’s sitting waiting, and they can’t start operating until they get the relevant permissions, and we can see some firms starting to sort of run out of the cash supplies, and we need to help the FCA expedite the backlog.”