Fintech Future-Embracing ESG
By Dr. Ingrid Vasiliu-Feltes, Globalist, Futurist and Digital Advocate
The Global ESG (environmental, social, and governance) Market Analysis published earlier this year reveals an impressive $38T assists under management for CY2019. Despite the pandemic impact 2020 was equally impressive for impact investing with more than 500 sustainability focused index funds and a $52T forecast by next year according to a Celent report. Ernst and Young also published a report highlighting that alternative funds outperformed relative to expectations in a volatile environment and that investor interest is expected to increase over the next few years as ESG focus is considered critical by many. Private investment capital is considered as the main driver compared to the traditional public sector which was dominant over the last decade.
The fintech industry plays a key role in all stages of the impact investing lifecycle and can greatly contribute to the broader financial inclusion efforts promoted by the G20 Global Platform for Financial Inclusion.
Fintech fuels impact investing and we are witnessing clear trends in novel channels: direct equity via innovative social platforms, peer to peer micro-lending platforms, direct debt sponsored by socially focused lending institutions, social impact bonds or community investment notes to only name a few.
VCs have realized that impact investing is not mutually exclusive with financial returns and have increased their commitments.
Digitally driven impact investing has experienced one of the most signifiant gains as investors have sensed that many legacy industries can be completely transformed by emerging technologies and afford the opportunity of building a ESG legacy.
Training a new workforce by re-skilling and up-skilling in order to meet the new expectations in the post-pandemic economy will be essential for long term success. Creating a new culture of impact investing by placing an emphasis on diversity, equity and inclusion can bridge the current financial divide and contribute to a sustainable post-pandemic economic recovery. There are positive signals by legacy organizations, as well as strong trends from fintech incumbents. As per a Stanford Social Innovation Review report Citigroup, Bank of America, JP Morgan Chase, Softbank, Paypal, Twitter, Google, Starbucks and others have increased their diversity investments. Deloitte forecasts that ESG mandates could represent half of US managed assets by 2025. Blackrock took the lead to announce that $7T of its assets would be governed by ESG considerations and 30 of the largest asset managers have committed to achieve net zero carbon across their combined portfolios by 2050.
Developing new financial instruments uniquely suited to meet consumer and customer expectations is on the agenda of many fintech organizations. Weather through personal finance solutions, neobanking, mobile payment methods, novel insurance types, innovative fintech products and services are reshaping the way we manage, spend and invest money as a society. 88% of investors believe that companies that prioritizing ESG initiatives represent better opportunities for long term returns.
Expanding the number and range of social impact conscious products and services across geographic markets and industries can accelerate the trust in impact investments globally.
ESG metrics and reporting are rapidly evolving to become business imperatives.Integrating ESG metrics along traditional financial metrics is one of the suggested approaches and would ensure optimal alignment with the overall core business model and enterprise strategy. Building new technology platforms that are powered by latest emerging technologies and developing new investment grade ESG metrics that shareholders can trust will be paramount over the next few years.
A 2020 OECD report summarized the current ESG progress and challenges. It emphasized the need for all key stakeholders to ensure consistency, comparability, portability of ESG standards. Furthermore, it highlighted the importance of balancing short and long term returns, as well as leveling the playing field among small and large issuers of ESG ratings. Overall, the key message was need for enhanced transparency and accountability.
Legal & regulatory frameworks that encourage mandates or incentives for impact investing are currently being developed, however the pace lags behind the market need and societal expectations. Global collaboration will be required to develop new ESG standards and harmonized frameworks.
Socio-economic barriers remain significant in many emerging markets where novel fintech and economic trends have not gained traction yet. Securing funding remains one of the major impediments in these regions.
Cultural barriers are also significant in specific areas the world, as solving urgent life-threatening daily challenges takes precedent over long term impact concerns.
Developing more refined analytics that can enhance investor in house monitoring, reporting and disclosures are a necessity, as most organizations currently use third party ESG ratings to guide their decisions.
A cross-industry collaboration can also leverage the latest emerging technologies such as AI, Blockchain, Edge computing, Cloud Computing, IoT, 6G and facilitate the design of novel fintech solutions.
Network builders, investors, wealth advisors, funders, academics and government officials are all being called upon to create a new global impact investment ecosystem with state of the art tax legislation and corporate governance laws that foster ESG consciousness.
As a long term strategy, we could aim towards the deployment of ESG-As A Service which could profoundly disrupt and transform the investment ecosystem globally.
Only by continuing to optimize our environmental efforts, increasing diversity and inclusion, as well as embedding social responsibility into the board governance fabric can we truly hope for a Fintech Future that embraces, nurtures and grows all relevant ESG domains.