This is an excerpt from The Future of Fintech in the UK 2023: An Innovate Finance Global Summit and UK Fintech Week special edition' report.

The recently published report by the Intergovernmental Panel on Climate Change (IPCC) – the scientific body that advises the UN on rising temperatures – revealed that as current trends stand, we will overshoot past the target limit of 1.5 degrees celsius of warming by the 2030s. As reported by the BBC: “Overshooting is risky, as the report acknowledges, because it might trip tipping points that can’t be uncrossed, such as the melting of permafrost that would in turn release vast amounts of warming gases.

“Coming back from overshooting will need expensive, unproven technology to pull CO2 from the air, something known as carbon capture. It also means that it’s even more urgent to get as quickly as possible to net zero – where the amount of greenhouse gas in the atmosphere does not increase,” the article read.

As Lord Chris Holmes surmised, while the IPCC report should dictate that widescale change will happen, issues with greenwashing and “an understandable amount of confusion over the difference between carbon neutral vs. net zero vs. zero carbon” have permeated the financial services industry. But what does UK fintech have to do with it?

According to Hogan Lovells, ESG “captures a huge number of topics from climate change to fair supply chains, and risk management to financial inclusion. ESG is most often used as a set of standards to measure the sustainability of a business or an investment; ultimately, the focus on ESG requires businesses – fintech included - to demonstrate they generate value for society.

“While ESG is a relatively recent concept, it’s now frequently the focus of policy, legislation, and regulation. Fintech should expect to be subject to some of these legislative changes, and will surely need help navigating them, but more importantly the same changes afford huge opportunities for fintech development in the ESG space.”

How can fintech firms demonstrate they generate value for society? By virtue of what the fintech industry stands for, they prioritise the customer and their needs, but in order for substantial change to occur, substantial investment and regulation is required. Further to this, according to KPMG, the ESG fintech sector will achieve 68% compound annual growth over the next two years and will become the fastest and most attractive investment case in the fintech market.

However, as mentioned, “regulatory change, institutional investor demand, corporate technical debt, and a lack of accessible data are all driving significant demand for climate, decarbonization and social impact-focused fintech. ESG is the fastest growing segment of fintech (albeit starting from a low base).”

Where should fintech firms in the UK start? In Nayi’s view, fintech firms in the ESG space “should understand their own emissions and work with a reputable company to assess this and then decide how they can reduce and offset these emissions each year. Clearly, the aim is to bring emissions down to a net zero level.” He continued to say that in the next few years, “companies will need to have an ESG strategy as much as they require strategies and policies for things like data protection and Know Your Client/Business.

“This priority is being driven by the pressures of a younger generation that expects sustainable business, regulatory mandates from governments to tackle the climate change crisis and, importantly, the changing demands of both clients and investors.”

Daprà has a similar belief and advised organisations to have a “socially responsible portfolio that prioritises environmental, social and corporate governance factors – ESG – is the most powerful action one can take. Being conscious of our impact on the environment, both from a business and operations point of view, and elevating the conversation to spotlight the opportunities with ESG, are the way forward.

“It’s important to understand that the world of finance and investments plays a primary role in the development of society. How we invest money is a pivotal driver for the change we want to see in the years to come.”

Although, changing operationally is not easy. Laura Rofe, director of partner development, PPRO, stated that achieving net zero requires a fundamental shift in behaviour. “The fintech industry needs to take greater accountability in thinking about the foundational infrastructure that is needed to accelerate the transition to net zero.

“Financial technology has the potential to lead the charge in developing climate change solutions, but we’re not seeing this happen fast enough. Regulators like the FCA have begun to make moves to support objectives and encourage green innovation in fintech, but there needs to be more of a blanket approach if we want to see more fintechs getting involved. Unfortunately, many fintechs are constricted by a lack of funds, and with the current economic climate, they have other priorities.”

Helen Child, founder, Open Banking Excellence (OBE) also believes that an organisation cannot do this alone and fintech collaboration is the key to delivering against net zero targets. “There are some great partnerships emerging, particularly between banks and carbon tracking fintechs but more needs to be done in this area to make the consumer proposition more compelling. Carbon trackers need to develop more specific and contextual models and banks need to think about how to present that data to users in a way that affects spending behaviour.”